Management of Technology Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World
Selected Papers from the Eleventh International Conference on Management of Technology
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Management of Technology Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Selected Papers from the Eleventh International Conference on Management of Technology
EDITED BY Yasser A. Hosni University of Central Florida, Orlando, FL, USA Tarek M. Khalil University of Miami, Miami, FL, USA
2004
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PREFACE Yasser A. Hosni, University of Central Florida, Florida, USA Tarek Khalil, University of Miami, Florida, USA"
The dramatic explosion of information, communication and transportation technologies in the last two decades have opened new vistas for industrial and new business development. It is widely recognized that the business paradigms that prevailed during the Industrial Revolution are giving way to new paradigms dictated by the information age, the knowledge age, and the Technology Revolution in which we are currently witnessing. This will require us to examine theories and practices used for the creation of wealth and prosperity. The International Association for Management of Technology is the leading professional organization solely devoted to the education, research and application of Technology Management. The Management of technology field is concerned with the integration of technology and business strategies to create wealth, enhance competitiveness, increase work opportunities and improve the quality of life. The yearly International Conference held under the auspices of the Association is considered to be one of the largest international gatherings of the World's leading experts in this emerging field. The theme of the 2002 Eleventh International Conference on Management of Technology, held in Miami Beach, Florida, was "The Drive Towards the Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World". The intent was to provide a special focus on the explosion expected in Ecommerce, supply chain logistics and other opportunities presented by the growth of the Internet activities. While many may fail to predict the extent of the impact of the Internet on corporate and national economies, it is timely to explore the opportunities and challenges that such technology provides in the near and not so near future. Deliberations during this conference provided the MOT community with a vehicle to explore the opportunities as well as the pitfalls of the new economy. Participants tackled some of the most important issues facing executives, technology managers, engineers, business managers, and public policy planners in the current turbulent business and technology environments. More than 250 presentations were
Dr. Yasser A. Hosni is a Program Chair of the International Association for Management of Technology (IAMOT) conferences and a member of the IAMOT Executive Board. He is a professor in the Department of Industrial Engineering and Management Systems, at University of Central Florida, Florida, USA Dr. Tarek M. Khalil is the founder and current president of the IAMOT. He is a Professor of Industrial Engineering at University of Miami, Florida, USA
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made during the four day conference. Papers submitted were reviewed by at least two reviewers. This book contains a selected set of the best papers presented. The book is divided into five major sections where papers related to the subject area are grouped together. Section one deals with E-Commerce and Supply Chain Management; section two covers topics related to Knowledge Management; section three discusses issues in Information Technology, Strategic, and Project Management; section four concentrates on International and National Systems for Technology Development; and section five is on Sustainable Development. On behalf of the Executive Council of IAMOT and the editors, we would like to express our sincere appreciation to all the participating authors, reviewers, conference presenters and track chairs for their effort and dedication in making the Eleventh International Conference a great success and providing the material for this book. Yasser Hosni and Tarek Khalil Editors
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CONTENTS Preface Reviewers
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SECTION I - E-COMMERCE AND SUPPLY CHAIN MANAGEMENT 1. Integrating Suppliers in a Demand-Pull Supply Chain
3
Pierre-Majorique Leger, Louis-A. Lefebvre, Luc Cassivi, Pierre Hadaya, Elie Elia 2. Predicting the Global Diffusion of Internet Usage - Effects of Market Environment Kaisu Puumalainen
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3. Can Electronic Data Interchange Measure up to a Collaborative Supply Chain?
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Timothy McNichols, Louis Brennan 4. The Integration of a Private Marketplace into Your Value Chain
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Ben Amaba 5. The Vizzavi Joint-Venture: An Exogamic Marriage Between Vivendi and Vodafone as a Way of Entering the E-Economy
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Dominique R. Jolly 6. Facing the Future: Competitive Situation in Telecommunications in Terms of Real Options
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Jan Edelmann, Kalevi Kyldheiko, Petteri Laaksonen, Jaana Sandstrom 7. Emergence of a New E-Innovation Paradigm
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Ping Lan 8. E-Commerce Between Nations of Different Guarantee Systems: Case for Trading Vegetables from China to Japan Masamitsu Moriyama,Takio Shimosakon,Huang Jing,Yoshinori Nishino,Shinichi Tamura,
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SECTION II - KNOWLEDGE MANAGEMENT 9. The Strategic Value of Technological Knowledge. An Integrated and Dynamic Model
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Martin de Castro, Gregorio, Garcia Muina, Fernando Enrique, Navas Lopez, Jose Emilio 10. Technological Knowledge Illustrated Via Maps
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Marianne Horlesberger, Alexander Kopcsa, Edgar Schiebel 11. Understanding Corporate Portals: Key Knowledge Management Enabling Applications
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Dr. Jose Claudio Terra, Dr. Cindy Gordon 12. Rapid Appraisal of Organizational Knowledge Management Needs: The Case of an Information Technology Services Firm
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Charles H. Davis, Fernando Pacheco 13. A Framework for Applying Distributed Teams in a Command and Control Environment
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Phillip T. Meade, Ronald M. Fussell 14. Knowledge Based View on Industrial Districts
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Kalevi Kyldheiko, Paavo Okko, Pekka Salmi 15. Towards Operationalization of Dynamic Capabilities
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Pirjo Stahle, Aino Poyhb'nen, Kalevi Kyldheiko 16. The Role of Academic Journals in the Emergence and Evolution of MOT
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Derrick F Ball, John Rigby SECTION HI - INFORMATION TECHNOLOGY, STRATEGIC, AND PROJECT MANAGEMENT 17. Strategic Management of Information in High Tech Firms: Achieving Collective Intelligence Using Information Technologies Sylvie Blanco
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Contents 18. The Challenges of Managing Global Virtual Teams Via Information Communication Technologies
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243
Norhayati Zakaria, Andrea Amelinckx, David Wilemon 19. Information System Development for Project Portfolio Management
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Kaj Rintala, Jarno Poskela, Karlos A. Artto, Marko Korpi-Filppula 20. Complexity as a Factor in NPD Projects: Implications for Organizational Learning 281 Jongbae Kim, David Wilemon 21. Standardized Project Management Capability in Product Development
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Dragan Milosevic, Peerasit Patanakul 22. When the Human Bandwidth Limits the Ability to Transfer Technology to International Locations
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Basil Khalil 23. The Effect of Human Development and Technology Achievement on the Diffusion of Wireless Communications1
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Lauri Frank, Sanna Sundqvist 24. A Model For Integrating and Managing Resources for Technical Training Programs
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R. Sawhney, A. B. Badiru, A. Niranjan SECTION IV- INTERNATIONAL AND NATIONAL SYSTEMS FOR TECHNOLOGY DEVELOPMENT 25. Organizing Global R&D: Challenges and Dilemmas
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Maximilian von Zedtwitz, Oliver Gassmann, Roman Boutellier 26. Technological Knowledge and International Performance - Evidence from Information and Communication Technology Small and Medium-Sized Enterprises 391 Sami Saarenketo, Olli Kuivalainen, Kaisu Puumalainen, Kalevi Kylaheiko
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Contents 27. Management of New Technologies and Economic Re-Organization in the Eastern European Countries
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lolanta Bivol, Thierry Grange 28. Organizational Factors and The Generation of Academic Start-Ups: Evidence from Italy 423 Rosa Grimaldi, Alessandro Grandi 29. Knowledge Stocks and Sustainable Competitive Advantage: The Case of the Metallurgic Sector in Spain
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Patricia Ordonez de Pablos 30. Perceptions of Technology Policy in Developing Countries: The South African Case
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Ian Hipkin, David Bennett 31. Gap Between Strategy and Management of Technology: A Review of Indian Scenario P.K. De
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32. Government's Support for Small & Medium Enterprises for Prospering Hong Kong Economy: Impacts of Globalization & China Joining WTO
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A. A. Shabayek, WAN K. M. Sammy SECTION V - SUSTAINABLE DEVELOPMENT 33. Towards Sustainable Development: Indicators to Measure Progress
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Mona K. Abou El-Seoud, Tarek M. Khalil, 34. Environmental Policies from the Business Perspective'
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Gyongyi Kovdcs, Nikodemus Solitander 35. Systems Mapping for High-Risk Product Acceptance
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Sreejit Mohan, Halvard E. Nystrom 36. Analysis of Sustaining Growth in a Corporation Using System Dynamics Modeling Luis Rabelo, Thomas Speller, Chris Burns, Phillip Meade
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xi REVIEWERS Dr. John Aje
University of Maryland University College, USA
Dr. David Bennett
Aston University Business School, Birmingham, UK
Dr. Frederick Betz Dr. Jeff Butler
University of Maryland University College, USA Manchester Business School, Manchester, UK
Dr. Dilek Cetindamar
Sabanci University, Istanbul, Turkey
Dr. Carmo D'Cruz Dr. Charles Davis
University of Central Florida, Orlando, FL, USA University New Brunswick, Saint John, Canada
Dr. Prasanta Kumar De
XLRI, Jamshedpur, India
Dr. Paul Forrester Dr. Charlotte A. Geffen
Aston University Business School, Birmingham, UK Battelle Memorial Institute, Richland, WA, USA
Dr. James W. Hooper
Marshall University, Huntington, WV, USA
Dr. Yasser Hosni Dr. Dominique Jolly
University of Central Florida, Orlando, FL, USA Groupe ESC Grenoble, Grenoble, France
Dr. Tarek Khalil
University of Miami, Miami, FL, USA
Prof. Isak Kruglianskas Dr. Koty Lapid Dr. Ellizabeth Lefebvre
University of Sao Paulo, Brazil Shark Technologies, Beer Sheva, Israel Ecole Polytechnique de Montreal, Canada
Dr. Louis Lefebvre
Ecole Polytechnique de Montreal, Canada
Dr. Robert M. Mason
Florida State University, Tallahassee, FL, USA
Dir. Horst Mueller
Eurowork Technologies, Sweden, and GRT, Lausanne,
Dr. Mohamed El Nawawi
Switzerland UNTDO, Vienna, Austria
Dr. Lionello Negri Dr Jorge E. Niosi
CNR STD3NOT, Rome, Italy University of Quebec at Montreal, Canada
Dr. Onno Omta
Wageningen University, The Netherlands
Dr. Tinus Pretorius Dr. Anil Rawat
University of Pretoria, South Africa Inst. Of Financial and Intl. Management, Bangalore,
Dr. James Rugusa Dr. M. Hashem Sherif Dr. Richard Smith
India University of Central Florida, Orlando, FL, USA ATT, USA Simon Fraser University, Vancouver, BC, Canada
Dr. Jose Solleiro Dr. William
Center for Technological Innovation, Mexico Thompson University of Central Florida, Orlando, FL,
Prof. Rias van Wyk
USA WR Sweatt Chair in the MOT, Institute of Technology University of Minnesota, USA
Dr. Maximilian von Zedtwitz BVID-International, Lausanne, Switzerland Dr. Philip Wolf
Arizona State University, USA
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SECTION I
E-COMMERCE AND SUPPLY CHAIN MANAGEMENT
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
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INTEGRATING SUPPLIERS IN A DEMANDPULL SUPPLY CHAIN
Pierre-Majorique Leger, HEC Montreal, Qc, Canada1 Louis-A. Lefebvre, Ecole Polytechnique de Montreal, Qc, Canada Luc Cassivi, Universite du Quebec a Montreal, Qc, Canada Pierre Hadaya, Universite de Sherbrooke, Qc, Canada4 Elie Elia, Ecole Polytechnique de Montreal, Qc, Canada5
INTRODUCTION In the late 1990s, the emergence of robust informational systems transformed the way business was conducted in many industries. Business functions such as manufacturing where collaboration could hamper volatile demand proved to be a favourable environment for e-commerce collaboration tools. This demand, powered by the growing needs of customers for personalized products and services, drove manufacturers to opt for mass customization and outsourcing strategies. In the quest for low-cost, high-quality products, manufacturers established flexibility as a priority in their business. Flexibility and collaboration among supply chain partners became critical for companies to compete and perform within their industry (Vickery et ai, 1999). Important modifications, such as the design of flexible modular products and the adjustment of production plans, were introduced to support short lead times. 1
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Pierre-Majorique Leger is Assistant Professor in the Department of Information Technologies at HEC Montreal. Email:
[email protected] Louis-A. Lefebvre is Full Professor in the Department of Mathematics and Industrial Engineering at Ecole Polytechnique de Montreal and Director of Centre ePoly. Email:
[email protected] Luc Cassivi is Assitant Professor in the Department of Management and Technology at Universite du Quebec a Montreal. Email:
[email protected] Pierre Hadaya is Assitant Professor in the Department of Management Information Systems and Quantitative methods at Universite de Sherbrooke. Email:
[email protected] Elie Elia is Ph.D. Candidate in the Department on of Mathematics and Industrial Engineering at Ecole Polytechnique de Montreal and research assistant at Centre ePoly. Email:
[email protected]
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THEORETICAL CONTEXT E-Commerce and Supply Chain Management Manufacturers and assemblers view business-to-business e-commerce initiatives as potential solutions to deal with the increased need for flexibility. By involving their suppliers and customers, they enhance flexibility through critical information exchanges among supply chain partners. The integration of information management and supply chain management along with other key corporate functions initiates the creation of tightly linked sets of inter-organizational transactions and processes (Spekman et al., 1998). Inter-organizational issues such as supply chain partnering and buyer-seller relationships remain at the forefront of business-to-business ecommerce (Sheth, 1996). In this study, e-commerce is found to encompass activities, such as collaborative product development, forecasting and production planning, that go beyond traditional transactional processes. Consequently, e-commerce initiatives require significant levels of cross-functional integration for the development of key processes (Lambert and Cooper, 2000). This integration compels companies to manage enterprise-wide knowledge and reacts to supply chain strategies proposed by partners (Muzumdar and Balachandran, 2001). Strategies like the outsourcing of manufacturing activities have become a competitive imperative and are among the extended supply chain initiatives of numerous organizations (Collins and Bechler, 1999). Other strategies, such as the development of joint activities, co-design and production plan sharing, have created synergistic effects for supply chain partners (Spina and Zotteri, 2000). The use of e-commerce tools to share information may also tighten relationships between partners of a supply chain. The implementation of collaborative e-commerce tools often transforms supply chain relationships by revealing both opportunities and difficulties (Boddy et al, 2000). Some difficulties are particularly likely to arise when several levels of suppliers are involved in the exchange of information, primarily communication and coordination problems. Lower-tier suppliers are often small and thus their material and human resources tend to be limited. Hence, the adoption of e-commerce initiatives must be well planned (Jeffcoate et al., 2000). However, when properly implemented, significant benefits arise from an efficient flow of information to second-, third- and fourth-tier suppliers. Another aspect of supply chain relationships that affects third- and fourth-tier suppliers is the power structure, which influences the involvement of smaller supply chain partners (Cox et al., 2000, 2001).
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RESEARCH QUESTION This paper analyzes the value chain of the optical connectivity equipment. This telecommunication device, which is composed of both hardware and software components, transmits information over a fiber-optic medium. Several case studies in this high-tech industry have revealed that e-commerce tools are extensively used in the day-to-day operations of the various companies examined. Using a semistructured questionnaire, seven companies, varying in size and in their position in the supply chain, were interviewed in order to identify the major e-commerce initiatives being exploited in the optical connectivity equipment value chain. Based on those case studies, particular attention is paid to the activities of the supply chain partners involved in the manufacturing of the optical connectivity equipment. A value chain matrix is used to address the following question: What are the impacts of e-commerce initiatives on the sub-assemblers and on the original equipment manufacturer (OEM)?
INDUSTRIAL SETTING The telecommunication equipment sector includes all the organizations that manufacture equipment and/or develop the associated software needed to fulfil the function of information processing and communication in a network. The optical equipment industry is a subgroup of that sector. The value chain of the optical connectivity equipment industry consists of four layers (Fig. 1.1). Network operators (the final users of the optical products) are in layer 1 and sub-assemblers (the manufacturers of parts and components) in layer 4. Optical connectivity equipment is purchased by network operators to operate telecommunication networks. These organizations can own and/or manage three types of networks: transport networks, metropolitan area networks and/or access networks. The four major market segments of network operators are the local exchange market, the inter-exchange market (connecting local exchanges in different areas), the Internet service provider market, and the network service provider market.
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Fig. 1.1 Optical connectivity equipment value chain
System integrators are the OEMs of optical connectivity solutions. The multinationals Nortel Networks, NEC, Lucent, Fujitsu, Tellabs, Alcatel, Sycamore, Cisco and Ciena are the major players in this industry. Today, these OEMs are moving from vertical integration of their value chain to a business model where they mostly focus on knowledge-based activities. As such, their investments are primarily focused on R&D to develop better products, on managing solid long-term relationships with clients and suppliers, and on integrating their final solutions at the clients' sites in accordance with their particular needs. The role of assemblers has evolved over the last few years. System integrators are outsourcing more and more of their assembly activities to electronic manufacturing specialists (EMSs). EMSs can manufacture the OEM's product with increased flexibility and lower costs. They benefit from lower labor costs and maximize production output by making heavy use of their manufacturing equipment. Solectron (with $14.1 billion in revenues in 2000), Celestica ($9.8 billion), SCI Systems ($9.2 billion), Flextronics ($4.3 billion) and Jabil Circuit ($3.5 billion) are among the major players in the EMS market. The last layer of the value chain comprises second-, third- and fourth-tier suppliers. The foremost activities being carried out in this layer of the value chain are component manufacturing and subsystem assembly. Some of these sub-assemblers are owned and operated by large multinationals with worldwide contracts such as Thomas & Betts while others are SMEs who have only a few major customers that continuously book orders.
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To understand the environment that shaped the design of the e-commerce initiatives adopted in the connectivity equipment value chain, it is important to identify the specific politico-economic, technological, industrial and market drivers for each layer of the value chain. The industry, which has changed drastically over the last few years, will be described over two periods: 1999-2000 and 2001-2002. Table 1.1 highlights the major changes that occurred from one period to the next. Table 1.1: Major changes in the environment of the optical connectivity equipment value chain (1999-2002)
The 1999-2000 period was characterized by an impressive growth rate. Adapting technical competencies to harness the convergence of voice and data was an imperative for all players in the industry. Manufacturing and production capacities were essential to constantly develop better products and remain first to market. Another important factor was demand fluctuation, which had to be carefully managed. Today's environment (2001-2002), on the contrary, is characterized by an economic slowdown and thus managing decreased demand has become a necessity for every player in the value chain. In 1999-2000, the primary strategy of network operators was to increase their telecommunications bandwidth capacity in targeted areas. In today's environment (2001-2002 period), network operators are now forced to postpone and even cancel infrastructure projects while still struggling with large amounts of debt. Consequently,
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network operators' overcapacity is translating into large inventories throughout the telecommunication equipment supply chain. Having to migrate from a world where electrons are transmitted over copper to one where light goes through glass fiber meant that system integrators needed to develop new core competencies. From 1997 to 2000, the acquisition of new start-up companies specializing in optical networking was seen as an opportunity to obtain these new competencies rapidly. Furthermore, improving flexibility and response time while increasing the level of outsourcing to EMSs was a difficult task since it required an integrated supply chain. In today's economic downturn (2001-2002 period), managing a flexible supply chain and supporting a demand-driven extended enterprise remain priorities for OEMs. Yet, they must now retain their key knowledge assets while downsizing their operations. Apart from the downturn, the assemblers' environment has not undergone any other major changes. EMSs are still building up flexible worldwide networks of manufacturing plants to provide sufficient production capacity to support their longterm relationships with system integrators. EMSs also continue to develop new valueadded services such as cradle-to-grave design, engineering, sourcing, and fulfilment services. The environment at the sub-assembler layer has been very competitive over the last few years. During the 1999-2000 period, OEMs and EMSs reduced their supplier base to a few key suppliers. As such, sub-assemblers faced constant pressure to extend their portfolio of products while supplying high-quality modular products. The recent downturn in the telecommunication sector has forced sub-assemblers to manage excess inventories and to compete on prices. Results The following three sections present the results of this study. First, nine adopted and planned e-commerce initiatives identified in the case studies are presented and described. Then the current and future impacts of these initiatives on the system integrator and sub-assembler layers are illustrated in a value chain matrix. Finally, this section concludes with the presentation of the major findings induced from this value chain analysis. E-Commerce Initiatives In order to grasp the implications and effects of e-commerce on the system and sub-assembler layer, a thorough understanding of the e-commerce adopted by these players was required. The following table describes different initiatives being implemented and used by system integrators assemblers.
integrator initiatives the nine and sub-
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Planned initiatives
Adopted initiatives
Table 1.2: E-Commerce initiatives e-Commerce initiatives
Description
1. Information platform
Serves as a collaboration platform for all value chain partners to exchange basic information.
2. Supply chain Ensures the exchange of information among business partners (forecasts, visibility tool suppliers' internal capacity and inventory status). 3. Web purchase Enables the transmission of purchase orders through a Web interface. orders 4. Web replenishment Orders directly from the shop floor on a demand-driven system. Collects shipping information from suppliers and delivers directly to final customers, i.e. network operators. 6. Billing and Executes billing and payment over EDI and is linked electronically to the firms1 payment internal systems. 7. Technical file Transfers files (blueprint of the required part in a standard digital format) through transfers an FTP server or directly by encrypted e-mail. Brings large companies and their suppliers together on a secure private electronic 8. Private electronic platform to exchange product information, conduct transactions on-line and adopt marketplace other value-added services. 5. Web shipping
9. Web configurator
Enables network planners to configure telecommunication equipment on-line with the use of a Web-based expert system.
The case studies pinpointed an important role of the system integrator, that of a change agent for the adoption of e-commerce. Generally developed internally by the OEM, these c-commerce tools suit the very specific needs and imperatives of the optical equipment supply chain. With the exception of the billing and payment tool, these initiatives are Wcb-based and directly linked to the OEM's Enterprise Resource Planning (ERP) system. The first seven tools were adopted in 2000 by the system integrator. The business partners were then progressively urged to adopt the tools. As for the last two initiatives, they are still at the design phase. The private electronic marketplace should be introduced in the not-too-distant future. The introduction of the Web configurator has been deferred due to the major cutbacks in the industry. E-Commerce Impacts on the Value Chain Based on a value chain analysis framework, Figure 1.2 presents the current and future effects of e-commerce on the system integrator and sub-assembler value chains. For purposes of comparison, the exact same generic value chain was used for both the sub-assemblers (on the left-hand side of the figure) and the system integrators (on the right). On the vertical axis of the matrix, the nine adopted and planned initiatives are listed. An "X" indicates that a given e-commerce initiative has generated innovative effects at this level of the value chain. An "F" indicates that the firms involved in the case studies expect innovative effects. The shaded area in the sub-assembler matrix
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indicates future challenges to be met by these small and medium-sized enterprises (SMEs). Value Chain Analysis The analysis of this figure reveals a pattern from which we can derive three major findings: the drivers of e-commerce adoption, the challenges for the subcontracting SMEs, and emerging trends for sectorial platforms. In the optical connectivity value chain, e-commerce adoption is driven by two main strategies initiated by the system integrator: the need for visibility throughout the supply chain and the implementation of a demand-pull approach. The accessibility of accurate and timely supply chain information makes all supply chain partners more visible. This visibility is achieved when partners can share information such as forecasts, schedules and production capacity, on a real-time basis. The supply chain visibility tool (initiative #2) has improved visibility by providing sub-assemblers with better forecasts. Sub-assemblers are now optimising production plans by anticipating fluctuations in demand. As for the system integrator, getting a clear picture of the subassemblers' production capacity and inventory status enables tighter management of shortages and greater flexibility in the attribution of orders. The adoption of e-commerce is also driven by the demand-pull strategy initiated by the system integrators. The trend toward customizing products more efficiently and diminishing lead times has clearly forced all layers of the optical connectivity equipment supply chain to implement customer-driven planning strategies. This demand-pull strategy is oriented toward make-to-order production, keeping inventories at very low levels and relying on fast procurement cycle times to fulfil customer needs. Visibility tools are insufficient to support a demand-pull approach and advanced collaboration tools (initiatives #3 to #7) are critical to successfully integrate planning and scheduling. As illustrated in Figure 1.2, only the system integrator's value chain has benefited from these initiatives for planning and scheduling, procurement, inventory management, manufacturing, and logistics activities. These advanced collaboration tools have significantly reduced total cycle time and inventory levels. The case studies revealed that sub-assemblers were not fully benefiting from the e- commerce initiatives. The main reason for this is the lack of internal system integration and the lack of flexibility in their planning and scheduling systems. The shaded area in Figure 1.2 illustrates these gaps. The vast majority of sub-assemblers that exploit functional applications (e.g. MRP II) are technologically and financially unable to support enterprise-wide integration. Moreover, none of them have developed interfaces between their internal system and the system integrator's Webbased tools. As such, information is manually transferred from one system to the other. A typical example of this is when a sub-assembler is unable to directly transfer
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the purchase orders received from the OEM to its scheduling system. The most frequent reasons given by sub-assemblers for not creating these interfaces are lack of capital, a perceived low return on investment, and different clients' conflicting ecommerce standards. As for the lack of flexibility in planning and scheduling activities, sub-assemblers may have to adopt new planning systems such as Advanced Planning and Scheduling (APS) tools that can run different planning scenarios on a daily basis. The hidden value of these e-commerce initiatives will be truly unleashed with cradle-to-grave demand-pull strategies and end-to-end visibility in the supply chain. In the present supply chain configuration, the power structure between SMEs and their own suppliers (often multinationals like Corning or JDS) is such that, while trying to extend electronic replenishment to the next manufacturing tier, the subassemblers face important challenges. For example, these large component suppliers use different e-commerce standards which require additional capital investments for the sub-assemblers. These power structure problems may well be overshadowed by the upcoming private sectorial platforms (or private exchanges). This e-commerce initiative (#8), driven by consortia of key players in the electronic industry, will bring together participating OEMs and their supplier bases in a secure environment. On these sectorial platforms, all business partners involved in the completion of a product can share and access the accurate and timely supply chain information required to optimise their operations (forecast, production capacity, inventories, delivery tracking, etc.). The platform is expected to benefit all manufacturing layers of the supply chain with applications such as the creation of end-to-end forecasts. At the other end of the value chain, Web configuration of telecommunication products (initiative #9) should also generate many benefits such as more efficient order and inventory management and improved demand planning.
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Fig. 1.2: The Value Chain Matrix: Analysis of the e-commerce impacts on the system integrator and sub-assemblers layers.
CONCLUSION Based on multiple case studies, this paper assesses the impacts of e-commerce initiatives on the value creation process for both an OEM and its sub-assemblers in the optical connectivity equipment industry. The empirical results reveal the importance of intra-enterprise integration at the sub-assembler level. They also highlight the need for more flexible planning tools and the influence of the power structure on the adoption of e-commerce in the supply chain. This study focused on the system integrator and sub-assembler layers of the optical connectivity equipment value chain. Future research should extend this value analysis to the impacts of e-commerce initiatives on the OEM's customers. It would also be interesting to understand how sub-assemblers can fully benefit from advanced e-commerce initiatives, e.g. collaborative planning forecasting and replenishment (CPFR) and advance planning and scheduling (APS). Analysing and benchmarking
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the impacts of e-commerce initiatives on the value chains of other high-tech industries could also prove interesting.
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BIBLIOGRAPHY Boddy, D., D. MacBeth and B. Wagner (2000). Implementing Collaboration between Organizations: An Empirical Study of Supply Chain Partnering. Journal of Management Studies, 37, 1003-1027. Collins, R. and K. Bechler (Fall 1999) Outsourcing in the Chemical and Automotive Industries: Choice or Competitive Imperative? The Journal of Supply Chain Management, 4-11. Cox, A., J. Sanderson and G. Watson (April 6, 2000). Wielding Influence. Supply Management, 31-33. Cox, A., J. Sanderson and G. Watson (Spring 2001). Supply Chains and Power Regimes: Toward an Analytic Framework for Managing Extended Networks of Buyer and Supplier Relationships. Journal of Supply Chain Management, 2835. Jeffcoate, J., C. Chappell and S. Feindt (2000). Attitudes towards Process Improvement among SMEs Involved in E-Commerce. Knowledge and Process Management Journal, 7, 187-195. Lambert, D.M. and M. Cooper (2000). Issues in Supply Chain Management. Industrial Marketing Management, 29, 65-83. Muzumdar, M. and N. Balachandran (2001). The Performance Advantage. APICS, 11, 57-61. Sheth, J.N. (1996). Organizational Buying Behaviour: Past Performance and Future Expectations. Journal of Business & Industrial Marketing, 11, 7-24. Spekman, R.E., J.W. Kamauff and N. Myhr (1998). An Empirical Investigation into Supply Chain Management: A Perspective on Partnerships. Supply Chain Management, 3, 53-67. Spina, G. and G. Zotteri (2000). The Implementation Process of Customer-Supplier Partnership. International Journal of Operations & Production Management, 20,1164-1182. Vickery, S., R. Calantone, and C. Droge (1999). Supply Chain Flexibility: An Empirical Study. Journal of Supply Chain Management, 35, 16-24.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
PREDICTING THE GLOBAL DIFFUSION O F INTERNET
USAGE
-
EFFECTS
OF
MARKET ENVIRONMENT
Kaisu Puumalainen, Lappeenranta University of Technology, Finland
INTRODUCTION The purpose of the present paper is to study how the characteristics of macro-level market environment affect the diffusion of Internet usage in different countries. The majority of previous applications of diffusion models have concentrated on consumer durables and developed countries. This study attempts to identify the factors affecting the applicability and parameters of diffusion models in order to find analogies for forecasting the diffusion of Internet usage in less developed markets. The objective of a diffusion model is to represent the level of spread of an innovation among a given set of prospective adopters in terms of a simple mathematical function of time that has elapsed since the introduction of the innovation (Mahajan and Muller, 1979). The underlying behavioral theory is that new product acceptance is an imitation process (Rogers and Schoemaker, 1971). Based on hundreds of studies in various disciplines, Rogers (1983) proposes that diffusion rates are affected by the type of innovation, its perceived attributes, the influence of communication channels, the nature of the social system and its population, the marketing activities of firms, consumer adoption processes, and the characteristics of individuals within the social system (Parker, 1994). The basic diffusion models have been criticized for their inability to include any independent explaining variables but time. Extensions to the basic model have included the role of some explanatory variables like pricing, advertising, promotion Dr. Kaisu Puumalainen is Professor of International Marketing at Department of Business Administration in Lappeenranta University of Technology, Finland, Email: kaisu.puumalainen@ lut.fi.
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Kaisu Puumalainen
and technological change (Robinson and Lakhani, 1975; Bass, 1980; Dolan and Jeuland, 1981; Horsky and Simon, 1983; Kalish, 1983). Although these studies provide valuable information on diffusion processes, they generally fail to consider more than one variable, and are not suitable for forecasting, since the additional variables would also have to be forecasted (Parker, 1994). Several authors have suggested using analogies by calculating estimates of the parameters for the analogies and regressing these estimates against various factors, like macroeconomic and micro level factors, that are likely to affect the diffusion process (Parker, 1994; Mahajan et al., 1990). The search for such empirical generalizations across products and social systems could guide forecasters in using diffusion models already at the earliest phases of product planning (Bass, 1993). As the globalization of markets increases, managerial interest in understanding adoption processes across countries has led to calls for more academic research on international diffusion (Dekimpe et al., 2000; Douglas and Craig, 1992; Dekimpe et al., 1994). Cross- cultural effects on the diffusion of innovations has previously been studied by e.g. Gatignon et al. (1989), Takada and Jain (1991), Helsen et al. (1993), Mahajan and Muller (1994), Dekimpe et al. (2000), and Gruber and Verboven (2001). Since most products are not launched simultaneously in multiple countries, large scale international studies using data from multiple categories should allow forecasters to anticipate the diffusion pattern of a product globally, or by country individually, given historic patterns in the earlier adopter markets (Parker, 1994).
THE BASS DIFFUSION MODEL AND MARKET ENVIRONMENT The Bass Diffusion Model Bass (1969) concluded that an innovation diffuses because of spread of information between adopters and from the mass media to adopters. Mathematically, the model is described by Equation (1): y(t) = —^ -• (i) x+q/.e-(^y /p The y on the left-hand side measures the number of cumulative adopters, and ; on the right hand side measures the point of time. Parameter m gives the upper asymptote of the function, and thus the final number of adopters. Bass sees the diffusion as a communication process, where the adoption is due to innovativeness (measured by p) and imitation (measured by q). Both parameters p and q have an effect on the shape of the diffusion curve: the smaller values they get, the later the turning point, which is the point of innovation's sales peak. Lekvall and Wahlbin (1973) suggested that the
Predicting the Global Diffusion of Internet Usage
17
Bass model coefficients p and q should be referred to as the coefficient of external influence and the coefficient of internal influence, respectively. The Bass model and its revised forms have been used for forecasting innovation diffusion in several areas like retail service, industrial technology, agricultural, educational, pharmaceutical and consumer durable goods markets (Mahajan et al., 1990). The innovations studied include e.g. movie attendance (Mahajan et al., 1984), televisions (Peterson and Mahajan, 1978), optical scanning equipment (Tigert and Farivar, 1981), and cellular phones (Dekimpe et al., 1998). Factors Affecting the Performance of the Bass Model As most of the previous applications of the Bass model have concentrated on one or just a few successful innovations and market areas, and mostly on developed western economies, there is a lack of understanding as to whether the diffusion model could be applied to less developed countries. According to Mahajan and Muller (1979), there is a distinct need to know when the models work and when they do not. Heeler and Hustad (1980) provided one of the earliest international diffusion analyses in marketing literature. Based on the Bass model, they found that the parameters varied by country and forecasting error was higher with international than U.S. data, and concluded that communication patterns and economic restraints may explain the differences between countries. The time dimension presents several limitations on the accuracy of the model specifications. In order to yield robust and stable parameter estimates at least six to ten periods of existing data are required for modeling, and the data should include the peak of the non-cumulative adoption curve (Heeler and Hustad, 1980; Srinivasan and Mason, 1986). Constraining the parameters to plausible ranges may allow for improved estimates with fewer observations, but the literature provides insufficient evidence on this subject (Parker, 1994). Bass (1969, p.266) noted "parameter estimates are very sensitive to small variations in the observations when there are only a few observations". There is assumed to be only one sales peak, which occurs no later than the penetration has reached 50% level, and around which the diffusion curve is symmetric (Parker, 1994; Mahajan et al., 1990). Furthermore, the early years of product diffusion often exhibit chaotic patterns, and the usefulness of these observations is questionable to estimate parameters, which are responsible for longterm trends (Modis and Debecker, 1992). Based on the discussion above, it is assumed that the Bass model works better in countries, where the diffusion has started earlier. The Bass model assumes a two step flow of communication, where the message of the innovation is first picked up through mass media communication by a few innovators who then pass the word to other members of the social system
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Kaisu Puumalainen
(Mahajan and Muller, 1979). This implies a complete social network, where all adopters interact with all nonadopters, which is unrealistic given the segmented nature of most markets (Bernhardt and MacKenzie, 1972). The Bass model is therefore supposed to work better in markets, where large amount of social communication among the members helps to reduce the risks of adoption. Social communication is likely to be enhanced by cultural homogeneity, equality and good communication infrastructure. Jain et al. (1991) suggest that the use of the Bass model is inappropriate in international settings where the supply of the product is restricted. Therefore the diffusion models for predicting the Internet usage should perform better in wealthier countries with better availability of telecommunications infrastructure and terminal devices. Factors Affecting the Parameters of Diffusion Models A unified theory to incorporate the marketing variables and exogenous factors into diffusion models is not apparent (Mahajan and Muller, 1979). Recent analogical approaches estimate the coefficients of external and internal influence from regression models that express a historical empirical relationship between these coefficients and product or market attributes. Once this relationship has been established, the values for the coefficients of a new product can be estimated by knowing its characteristics. This approach for the Bass model has been suggested by Srivastava et al. (1985), Gatignon et al. (1989), and Sultan etal. (1990). Thomas (1985) has recommended that the choice of analogies could be made on five bases of comparison: environmental situation, market structure, buyer behaviour, marketing mix strategy, and characteristics of the innovation itself. Helsen et al. (1993) used five factors based on 23 indicators: mobility, health situation, foreign trade activities, standard of living and cosmopolitanism. Several authors have argued that a society's diffusion rate is related to its standard of living and stage of economic development (Dekimpe et al., 2000; Antonelli, 1993; Gatignon and Robertson, 1985; Helsen etal., 1993). Uncertainty and risk taking are assumed to affect individual adoption timing (Parker, 1994), and factors like education and wealth reduce the perceived risk of adoption. In the telecommunications domain, Gruber and Verboven (2001) studied the diffusion of mobile communications in Europe. They found that GDP and technology had stronger effects on the diffusion than competitive situation. Generally in diffusion models the innovation is assumed to be independent of other innovations. However, Peterson and Mahajan (1978) have proposed that interrelationships with other innovations can affect the adoption rate of the innovation studied. They have classified innovations as independent, complementary, contingent
Predicting the Global Diffusion of Internet Usage
19
and substitute innovations. Mahajan et al. (1990) emphasize the need for consideration of other innovations especially if the products are contingent or complementary. The diffusion of Internet usage is contingent upon the network infrastructure and terminal devices. Mahajan and Peterson (1978) suggest that market potential changes over time and may even be affected by the exogenous variables like general economic conditions, changing characteristics of the individuals in the market, technological changes or government actions. If these characteristics affect the variability of market potential within a country, there is a reason to assume that the same characteristics affect the variability of the market potential between countries. Diffusion theory predicts varying diffusion rates and patterns by country because of differences in social system characteristics (Gatignon and Robertson, 1985). Firstly, innovations diffuse more slowly in heterogeneous social systems (Dekimpe et al., 2000; Gatignon and Robertson, 1985; Takada and Jain, 1991). There is no reason to suspect the validity of this hypothesis, although the nature and boundaries of the social systems where the diffusion is examined have experienced dramatic changes since the basic diffusion models were developed. The globalization and developments in information technology raise the question of determining the boundaries of social systems: do the diffusion models work on country level, when there are various segments within a country or the segments are cross-cultural? The effects of globalization and intercultural information flows have been demonstrated in the findings of Gruber and Verboven (1998), who found that European countries, who adopted mobile communications later, have caught up by faster diffusion rates. Especially in the presence of network externalities, it has been shown that countries adopting later will have faster diffusion (Dekimpe et al., 2000; Kumar et al., 1998). The effect of intercultural communication has also been demonstrated by Gatignon et al. (1989), who found that countries with a higher degree of cosmopolitanism show a greater propensity to innovate and a smaller propensity to imitate. Based on the discussion above. Figure 2.1 presents a synthesis of the factors that are assumed to affect the performance of the Bass diffusion model, estimated market potential and rate of diffusion.
Fig 2.1: Factors affecting the diffusion of Internet usage
20
Kaisu Puumalainen
EMPIRICAL RESEARCH Data and Measures The empirical study consisted of 113 countries from the ITU database with a population of more than 1 million inhabitants. The estimated number of Internet users in each country was available as an annual time series for all of these countries, but the length of the time series varied from 11 observations (years 1990-2000) to three observations (years 1998-2000). Since a minimum amount of six observations has been recommended for the use of the Bass diffusion model (Heeler and Hustad, 1980), the diffusion patterns were estimated only for those 80 countries, where the diffusion of Internet usage had started before 1996, and complete data until 2000 was available. The effects of political environment were measured using a composite country risk index obtained from PRS Group. Following Antonelli (1993), Helsen et al. (1993) and Dekimpe et al. (2000), GNP per capita in year 1991 was used as a measure of a country's wealth, obtained from the ITU database. The technological advancement was described by the Technology Achievement Index from United Nations Development Report, and technological infrastructure by telecommunications investments per capita, and number of personal computers per capita in 1991, obtained from the ITU database. Indicators for the socio-cultural environment included cultural homogeneity (number of ethnic groups, suggested by Dekimpe et al. (2000)), cosmopolitanism (outgoing international telephone call minutes per capita 1991), standard of living (Human Development Index 1990), and risk aversion (Hofstede's (1991) Uncertainty Avoidance Index). The earliness of adoption was measured by the starting year of Internet diffusion. Application of the Bass Model The Bass diffusion model was applied to 80 countries, where the diffusion of Internet usage had started prior to 1996. The dependent variable was the annual cumulative number of Internet users divided by population, i.e. the penetration of Internet usage among the population. The estimation of the model was conducted by SPSS nonlinear regression procedure with sequential quadratic programming. The estimate for eventual Internet penetration (market potential m) was constrained to be lower or equal to 1, following recommendations by Parker (1994). The estimation succeeded for only 24 countries (30%), while the model failed to converge in 17 countries (21%) and provided statistically non-significant estimates in 39 countries (49%). The latter problem is likely due to the small number of
Predicting the Global Diffusion of Internet Usage
21
observations, since the estimations quickly converged, but all the estimates were very close to the iteration starting values (m=l, p=.O5, q=.7O), and had typically standard errors more than ten times larger than the estimate itself, see Table 2.1. According to Parker (1994), the nonlinear estimation procedure appears to offer the best general approach to aggregate diffusion model estimation, although it typically suffers from non-converging estimates and local minima. Table 2.1: Results from the Bass model estimation Mean of launch year Estimation succeeded (N=24) Estimation did not converge (N=17) Estimates not significant (N=39) ANOVA test
Mean of m
Mean of p
Mean of q
91.4
.47
.004
.78
92.5
.40
-1.14
.87
93.6
.95
.0005
.69
F=21,sig.000
F=68,sig.000
F=1.9,sig.l57
F=l.l,sig.329
Most of the countries where the Bass model worked well had started the diffusion in 1990 or 1991. The eventual market potentials ranged from .13 for Slovakia to 1 for Austria, Belgium and Germany, with a mean value of .48. The coefficient of innovation was lowest in Ireland (.00074) and highest in New Zealand (.033) with a mean of .0043. The coefficient of imitation ranged from .42 (Finland) to 1.24 (Slovakia) with a mean of .78. The time from Internet launch to reaching eventual penetration was on average 14.4 years, ranging from nine years for Slovakia to 20 years for Germany and Belgium. EFFECTS O F MARKET ENVIRONMENT ON THE PERFORMANCE O F THE MODEL In order to find out, in what kind of circumstances the Bass model estimation worked well, an ANOVA analysis was performed. The means of environment factors in the three groups of estimation performance are presented in Table 2.2. The means are significantly different for all affecting variables except socio-cultural homogeneity. Countries, where the Bass model worked well are characterized by lower political risk, higher wealth, better technological advancement and infrastructure, cosmopolitanism, better living standard, and lower risk aversion. However, these countries have also started the diffusion of Internet usage earlier, and therefore the estimation of the Bass model is more likely to succeed just because of the amount of
22
Kaisu Puumalainen
data available. In order to control for the amount of observations, and find out the pure effects of the other environmental factors, a larger database of countries and innovations would be required. Table 2.2: The performance of the Bass model in different environments Variable Political risk TAI Telein vestment PCs GDP Ethnic groups Communication HDI UAI Launch year
ANOVA test Mean of variable in subgroup Estim. ok F Fail conv. Std .errors 84.1 27.5 68.8 71.6 .58 25.7 .29 .40 26.9 33.4 142.7 49.9 37.7 .016 .015 .098 3432 18568 43.3 3785 6.2 .26 5.4 5.5 29.4 7.4 66.5 9.7 .87 25.7 .67 .77 11.1 53.3 70.5 83.8 1991.4 20.8 1993.6 1992.5
Sig. .000 .000 .000 .000 .000 .768 .000 .000 .000 .000
EFFECTS O F MARKET ENVIRONMENT ON THE PARAMETERS The effects of the hypothesized factors affecting the diffusion parameters could unfortunately be tested only on a very limited sample, i.e. the 24 countries, where the Bass model worked well. The small sample size does not favor the use of multiple regression models, and thus the associations between diffusion parameters and affecting factors are based on simple correlations, see Table 2.3. Furthermore, the high multicollinearity among the affecting factors makes the interpretation of the results only tentative. From Table 2.3, it can be seen that the environmental factors have the strongest impact on the estimated market potential: the potential is higher for countries characterized by high standard of living, cosmopolitanism, and wealth. Also low political risk, high technological advancement and technological infrastructure are weakly associated with higher market potential estimates. The coefficient of innovation is higher in later adopting countries. The coefficient of imitation is lower in wealthier countries, but this association may well be spurious, resulting from the fact that wealthier countries are earlier adopters having slower diffusion than later adopting countries.
Predicting the Global Diffusion of Internet Usage
23
Table 2.3: Correlations between diffusion parameters and affecting factors
Political risk TAI
Teleinvestment PCs GDP
Ethnic groups Communication HD1 UAI
Launch year
m
P
q
.378* .399* .367* .388* .542** .296 .590** .673** .026 -.322
-.075 -.084 -.088 -.036 .108 .143 -.027 -.077 -.199 497**
-.052 -.126 -.142 .074 -.354* -.047 -.227 -.300 -.252 .224
Years to m .188 .255 .352 .073 .390* .058 .333 .473** .194 -.615**
** correlation is significant at the .05 level, * significant at the . 10 level
CONCLUSIONS AND FURTHER RESEARCH Countries, where the Bass model worked well are characterized by lower political risk, higher wealth, better technological advancement and infrastructure, cosmopolitanism, better living standard, and lower risk aversion. However, the pure effects of environmental factors on the performance of the diffusion model could only be identified, if a large enough sample was available to control for the effects of adoption timing. The study confirmed that diffusion tends to be faster in countries that adopt the innovation later. The potential is higher for countries characterized by high standard of living, cosmopolitanism, and wealth. The results of this study in general provide further empirical evidence on the difficulties associated with international diffusion forecasting. A problem in the parameter estimation is that one is working with very few data points and multicollinearity among the variables, and one may obtain parameter estimates which are unstable with high standard errors. This may require consideration of such approaches as ridge regression to handle multicollinearity (Mahajan and Muller, 1979), or "soft computing" approaches like neural networks. The convergence of NLR estimation to local minima due to small number of observations could be avoided by using a larger variety of iteration starting values, or by using semiannual or quarterly data instead of annual diffusion data.
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Kaisu Puumalainen
BIBLIOGRAPHY Antonelli, C. (1993). Investment and Adoption in Advanced Telecommunications. Journal of Economic Behavior and Organization, 20, 227-245. Bass, F.M. (1969). A new Product Growth Model for Consumer Durables. Management Science, 15, 215-227. Bass, F.M. (1980). The Relationship between Diffusion Rates, Experience Curves, and Demand Elasticities for Consumer Durable Technological Innovations. Journal of Business, 53, July, 51-67. Bass, F.M. (1993). The Future of Research in Marketing: Marketing Science. Journal of Marketing Research, 30, February, 1-6. Bernhardt, L. and K.E. MacKenzie. (1972). Some Problems in Using Diffusion Models for New Products. Management Science, 18, 187-200. Dekimpe, M.G., P.M. Parker and M. Sarvary. (1994). Modeling Global Diffusion Processes: An Application to the Cellular Telephone Industry. Working Paper, INSEAD, Marketing Department. Dekimpe, M.G., P.M. Parker and M. Sarvary. (1998). Staged Estimation of International Diffusion Models: An Application to Global Cellular Telephone Adoption. Technological Forecasting and Social Change, 57, 105-132. Dekimpe, M.G., P.M. Parker and M. Sarvary. (2000). Global Diffusion of Technological Innovations: A Coupled-Hazard Approach. Journal of Marketing Research, 37, February, 47-59. Dolan, R.J. and A.P. Jeuland. (1981). Experience Curves and Dynamic Demand Models: Implications for Optimal Pricing Strategies. Journal of Marketing, 45, 1,52-73. Douglas, S.P. and S.C. Craig. (1992). Advances in International Marketing. International Journal of Research in Marketing, 9, 291-318. Gatignon, H., J. Eliashberg and T.S. Robertson. (1989). Modeling Multinational Diffusion Patterns: An Efficient Methodology. Marketing Science, 8, 231-247. Gatignon, H. and T.S. Robertson. (1985). A Propositional Inventory for New Diffusion Research. Journal of Consumer Research, 11, 849-867. Gruber, H. and F. Verboven. (1998). The Diffusion of Mobile Telecommunications Services in the European Union. Discussion papers, 138. Tilburg University, Center for Economic Research. Gruber, H. and F. Verboven. (2001). The Diffusion of Mobile Telecommunications Services in the European Union. European Economic Review, 45, 577-588. Heeler, R.M. and T.P. Hustad. (1980). Problems in Predicting New Product Growth for Consumer Durables. Management Science, 26, 1007-1020.
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25
Helsen, K., K. Jedidi and W.S. DeSarbo. (1993). A New Approach to Country Segmentation Utilizing Multinational Diffusion Patterns. Journal of Marketing, 57, October, 60-71. Hofstede, G. (1991). Cultures and Organizations: Software of the Mind Intercultural Cooperation and its Importance for Survival. McGraw-Hill, Cambridge. Horsky, D. (1990). A Diffusion Model Incorporating Product Benefits, Price, Income and Information. Marketing Science, 9, 342-365. Horsky, D. and L.S. Simon. (1983). Advertising and the Diffusion of New Products.
Management Science,!, 1-17. Jain, D. and R.C. Rao. (1990). Effect of Price on the Demand for Durables: Modeling, Estimation, and Findings. Journal of Business and Economic Statistics, 8, 163-170. Jain, D., V. Mahajan and E. Muller. (1991). Innovation Diffusion in the Presence of Supply Restrictions. Marketing Science, 10, 83-90. Kalish, S. (1983). Monopolist Pricing with Dynamic Demand and Production Cost. Marketing Science, 2, 135-160. Kumar, V., J. Ganesh and R. Echambadi. (1998). Cross-National Diffusion Research: What Do We Know and How Certain Are We? Journal of Product Innovation Management, 15, 255-268. Lekvall, P. and C. Wahlbin. (1973). A Study of Some Assumptions Underlying Innovation Diffusion Functions. Swedish Journal of Economics, 75, 362-377. Mahajan, V., E. Muller and A. Kerin. (1984). Introduction Strategy for New products with Positive and Negative Word-of-Mouth. Management Science, 30, 13891404. Mahajan, V. and E. Muller. (1979). Innovation Diffusion and New Product Growth Models in Marketing. Journal of Marketing, 43, Fall, 55-68. Mahajan, V. and E. Muller. (1994). Innovation Diffusion in a Borderless Global Market: Will the 1992 Unification of the European Community Accelerate Diffusion of New Ideas, Products and Technologies? Technological Forecasting and Social Change, 45, 221-237. Mahajan, V. and R.A. Peterson. (1978). Innovation Diffusion in a Dynamic Potential Adopter Population. Management Science, 15, 1589-1597. Mahajan, V., E. Muller and F.M. Bass. (1990). New Product Diffusion Models in Marketing: A Review and Directions for Research. Journal of Marketing, 54, 1-26. Modis, T. and A. Debecker. (1992). Chaoslike States Can Be Expected Before and After Logistic Growth. Technological Forecasting and Social Change, 41, 111-120.
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Parker, P.M. (1994). Aggregate Diffusion Models in Marketing: A Critical Review. International Journal of Forecasting, 10, 353-380. Peterson, R.A. and V. Mahajan. (1978). Multi-Product Growth Models. In Research in Marketing, J. Sheth, ed. JAI Press, Greenwich. Robinson, V. and C. Lakhani. (1975). Dynamic Price Models for New Product Planning. Management Science, 21, 1113-1132. Rogers, E. M. (1983). Diffusion of Innovations. Free Press, New York. Rogers, E.M. and F.F. Shoemaker. (1971). Communication of Innovations: A CrossCultural Approach. The Free Press, New York. Sharif, M.N. and K. Ramanathan. (1981). Binomial Innovation Diffusion Models with Dynamic Potential Adopter Population. Technological Forecasting and Social Change, 20, 63-87. Srinivasan, V. and C.H. Mason. (1986). Nonlinear Least Squares Estimation of New Product Diffusion Models. Marketing Science, 5, 169-178. Srivastava, R.K., V. Mahajan, S.N. Ramaswami and J. Cherian. (1985). A MultiAttribute Diffusion Model for Forecasting the Adoption of Investment Alternatives for Consumers. Technological Forecasting and Social Change, 28, 325-333. Sultan, F., J.U. Farley and D.R. Lehmann. (1990). A Meta-Analysis of Applications of Diffusion Models. Journal of Marketing Research, 27, 70-77. Takada, H. and D. Jain. (1991). Cross-National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries. Journal of Marketing, 55, April, 4854. Thomas, R.J. (1985). Estimating Market Growth for New Products: An Analogical Diffusion Model Approach. Journal of Product Innovation Management, 2, 45-55. Tigert, D. and B. Farivar. (1981). The Bass New Product Growth Model: A Sensitivity Analysis for a High Technology Product. Journal of Marketing, 45, Fall, 81-90.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
CAN ELECTRONIC DATA INTERCHANGE MEASURE U P T O A COLLABORATIVE SUPPLY CHAIN?
Timothy McNichols, Trinity College, University of Dublin, Ireland' Louis Brennan, Trinity College, University of Dublin, Ireland2
INTRODUCTION The recent focus on supply chain management and collaborative commerce, cCommerce, has highlighted the significance of information systems across extended enterprises. Proactive organizations are increasingly pursuing more collaborative opportunities with their supply chain partners. Intensifying this interest is the accelerated pace of development of Internet-based systems capable of bridging the organizational divide. Many organizations perceive Internet-based systems as an 'enabling technology' (Porter, 2001:64) in providing operational and potentially strategic benefits to their supply chain activities. Although, in the past, some organizations invested in Electronic Data Interchange (EDI) in order to obtain operational improvement and strategic advantage in their industries, yet actual results are mixed when compared to company expectations (Holland et al., 1992; Mukhopadhyay et al., 1995; Massetti and Zmud, 1996). Often these EDI investments fail to deliver the expected results causing doubt over the 'true' value of the system. The limited uptake of EDI as well as the uncertainty surrounding the benefits of interorganizational systems may hinder future investments in information system linkages with supply chain partners.
1
Mr. Timothy McNichols is a Government of Ireland Senior Research Scholar** at the School of Business Studies, Trinity College Dublin, Ireland. 'E-mail:
[email protected] **Funding received from the Irish Council for the Humanities and Social Sciences 2 Dr. Louis Brennan is a Senior Lecturer at the School of Business Studies, Trinity College Dublin, Ireland. E-mail:
[email protected]
28
Timothy McNichols and Louis Brennan
To reduce this uncertainty, the authors examined numerous EDI studies in terms of their appropriateness for evaluating the potential benefits of Internet-based collaborative initiatives. While existing EDI approaches for assessing interorganizational benefits can provide an initial platform for investigation, they are insufficient as an archetype for Internet-based collaborative systems due to the complexities of supply chain interactions, the difficulty in isolating collaborative benefits and the multiplicity of business processes. Furthermore, there are a discernible lack of studies which evaluate EDI by integrating the diverse perspectives of information systems, organization theory, operations management and strategic management literatures. Hence, a multi-disciplined holistic approach is required to fully evaluate the complexities and expanded potential of these new Internet-based collaborative systems.
Em T O INTERNET-BASED COLLABORATIVE SYSTEMS Internet-based collaborative systems (IBCS) are a relatively recent phenomenon. Historically, the origins of supply chain linkages can be traced to EDI as one of the earliest inter-organizational systems to be scrutinized academically. There are many definitions of EDI, such as, the "computer-to-computer transmissions of standard business data" (Emmelhainz, 1990:8) and "intercompany computer-to-computer communication of standard business transactions in a standard format" (Sokol, 1995:14). However, this early e-Commerce system necessitates a more detailed definition involving the transmission of standard business documents in a standard format from one trading partner's computer application to another (Banerjee and Sriram, 1996). Distinguishing EDI as a standard trading partner interface highlights the limited transaction sets of this type of system. In the last decade, Enterprise Resource Planning (ERP) has gained momentum as an enterprise wide information system. Although until recently ERP systems were predominated internally focused with only limited support for inter-organizational linkages (Saloner and Spence,
Figure 3.1: Evolution of Interorganisational Systems (Darker = More Interorganisational focus)
2002:94). The development of truly collaborative systems is only now beginning to evolve with the Internet as an enabler (refer to Figure 3.1).
Can EDI Measure up to a Collaborative Chain?
29
To sustain strategic benefits from inter-organizational systems, Fearon and Philip (1998) argue that adversarial methods of competition need to be replaced in favor of longer term collaborative trading practices. However, the question of whether EDI enhances supply chain partnerships has been inconclusive in the literature. Clemons and Row (1992; 1993) proposed there are conditions in which EDI is a partnership enhancer leading to long-term trading relationships that may confer competitive advantage. Contrary to this, Pfeiffer (1992) contends that although EDI connects disparate organizations there is limited empirical evidence of its influence on the establishment of collaborative relationships. Collaboration is defined as a process of decision making among independent organizations involving "joint ownership of decisions and collective responsibility for outcomes" (Gray, 1991:227). For collaborative relationships, this definition could be elaborated to include: a commitment to working together; goal congruency and benefit sharing. Since the success of collaboration depends upon the ability and willingness of managers to build meaningful relationships and create trust (Schrage, 1990). Internet-based collaborative systems can be defined as hubs for collaborative commerce efforts, where companies can exchange proprietary data, jointly manage projects and cooperate on the design of new products (Williams, 2000).
DISCIPLINARY PERSPECTIVES OF EDI EVALUATION An extensive review of previous EDI literature is important in order to classify the evaluation approaches relevant to E C S . Many authors have investigated the benefits of inter-organizational systems and EDI in particular. However, the difficulties in evaluating the benefits are wide ranging, including the complexity and dynamics of the supply chain, the socio-political dimensions of trading partner relationships, the various organizational contingencies to the actual measurement of the performance outcomes. Given these difficulties, very few authors have incorporated a multidisciplinary approach to investigate this phenomenon with notable exceptions, such as: Chatfield and Bjorn-Andersen (1997); Holland and Lockett (1994); Chatfield and Yetton (2000); Bensaou (1997) and Reekers and Smithson (1994). The following section reviews the main disciplinary approaches to EDI evaluation. The largest category of literature on EDI is information systems research which has been considerably influenced by the transaction cost analysis perspective (Williamson, 1975; 1985). This economic approach focuses on efficiency implications resulting from trading partner information links. Authors have utilized this perspective to justify the costs of implementing inter-organizational information systems (Clemons and Row, 1992; 1993) or alternatively, to investigate the difference between electronic markets and hierarchies (Malone et al., 1987; Benjamin et al.,
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1990; Choudhury, 1997) within EDI systems. The majority of the information systems literature on EDI is focused around five separate perspectives: (1) a 'technological' perspective based upon the technological obstacles as a barrier to successful adoption. (2) An 'impact on organizations' perspective where the potential of EDI for organizational and strategic benefits are evaluated. (3) An 'implementation' perspective which explores the role of planning or critical success factors in adopting EDI (Galliers et al., 1995). (4) An 'inter-organizational structures' perspective which concentrates on the ability of EDI to restructure an industry or transform individual partnerships, e.g. Cash and Konsynski (1985), Holland et al. (1992). (5) A 'business process reengineering' perspective emphasizing how EDI can enable business processes and provide a platform for redesigning processes (Benjamin et al., 1990; Venkatraman and Zaheer, 1990; Swatman et al., 1994). Strategic management literature often criticizes the transaction cost paradigm as it concentrates on the extremes of markets and hierarchies while neglecting network forms (Oliver, 1990; Ring and Van De Ven, 1992; Roberts and Mackay, 1998). This network concept considers EDI a structural enabler to improve flexibility, exchange and adaptation processes (Reekers and Smithson, 1996). Thereby allowing individual firms to increase their resources and capabilities to compete effectively against competitors by coordinating their strategies, resources and competencies in these structures (Roberts and Mackay, 1998). Roberts and Mackay (1998) stress that achieving potential from e-commerce initiatives in the supply chain is beyond implementing an information system but a process of organizational change. Other authors emphasize e-commerce systems ability to link into the organization's business strategy (Porter, 2001) or a means to implement competitive strategies in organizations (Kalakota and Whinston, 1997). Many operations management authors (Shapiro, 1984; Scott and Westbrook, 1991; Bowersox and Closs, 1996) argue that linking information systems allows more supply chain integration and information sharing, which can substantially improve overall supply chain performance. These systems can provide enablers for better coordination and planning of the supply chain if organizations develop their capabilities for sharing information in an effective manner (Lee and Whang, 2000). The complexities of supply chain interactions need to be considered when evaluating the benefits of inter-organizational systems. Another important consideration is the effect of socio-political factors, in particular interdependency, power and trust. The resource dependency approach focuses on the power/dependence relationship of organizations, since EDI is often regarded as a control mechanism to expand influence and power. Various studies (Premkumar and Ramamurthy, 1995; Webster, 1995; Hart and Saunders, 1997; Zaheer et al., 1998) have indicated that these factors have an impact on EDI use and its resulting benefits. However, a criticism of resource dependency theory is the
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limited focus on dyadic relationships between trading partners (Reekers and Smithson, 1996). A network perspective argues that in order to understand the dynamics of inter-organizational coordination it is necessary to study 'several party' relationships (Axelsson and Easton, 1992). The limited marketing research that exists on EDI is mainly concerned with the influence on trading partner relationships. An alternative to the transaction cost approach, authors emphasize the socio-political impact on the channel relationship (Stern and Kaufman, 1985; Mohr, 1990) or the innovation adoption theory (O'Callaghan et a l , 1992). Williams et al. (1998) investigated how organizational behavior affects the channel relationship through innovation adoption theory. Indicating that the adoption of technologies is not only influenced by internal factors but also the organization's external environment (Gatignon and Robertson, 1989).
REVIEW: THE IMPACT OF EDI There are different ways to categorize the benefits attributable to inter-organizational systems. Iacovou et al. (1995) identified two distinct categories of potential advantages based upon the level of system integration within the organization: direct and indirect benefits. Direct benefits focus on operational savings and efficiency namely, reduced transaction costs; improved cash flow; reduced inventory levels and cycle time; improved information quality. Whereas indirect benefits are mainly concerned with follow-on benefits, namely, competitive advantage; improved trading partner relationships; significant organizational change; improved customer service; and new markets or opportunities. An extensive literature survey revealed literature and empirical studies from multiple disciplines evaluating the benefits of EDI (table available from authors). Of the eighty-five empirical studies reviewed, a vast majority investigated the direct benefits, particularly whether operational savings were achieved. The majority of the empirical research indicated a positive impact between EDI adoption and operational benefits in terms of reduced transaction costs, improved cash flow, higher information quality, quality improvements (refer to Table 3.1). However, some studies could not substantiate a link between EDI and inventory level reductions / cycle times, which was disputed by 20%. Another contentious direct benefit is whether EDI contributes to quality improvements. However, the limited number of studies precludes any firm conclusions. The paucity of studies examining EDI impact on quality improvements and increased cash flow may stem from the difficulty in isolating these variables in a fluid and multivariate environment. Although most of the studies investigating the ability of EDI to increase operational efficiency in adopting organizations supported this contention, 15% of the sample disputed this claim.
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Timothy McNichols and Louis Brennan Table 3.1: Multidiscipline Literature Survey of EDI Benefits (85 surveys) Note: Due to rounding the sum of the percentages can exceed 100%
Recent EDI studies are moving away from examining efficiency and effectiveness benefits towards indirect benefits. Of the eighty-five empirical studies reviewed, roughly two-thirds investigated some elements of indirect benefits often with contradictory evidence. The three most contentious benefits are: competitive advantage, improvement of buyer-seller relationships and improved customer service (refer to Table 3.2). Competitive advantage is the most contentious with 52% of the pertinent studies unable to substantiate the linkage with EDI. Benjamin, De Long et al. (1990) proposed that EDI can provide competitive advantage over a limited period but eventually becomes a competitive necessity when other competitors adopt the technology. Nishiguchi (1994) suggests that the inability to provide long-term sustainable competitive advantage implies that "EDI is essentially a cooperative phenomenon" (p.42). However, even the notion that EDI is a cooperative phenomenon has been contested by 31% of the applicable studies in this survey. Some studies have observed the forced adoption by their trading partners, e.g. Webster (1995), observed lower potential benefits from the non initiator organization than the initiator. Several authors (Emmelhainz, 1988; Iacovou et al., 1995; Lim and Pal via, 2001) have suggested EDI provides a more efficient and less costly method of communication with customers. However, other studies (Hinterhuber and Levin, 1994; Suzuki and Williams, 1998) indicate that EDI may hinder customer service due to a buyer being locked into a limited number of suppliers which exerts pressure on the suppliers.
Can EDI Measure up to a Collaborative Chain?
Symbol key: Mixed ? Power? Pro Con
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Mixed findings due to other factors (i.e. organizational factors and industry competitiveness) Benefits contingent upon the length of time of advantage or industry competitiveness Benefits contingent upon relationship dynamics between trading partners Study found a relationship between EDI and this type of benefit Study found no relationship between EDI and this type of benefit
MEASUREMENT METHODS IN EDI One crucial element in determining the effectiveness of inter-organizational systems is measuring the potential benefits from Internet-based collaborative systems. The difficulty lies in quantify the benefits given that traditional financial management techniques focus on conventional models such as Return on Investment methods, Net Present Value, Activity-Based Costing and Cost Value strategies to justify implementing information systems. While these methods are satisfactory for measuring cost savings, many of the inter-organizational benefits are less tangible. Often the value of IT initiatives is based upon contribution to a firm's competitiveness through information transfer and value creation at a strategic level (Ross et al., 1996). Furthermore, the impacts of inter-organizational systems are often indirect and/or unintended, requiring consideration of the contingencies in supply chain interactions. A review of the literature reveals that diverse research methods have been employed to measure EDI benefits. Surveys and/or questionnaires are utilized the most frequently and appear in 51% of the reviewed studies. These techniques are often supported by statistical analysis of the results. The substantial use of surveys
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and questionnaires may be due to the problematic nature of measuring indirect benefits. Often the indirect benefits of organizations require certain evaluation criteria that are difficult to quantify such as customer satisfaction, information flow, supplier performance and flexibility (Beamon, 1999). The second most common form of investigation, case studies accounted for 33% of the sample. Very few studies have employed mathematical-based methodologies. This might possibly be due to the difficulties in quantifying the benefits particularly of an indirect nature. The limited studies have focused predominantly on statistical modeling using financial data or simulation forecasting. Some authors (Cachon and Fisher, 2000; Lee and Whang, 2000) have applied statistical methods to analyze the effects of EDI on a trading dyad (refer to Table 3.3). These studies investigated the information sharing potential of EDI in stationary and non-stationary demand situations. The primary purpose of these modeling techniques is to forecast the effects of information sharing. However, difficulties in employing this methodology arise when examining a network relationship (non-dyadic) or investigating multivariate environments. Furthermore, the fluid environment of an Internet-based system is problematic when attempting to examine multiple temporal variables. Alternatively, simulation models are used to replicate a realistic trading environment to provide traceable results from EDI implementation (refer to Table 3.3). Simulation models can provide a controlled environment in situations where it is problematic to isolate the desired variables as in a network relationship. However, the majority of studies using simulation methods examined one or more direct benefits, such as inventory levels/cycle times, sales forecasting and information exchange benefits. To assess the actual indirect benefits of Internet-based collaborative systems, an in-depth qualitative-based approach is deemed most appropriate.
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Table 3.3: Quantitative Assessment Methods for EDI Adapted from Hoogeweegen et al. (1998)
LIMITATIONS O F EDI EVALUATION The evaluation approaches of EDI can provide a rudimentary platform for the initial assessment of Internet-based collaborative systems. However, there are several limitations associated with using EDI as the benchmark for research into Internetbased collaborative systems. Firstly, traditional EDI systems are based around proprietary communication protocols limiting the exchange potential of the system and often constrained by industry standards (Lee and Whang, 2000). Open protocols (TCP/IP) and platform languages can provide more sophisticated technological capability and capacity to share information across organizational boundaries more conveniently, more flexibly and at a lower cost. This greater capacity increases the likelihood of greater potential benefits. Secondly, generic EDI systems may fail to adequately represent the special requirements of a particular supply chain, since EDI is designed for transaction processing with rigid text formats, this severely limits higher level information sharing (Lee and Whang, 2000). The augmented scope of transaction sets increases the diversity of potential benefits including indirect benefits. Thirdly, a collaborative system based around an Internet network structure expands the interaction variables from a typical dyadic focus of an EDI system towards multiple relationships. This network of interactions among supply chain partners has to be considered when assessing the benefits of IBCS. Finally with the situational factors much more complex, the multiple dimensions of variables become more intensified and consequently, so does the evaluation methods required.
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A HOLISTIC MODEL FOR EVALUATING COLLABORATIVE SYSTEMS The preceding analysis points to the need for a combined perspective, employing a holistic approach to the evaluation of IBCS in order to truly assess the potential of collaborative supply chain initiatives. In addition to previously identified variables from the EDI literature, the distinguishing characteristics of collaboration need to be identified and evaluated, namely: power and trust; information sharing and knowledge transfer; and management support (goal congruency). These constructs need to be developed and tested. Only then can a more inclusive evaluation model be constructed that integrates these collaborative constructs with the relevant variables from previous EDI approaches. POWER AND TRUST Both the development and operation of inter-organizational systems pose opportunity shifts in the balance of power between companies. The interdependency of organizations, particularly the pressure from trading partners, plays a central role in inter-organizational systems adoption by firms (Iacovou et ai, 1995; Webster, 1995; Hart and Saunders, 1997). One of the biggest challenges in supply chain relationships is cultivating mutual trust. However, participants may be reluctance to share information on costs and processes, due to sensitive and confidential information, which inhibits the trust necessary to harness collaborative inter-organizational efforts (Handfield et ai, 2000). The constructs of power and trust, often omitted from EDI studies, are necessary for a truly IBCS to achieve collaborative benefits. INFORMATION SHARING AND KNOWLEDGE TRANSFER A central premise of collaboration is to what extent companies are willing to share information and give up their individualism in favor of more collaborative partnerships (Reekers and Smithson, 1994). Firms can form information partnerships, by sharing information and linking their information systems to achieve unique synergies (Konsynski and McFarlan, 1990). This willingness of organizations to transfer knowledge can create value networks (Allee, 1998), which redistribute organizations' core competencies to supply chain linkages and increase the value throughout the supply chain. The extent of information sharing and collaborative work practices are vital constructs to evaluate collaborative performance.
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MANAGEMENT SUPPORT (GOAL CONGRUENCY) Top management support is important in inter-organizational systems, requiring long term vision and top level interaction among trading partners (Premkumar and Ramamurthy, 1995). The diverse nature of the buyer-supplier relationships within one firm or a supplier network can have a substantial impact on the attainment of the inter-organizational system. A collaborative system needs flexibility to pursue the different organizational goals required when supporting relationships from strategic to transaction-based suppliers. To fully achieve more information sharing, organizations need to participate in goal congruency as well as being organizationally capable and prepared to participate. The management support for the relationship and the extent of goal sharing are important collaborative constructs. An evaluation model needs to investigate all the collaborating participants to fully assess the impact of IBCS. The vast majority of previous EDI studies evaluate only limited elements of the diverse factors that influence the outcome of collaborative systems. A more comprehensive holistic model needs to incorporate the following three criteria (see Figure 3.2): (1.) The differences between EDI and Internet-based technologies reveal the need to consider each organizations' preparedness in terms of integrating these new systems within its supply chain; and (2.) The interaction contingencies that address the complexities of the supply chain dynamics such as the multiplicity of relationships; and (3.) The perceptions of organizations adopting the system are considered to be a crucial ingredient in the determination of benefits from collaborative systems. A higher recognition of the benefits from the system increases the likelihood that resources will be allocated to implement the system (Iacovou et ai, 1995).
Figure 3.2: A Holistic Model for Evaluating Internet-based Collaborative Systems
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CONCLUSION EDI fails to measure up to a collaborative supply chain but can provide an initial stepping stone to investigate this contemporary area of collaborative systems. This paper has considered the role of EDI within the context of evolving interorganizational relationships along the supply chain. A survey of previous EDI studies from a number of disciplinary perspectives reveals mixed evaluation outcomes. Greater consistency across the studies was found in relation to direct benefits with the vast majority of studies reporting improvements at an operational level. On the other hand, there was less consistency in relation to outcomes associated with indirect benefits with less than 50% of studies finding that EDI delivered competitive advantage. A variety of approaches, both qualitative and quantitative approaches, have been deployed to evaluate EDI benefits. When considered in the context of Internet-based supply chain collaborative initiatives, the considerable deficiencies of these approaches become apparent. The limitations derive from the inherently limited nature (even when applied to EDI systems) and the significantly greater capabilities that can be harnessed from Internet-based collaborative systems and the ensuing relationships. This suggests that a holistic based approach to the evaluation of collaborative systems within the supply chain is required. Existing methods for measuring interorganizational benefits are insufficient as a prototype for assessing Internet-based collaborative systems, particularly due to the complexities of supply chain networks and the difficulty in isolating benefits from multiple variables. However, some of the evaluation perspectives can provide the foundation to guide the construction of a new IBCS framework. Nevertheless, a revised framework incorporating a nexus of interdisciplinary factors is recommended. This holistic model needs to integrate the key elements from the multiple disciplines to comprehensively assess the benefits achievable from Internet-based collaborative systems. Only when the vital constructs which define collaboration are included can a truly IBCS model be developed. The adequacy and comprehensiveness of this model needs to be operationalized. Such an exercise would help in establishing its robustness and the requisite model refinement.
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BIBLIOGRAPHY Allee, V. (1998). Reconfiguring the value network. J. Bus. Strategy, 21, 4. Anvari, M. (1992). Electronic data interchange and inventories. Int. J. Prod. Earn., 26,1-3. Axelsson, B. and Easton, G. (1992). Industrial Networks: A New View of Reality. Routledge, London. Banerjee, S. and Sriram, V. (1996). The impact of electronic data interchange on purchasing: an empirical investigation. Int. J. Oper. & Prod. Man., 15, 29-38. Barua, A. and Lee, B. (1997). An economic analysis of the introduction of an electronic data interchange system. Info. Sys. Res., 8, 398-422. Beamon, B. M. (1999). Measuring supply chain performance. Int. J. Oper. & Prod. Man., 19,275-292. Benjamin, R., De Long, D. and Scott Morton, M. (1990). EDI: How much competitive advantage? Long Range Planning, 23,29-40. Bensaou, B. (1997). Inter-organizational cooperation: role of information technology an empirical comparison of US and Japanese supplier relations. Info. Sys. Res., 8, 107-125. Bowersox, D. and Closs, D. (1996). Logistical Management: The Integrated Supply Chain Process. McGraw-Hill, New York. Cachon, G. and Fisher, M. (2000). Supply Chain Inventory Management and the Value of Shared Information. Man. ScL, 46, 1032-1048. Cash, J. and Konsynski, B. (1985). IS redraws competitive boundaries. H.B.R., 85, 134-142. Chatfield, A. T. and Bjorn-Andersen, N. (1997). The impact of IOS-enabled business process change on business outcomes. J. of MIS, 14, 13-40. Chatfield, A. T. and Yetton, P. (2000). Strategic payoff from EDI as a function of EDI embeddedness. J. of MIS, 16, 195-224. Choudhury, V. (1997). Strategic choices in the development of inter-organizational information systems. Info. Sys. Research, 8, 1-24. Clemons, E. and Row, M. (1992). Information technology and industrial cooperation: The changing economics of coordination and ownership. J. of MIS, 9, 9-28. Clemons, E. and Row, M. (1993). Limits to inter-firm coordination through information technology. J. of MIS, 10, 73-95. Emmelhainz, M. (1988). Electronic data interchange: Does it change the purchasing process? J. ofPurch. & Mat. Man., 2-8. Emmelhainz, M. (1990). EDI: A Total Management Guide. Van Nostrand Reinhold, New York. Fearon, C. and Philip, G. (1998). Self assessment as a means of measuring strategic and operational benefits from EDI. Eur. J. Info. Sys., 7, 5-16.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
T H E INTEGRATION O F A PRIVATE MARKETPLACE INTO YOUR VALUE CHAIN: A SUGGESTED PRACTITIONER FRAMEWORK Ben Amaba, University of Miami, Industrial Engineering Miami, Florida
INTRODUCTION The Internet has allowed companies to set new benchmarks in performance and expectations. Value chains are allowing competitors to form alliances and heighten the transfer of knowledge, increase velocity of product cycles, and establish responsive feedback from the end customer. Marketplaces, an electronic meeting place where commerce can be done, have been a Utopia or a crippling asset. Marketplaces are internet connections between buyers and suppliers. Marketplaces provide prompt visibility of inventory status, pricing, and capacity. With this information, accuracy and velocity of goods and money is improved. In turn, costs are lowered and customer satisfaction is increased. Marketplaces are yet another technology if exploited correctly can be a revolutionary innovation for a company. Marketplaces have the potential to develop a key competitive advantage if done correctly. In moving forward, a framework of planning and executing must be followed to be successful. There exist public and private marketplaces. Public marketplaces are characterized by many buyers and several suppliers. In contrast, a private marketplace is owned and governed by either one supplier with several buyers or one buyer with several suppliers. I will focus on private marketplaces in this paper. The electronic Marketplace is a technology that will go through stages of evolution. Development, launch, growth, maturity, substitution, and obsolescence (Khalil, 2000) are key to understanding time horizons to exploit this technology as a competitive advantage. One can chose to participate in any of the different stages. Although the risks are high in the development, launch and growth stages, the
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payback is even higher if you chose to be a leader and/or pioneer. Many leaders in the past have become icons in their industry by taking calculated risks and gaining first mover advantage in transforming the industry. Clear objectives and implementation plans are crucial. Most leaders are given the opportunity to control the standards edifying their position in the industry as they look for other strategic degrees of freedom to expand in (Slywotzky and Morrison, 1997), but this has to occur with a strong structural management team. Once a leader who can manage to goals and expectations establishes a standard, not only are the profits greater, the time horizon of dominance is extended giving a larger window of opportunity to exploit other areas of innovation and technology. Public marketplaces are more recent examples of history repeating itself. A public marketplace has been loosely defined as an unbiased third party electronic repository of information where participants, both buyers and suppliers, with a common industry or interests conduct commerce. Public marketplaces captured the hearts and minds of senior executives in 1998 and 1999 with the dot.com explosion. Similar to other blunders, vision with no structure is simply a hallucination. As public marketplaces flourished with venture capital, the base rational of their existence was clouded with idealistic visions of overnight transformations of industry and cultures. Although some public marketplaces continue to grow, many closed because of a poor value proposition. Rather than understanding the specific objective and metrics they were sanctioned to do, the first mover advantage syndrome was a blind race to an evasive finish line. Incremental change in an agile and pragmatic manner was missing in most endeavours in 1998 and 1999. Most companies have since stepped back reluctantly to better understand the landscape but continue to have fears of being left behind. Private marketplaces, also known as private hubs, are the focus for 2001 to 2003. Many companies are starting with a private marketplace to lessen their risk in implementation and guarantee returns. One of the main advantages of private exchanges is you can begin by working with a single, long-standing partner. This narrows down any process gaps that may otherwise exist between new partnerships. Private exchanges are attractive because they're efficient. There's a direct communication between supplier and customers (Varon, 2001). The private marketplace allows a firm to test or sample the technology. If the process work and architecture is done systematically, the incremental cost to add other partners are nominal compared to the incremental productivity and efficiency gains. The base technology should be flexible enough to connect to other marketplaces, both private and public, and provide scalability. Forrester reports that early adopters expect to save up to 10% on their total supply chain purchases by 2003. Purchasing executives plan to use private hubs to achieve those results. Fifty percent of Forrester interviewees
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identified private trading venues as the key location of procurement facilitation and Supply Chain execution (Sanders, 2001). Forrester classifies private hubs into three categories: monitor, manage and optimise. In the monitor scenario, return on investments is predicted to be 290% in 18 months. In the manage scenario, return on investments is gauged at 1,400% in 12 months while the optimise scenario provides an estimated return on investment at 893% in 15 months (Favier, 2001). Although the ROI (return of investment) seems astronomical, the point is there are significant savings, which need to be investigated. In IBM's case, Steve Ward, general manager of IBM's Global Industrial Sector, can maintain "very detailed" forecasts for 90 days to a year by producing visibility to trading partners through marketplaces and the Internet. "Our suppliers have visibility to how much inventory we have, "says Ward (Teach, 2001). Nokia is another example of a firm who has exploited private hubs to its advantage. Their premise of sharing knowledge using Internet value chains between suppliers and customers has provided a knowledge base of activities, velocity of products and customer intimacy. They integrated their ERP (enterprise resource planning) and APS (advanced planning systems) systems to the Internet providing clear communications between their suppliers and customers. This superb application of technology provided them an opportunity to leapfrog into a leadership position (Leger, P.-M., Haydaya, E., Gauthier-Oullet, 2000). Therefore, it is clear private marketplaces are a competitive advantage if applied, managed and measured properly.
APPROACH Although private marketplaces may be a new solution, basic engineering approaches can increase private marketplace effectiveness. In evaluating and implementing a private marketplace, one should break the project into two major segments: planning and execution. Planning should include your assessment and business case. Three levels of planning include strategic, tactical and operational. The integration and uniformity of these plans should always be synchronized. Starting on the strategic level, it is important to align the business and the technology strategy. Therefore, before implementing any new technology into an organization one must examine carefully the corporate strategy. Corporate strategy is an art to itself and many frameworks can be utilized to solidify corporate position against market opportunity. The importance of the strategic exercise is to insure the outputs from the strategic plan align on how the private marketplace will be used to execute the plan. Many businesses base their success on the tools versus the appropriate application of the tool. The tool is only an instrument with no inherent ability to execute plans on its own. There are several methods that have endured the test of time. No matter what
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combination of methods you use one must be sure that the methods fit together tightly to provide uniformity and integrity. Whether a company looks internally or externally, the sponsoring executive or executive consultant must be able to bridge strategy and operations as well as bridge across vertical functional departments including engineering, production and finance to name only a few. Seek individuals with leadership and management excellence. Look for consulting firms who offer a breadth of resources and skills. Once this holistic concept is embraced the success of a private hub implementation will be ten fold.
STRATEGY As an example, one can leverage the Delta Model developed by Arnoldo Hax of Massachusetts Institute of Technology (Hax, 1999) as a starting point. Hax presents an innovative model using a triad approach. Using three points of a triangle, one can apply his method to private marketplaces. Hax presents three distinct strategies to provide base objectives: Competition based on System Economics, Customer Solutions and Best Product. Competition based on System Economics relies on setting de facto standards in the industry. Microsoft and Intel are prime examples. 90% of the personal computer software in the market uses Microsoft's operating system. Although many argue OS/2, Apple's operating system and Java were or are better operating systems; Microsoft enjoys dominance in the space. Intel relies on a similar situation. Their brand alone forces many manufacturers to use their chips. Other chip manufacturers like AMD and Motorola carry excellent products and are readily available. Nonetheless, Microsoft and Intel are clear examples of complementer lock-in or competitor-lockout. A Customer Solution is well represented by MCI WorldCom. They have expanded "horizontally" across a range of related services for the targeted customer segment by bundling. A single bill and one contact for all the services provide a onestop shopping concept for those of us inundated with the complexity of our phone services. A Best Product or Service approach is Federal Express. If one has to get a package there no matter what it takes, FedEx is there to deliver on time. To meld in other forms of strategic analysis, one can incorporate Bruce Merrifield's strategic priorities (Merrifield, 1991) and Michael Porter's Value Chain analysis and five-force diagram (Porter, 1998). Bruce Merrifield recommends a sequenced step of priorities starting with leadership and vision. He follows with a solid management team, a well thought out strategy, internal and external systems, intelligent people, education and skills, tools, assets and a favourable economy. Porter's value chain can help with data collection and analysis to bring out points one
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must consider in moving forward. Porter's well recognized five-force diagram and value chain analysis strengthens the strategy and provides a common language for corporate communication. No matter what the combination of methods used the integration, communication and support of the system must be kept simple, well understood and repeatedly scrutinized by the team as the environment and technology changes. Strategy, itself will never standalone, but it is essential to clearly understand the company's strategy before moving to the tactical and operational action plans. Most corporations have some strategy in place. The difficulty increases, as strategy has to be translated to more granular quarterly and daily activities. Many executives understand their strategy, but are perplexed on how to apply technology like a private marketplace to enable their plans. A systematic approach to private marketplaces can expedite the benefits and mitigate risks. Although not exclusive, three methods in the technology space include ASSETS, technology road maps, and the Technology Audit Method (Khalil, 2000). ASSETS is a framework designed to integrate technology and business decisions regarding acquisition, development and use of advanced technology like private marketplaces. ASSETS is recommended to be implemented in a phased approach. The Technology Audit method can be used as a precursor input to the ASSETS model. The Technology Audit Method was developed by Javier Garcia-Arreola to determine current technological status, identify areas of opportunity and leverage a company's technological strength. The model examines six major areas: technological environment, technology categorization, markets and competitors, innovation processes, value-added functions and acquisition & exploitation of technology. The ASSETS and Technology Audit Method can help formulate success factors for a private marketplace. To position the private marketplace for full exploitation a technology road map can be developed. A technology roadmap was developed by Motorola as a corporate wide technology tool (Khalil, 2000). It provides an objective evaluation of Motorola's capability in the technology, a comparison of Motorola's capabilities and those of its competitors, today and in the future, and a forecast of the technology. Since Motorola's success with technology roadmaps, others have developed with different time and resource constraints (Phall, 2000). This is important to understand how technology has been introduced in the past so that future implementations are carefully positioned and optimised. With the background and base set, a firm can move forward into the tactical details and objectives.
TACTICAL A framework has to be agreed upon on how to begin the tactical plans. Many high level approaches have been developed since the technology boom accelerated with the
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rush of ERP systems. But private marketplaces require more than ERP experience in the four walls of a plant or building web pages. What we did learn this past year is that communication, analysis, project management and technical skills must have depth. Before communication can occur the content must be correct and manageable. For example, there are many disparate systems for numbering and naming parts. This heterogeneous set of material identifiers coupled with different processes make it more difficult to develop implementation plans and roadmaps with outside suppliers or buyers. An implementer of private marketplaces has five key domains to manage: the engagement, business processes, organizational change, application portfolio and the technical architecture. Each of these areas has to be subdivided into more manageable components. To illustrate, the technical architecture has to be broken down to middleware, database, security, single sign on, hardware, terminals, communication protocols, etc. These subcomponents are naturally composed of a plethora of legacy and new technologies. The domains have to be connected using dependency diagrams. If there is a major need in the business domain the technical domain must adapt to accommodate the business requirement. This is a bilateral situation. If there is a technology like Tivoli being introduced, certain business processes may have to be improved to exploit the technology. To add to the complexity, we add dimensions including vertical functional areas and other external trading partners. Because of the decentralization era in the early 1990s, many companies, systems integrators and consultants find themselves with an immense checklist of requirements and components to integrate. If the domain needs are not synchronized, the private marketplace will not be successful. Then add constraints of time and resources. The timing of the resource consumption is equally important contributing to the success of a project. If the activities in a domain are not aligned to different stages or phases in a project, less than spectacular results can be produced. Although popular phased approaches can be derived from ERP (high level design, detail design, configuration, and execution) experience or Six Sigma (plan, do, check, and act) initiatives, the detail behind each phase must include specifics on activities and tasks associated with private marketplaces. As previously mentioned, private marketplaces include trading partners outside of the immediate control of the firm and a complex web of technologies. Therefore, project management techniques need to be updated that consider the technical attributes of a private marketplace.
THE BUSINESS CASE Developing a business case is the next critical step in planning. A business case is a document that begins with a purpose. The purpose is simply a short and direct paragraph letting the audience know why the document was prepared. Relevant
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information should be summarized in an introduction and include a strong correlation to the strategic objectives of the business. There should be enough information in the purpose section that the reader understands the project without reading the entire document. The business case should provide a clear description of the private marketplace and discuss how the private hub exploits an opportunity, solves a problem or meets a business need. It should be descriptive and concise enough to communicate what the problem or opportunity is, why is this a problem or opportunity, and how the private marketplace is satisfying the problem or opportunity. The case should explain information on time required to be successful, resources, effort and budget. The most critical part is the operating scenario. The operating scenario provides a common body of knowledge for understanding the project. It should describe the process and provide a foundation or framework for discussions with all the project team and evaluators for the impacted areas. It should describe down to the task level what changes are to be prioritized, examined or changed. If the implementation of a private marketplace changes existing operations, a description of the current operating scenario is needed as a starting point or base of knowledge for the proposed operating scenario. In addition to the normal operating scenarios, governance is an imperative when planning out a private marketplace. Since you are dealing with systems, people and processes outside your company, you must consider how to handle any changes or modifications that could occur with your trading partners. Row charts and diagrams are invaluable with the appropriate dependency diagrams between processes, applications and architectures. As you move forward to the quantitative analysis, theories, including Information Economics, risk management and EVA (Economic Value Add - Stern, 1991), have initiated a formalized process to prioritise and measure private marketplaces as it relates to capital expenditures and business strategies. In many cases, companies can benefit by combining ABC (activity based costing - White, 1997) to the EVA analysis when evaluating private marketplaces (Roztocki and Needy, 2000). A financial analysis with the right caveats is becoming more important as competition becomes keen and a margin of error is limited. Although the financial analysis is important, other key components must be understood and documented to clearly define and measure the success of a private hub including but not limited to customer satisfaction and innovation. For years many scholars and financial analysts have tried to force fit traditional accounting and finance methods to forecast and measure returns on information technology. Like basic research and development, information technology has eluded return on investment models. If left up to accounting methods, information technology may never be implemented, hi many instances, productivity gains, financial impacts, customer service and innovative
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metrics are combined to target a specific objective. The modelling and personal productivity tools available today enable firms to do very deep analyses in operations and finance. Excel, TORA, OSL, CPLEX, SAS, Minitab and other packaged software can do trend analysis, "what-if' scenarios, stochastic processing, simplex algorithms, sensitivity reports, and very complex financial analysis. Leveraging these tools into the business case analyses can be very helpful. When a firm considers private marketplaces, it must consider the intangible and/or the soft benefits marketplaces can bring. For example, a private marketplace doing design collaboration produces intangible benefits including faster application of design technologies, reuse of design and materials, responsiveness between trading partners, effective communication between departments, more accurate product designs, interchangeable parts and higher quality. These factors are critical inputs to developing a business case analysis for the marketplace. It is important to recognize that certain investments of technology cannot be modelled because uncertainties in the social, political, and economic communities. Companies can only put the proper milestones in place to determine appropriate actions to take should outcomes vary from anticipated results. The Xerox machine is a perfect example. The forecast of 3,000 machines over the life of the product was less than spectacular for most financial analysts. The outcome of 200,000 machines sold proved that basic finance was inadequate to manage a new product line (Khalil, 2000). Many factors have been documented for marketplaces. The use of Supply Chain Operations Reference Model (SCOR) or Collaborative Planning, Forecasting and Replenishment (CPFR) guidelines can provide direction depending on the firm and the industry. Most consulting firms and systems integrators can provide base metrics to help drive financial models and discussions. The financial section will act as a reference and monitoring device. It will serve the project team as a quantifiable success rate factor that will bring favorable discussion during the planning and execution phases. This section is where the cost/benefit analysis appears along with sensitivity analyses of critical drivers. Development of a cost/benefit analysis begins with a well-defined operating scenario. No work can begin without it. The cost/benefit analysis helps determine if a project makes financial sense. Just because a project makes financial sense does not mean that it should or should not be undertaken. The importance of the financial analysis is to establish facts and impacts to make the decision. Some projects are implemented for strategic reasons and may be qualitative in nature. These qualitative elements should be modelled based on documented assumptions. Sensitivity analyses determining the most sensitive critical drivers in the cost/benefit analysis and financial risks helps answer the question, " How much can key drivers change before a project is or isn't financially viable?" Risks and alternatives should be documented
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including the recommended solution as well as why this is the best solution. Contingency plans should be mapped to each risk. Details in the planning phase are essential before moving to the execution phase. There are as many hours spent on planning as execution. Without proper planning, private marketplaces find themselves doing the wrong things right or the right things wrong. If you plan to fail, plan to fail. Execution requires that costly and limited resources are directed and controlled. Any change in outcomes as compared to the plan will force one to revisit the plan and document any changes or deviations. The process is an iterative closed loop between planning and execution. If the plans were well integrated and thought out with the appropriate project milestones and metrics, the execution should be fairly straightforward. The ability to keep the project on track and moving forward are basic project management attributes.
EXECUTION Like execution, a phased approach can be very valuable. The minimum of any execution framework should include the initial configuration, deployment and ongoing maintenance. Focusing on one functional area, product or channel is important in the execution phase. Of equal importance, knowledge transfer of the processes, applications, architecture, maintenance and enhancements to the marketplace must be provided to participants internally and externally. When beginning a private marketplace implementation, focus on one segment as a prototype. Choices include demand management, supply planning, factory planning & scheduling, logistics & transportation, collaborative product design & sourcing and Internet-enabled procurement. Further segmentation to a specific supplier or buyer provides control and governance of the private hub. Provide a testing ground for the first set of transactions before converting or integrating any legacy systems. Every phase should be aligned with the domains previously mentioned during the planning phases. Dependency diagrams between phases and domains should be documented to the activity and task level. Operational variances and productivity ranges should be tracked to insure operational activities are within tolerance ranges. If a large standard deviation is recognized, controls need to be put in place and modifications to the original business case need to be incorporated. Execution takes discipline and extensive observation. The objectives were set in the plans and execution is focused on meeting those objectives. Daily meetings with the implementation team are vital in the on boarding of the first trading partner. Feedback sessions and operational reviews are mandatory, even if it is to say you are on track.
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TEAMING The next obvious question is who is on the team to launch this initiative. The planning and implementation team will be composed of internal personnel, trading partner employees and an outside consulting firm who has done many successful implementations. Your current ERP and APS systems will play key roles in the private marketplace. Therefore, depending on what product line or channel you prototype your team members will originate from practically every functional area. During your strategic and tactical planning sessions, an executive sponsor and the core team members will be identified. Since private marketplaces are in the early stages of technological development, experience will be invaluable. Because of the cost and relationships at stake, experimentation with a marketplace novice and a nondedicated staff will cause great turmoil and unnecessary expense for the company. Many companies have experienced bankruptcy and shutdowns when this endeavour is taken on without the proper resources. Integration is a major activity in the entire process, not only from a technological perspective but more importantly a process, organizational and application stance. The teams should have intellectual capital for supply planning, design, production, marketing and delivery of enterprise products and services. They should be able to span multiple categories and provide a framework that facilitates cross-category teaming. Industry benchmarks and specific competitors' performances to identify opportunities to increase market share, service levels and profitability are beneficial.
CONCLUSION Private marketplaces provide a forum of discussion, visibility and collaboration between trading partners. It is clearly one of the most sought after solutions in value chain and supply chain initiatives. Advances in telecommunications, pervasive computing, software, and hardware enable opportunities for faster transactions as well as transformations. Private marketplaces can become a competitive advantage by shortening the time to respond to cancellations, engineering changes or expedite orders. It can form tighter links to suppliers and customers. Functional details and processes must be mapped out before implementing any private hub. Simply introducing the technology into the company is not sufficient. Electronic commerce will not realize its potential unless it is treated in terms of value creation and business opportunities as opposed to a technical label (Chaharbaghi, 2000). Knowing how to plan and implement a private marketplace, takes experience and a framework that can integrate the vital domains and phases across the different functional departments. Traditional approaches have to be updated to consider qualitative elements and
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specific details in the process and technical domains. Complexity increases exponentially when trading partners are involved and governance becomes a major component in the overall solution. Like all technologies in the past, private hubs can be a distinctive technology if managed and controlled with discipline and foresight. Private marketplaces are in the early stages of development, but clearly can provide the competitive difference, productivity gains, cost savings and customer reach that certain market leaders have already discovered. But like all technologies, basic strategic analysis, business case documentation and project management are essential part of any implementation framework.
BIBLIOGRAPHY Chaharbaghi, K., Electronic Commerce: The Hidden Potential, East London Business School, University of East London, United Kingdom, 2000. Favier, J., Saving Big With a Private Hub, Forrester Reports, June 2001. Hax, A. and Wilde, D., The Delta Model: Adaptive Management for a Changing World, Sloan Management Review, Massachusetts of Technology, Winter 1999. Khalil, T., Management of Technology, The Key to Competitiveness and Wealth Creation, McGraw-Hill Higher Education, Boston, 2000. Leger, P.-M., P. Hadaya, E. Lefebvre and R.Gauthier-Oullet, Optimising Product Value Chains, 9th IAMOT Conference Proceedings 2000, Miami, 2000. Merrifield, B., Strategic Priorities, Wholesale Distribution Forum, 1991. Phall, R., CJP. Farrukh, and DR. Probert, Fast-Start Technology Road mapping, Department of Engineering, University of Cambridge, 2000. Porter, M., On Competition, Harvard Business Review Book, Boston, 1998. Sanders, M., Spending Wisely on Private Hubs, Forrester Reports, July 2001. Roztocki, N. and K. Needy, An Integrated Activity-Based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers, University of Pittsburgh, Department of Industrial Engineering, Pittsburgh, 2000. Slywotzky, A. and D. Morrison, The Profit Zone, Times Books, New York, 1997; Stewart, G., The Quest for Value, HarperCollins, New York, 1991. Teach, E., The Great Inventory Correction, CIO, September 2001. Varon, E., What You Need to Know About Public & Private Exchanges, CIO, pp. 9298,2001. White, T., The 60-Minute ABC Book: Activity-Based Costing for Operations Management, Consortium for Advanced Manufacturing International, 1997.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
THE VIZZAVI JOINT-VENTURE: AN EXOGAMIC MARRIAGE BETWEEN VIVENDI AND VODAFONE AS A WAY O F ENTERING THE E-ECONOMY
Dominique R. Jolly, CERAM Sophia Antipolis, France
ABSTRACT
Pooling resources from several partners is the very basis of inter-firm alliances. Depending on the profiles of the allies, resources brought into the alliance will be more or less related. This relatedness has a huge impact on the way alliances are conducted. Endogamies, i.e. inter-firm alliances where resources pooled by partners are strongly related, aim at accumulating similar resources to gain the benefits of size or scale effects (such as MCC or Sematech consortiums). Most of the time, these alliances raise serious competitive issues - such as weakly differentiated outputs (like cars with the same body sold under different brands). Whereas exogamies, which have highly differentiated pooled resources, are settled to gain benefits from the symbiotic combination of idiosyncratic resources (such as the alliance of a big pharmaceutical company and a small dedicated biotechnology start-up). These do not usually raise competitive market problems. Competition is still present, but it is directed towards the capture of knowledge from the partner. This paper is based on the case of Vizzavi — a joint venture between two companies with very different profiles: Vivendi-Universal, a French multi-utility group and Vodafone, a British Dr. Dominique R. Jolly is Professor of Business Strategy and Technological Management at CERAM Sophia Antipolis, BP 85, 60 rue Dostoi'evski, 06902 Sophia Antipolis Cedex (France). Email:
[email protected]
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mobile phone company. The objective of the joint venture is to provide customers with web-based interactive services across a variety of platforms (mobile handsets, fixed telephony networks, personal computers and digital assistants, television sets). Each partner pools very specific resources in the joint venture. Vodafone brings the access to its European client base and its experience with the Internet. VivendiUniversal provides a large range of media content and programs (especially the record and movie studios acquired in 2000 through its merger with Seagram) and its own client base. This example shows how the combination of very specific resources originating from very different partners - creates symbiotic effects. Because they combine companies with basically very different backgrounds, exogamic partnerships such as this Vizzavi case do not cause traditional and direct competitive troubles between partners.
INTRODUCTION The e-economy calls for the consolidation of very different resources. Very often these resources are not under the control of one single firm. Inter-firm alliances provide one way of pooling these resources. This paper is focused on an example of these new alliances. It starts with an examination of the literature which enables a distinction to be made between endogamy and exogamy: the first is the union of two partners coming from the same social sphere whereas exogamy is the combination of two partners originating from different milieus. Then, the paper presents an example of an exogamic partnership recently created: the case of Vivendi-Universal and Vodafone. The final part of the paper draws lessons from this case study. THE CONCEPT OF ENDOGAMY VERSUS EXOGAMY As the concept of inter-firm alliances may be different from one author to another, I state, as a prelude, the definition used in this study. I then emphasize the relatedness between the resources brought into the alliance. This further highlights the differences between endogamies and exogamies. What is an inter-firm alliance? An inter-firm alliance can be defined as a link set up voluntarily between several sovereign firms. This link is characterised by the pooling of a fraction of their resources in order to pursue common goals in a given area and to gain access to reciprocal advantages; partners are interdependent in their joint field of action but remain autonomous outside this territory of cooperation (Jolly, 1995). Cooperation takes the form of either an equity joint venture or a non-equity joint venture. The
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equity joint venture means that a new, distinct organizational structure held by the partners has to be launched; in this case, resources coming from the different partners are pooled in the same entity. In the case of a non-equity joint venture, the allies sign a simple contract stating the types of exchanges or relationships that they will operate. In order to get a better understanding of inter-firm alliances, many authors have tried to establish various typologies. Criteria such as the stages of the value chain covered, the nationality of partners, their respective sizes, and the characteristics of the business in which they operate are frequently used. I contend here that one particular criterion has a tremendous effect on the management of alliances. What is the relatedness between the resources brought by partners? My point is that, before anything else, we need to consider the proximity between the profiles of the two companies. The profile is the image that we have of a given firm or a given SBU through the lens of a model (Ansoff, 1965; Porter, 1985) with different partitions depicting the various assets, capacities, abilities, and expertises held and controlled by the firm (or the SBU). When two firms decide to cooperate in a given area, they will not be able to bring to the alliance anything other than the resources and competences that they own. This means that their respective profiles will have a strong impact on the type of alchemy that will occur through the pooling of resources in the alliance. The advantages gained from effective cooperation between allies depend on the resources pooled by the partners. The relationship can be summarized as follows: Profile of the alliance = f (Types of benefits gained from the cooperation) = f (Resources brought into the alliance) = f (Profiles of the allies). Relatedness between partners has been extensively studied in the diversification literature (Ramanujam & Varadarajan, 1989; Very, 1993). This literature shows that relatedness can be defined as the overlap of the key success factors of their businesses and/or the similarities between their value chains. Multi-dimensional scaling using morphological criteria was developed to evaluate relatedness (Galbraith & Kazanjian, 1986). Two contrasting situations have to be distinguished. If the two allies exhibit related profiles, it means that they will probably pool the same kind of resources in the alliance. In this case, the allies pool resources to jointly gain access to size or scale effects. I consider this to be an "endogamy" because it links companies that come from the same industry and share the same profile. Joint R&D between companies of the same industry, such as the MCC or Sematech consortiums, are examples of endogamies (Ouchi & Bolton, 1988 ; Werner, 1992; Spencer & Grindley, 1993). The automotive industry also exhibits several examples of this type.
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In the late eighties, two European car manufacturers sharing similar profiles, Peugeot and Fiat, co-developed a new mini-van manufactured in the plant built and owned by the two companies. The car is sold by the two partners under four different brands (Peugeot and Citroen, Fiat and Lancia). It has been shown that this alliance was devoted to size effects at the design and the manufacturing stages: sharing of investment, sharing of risk, obtaining an optimal production scale, and increasing bargaining power vis-a-vis suppliers (Jolly, 1997). In summary: Similar profiles => similar resources brought by the allies => accumulation of identical resources in the alliance => size effects. On the contrary, if the two partners show unrelated profiles, it means that they will necessarily pool different kinds of resources. In this situation, they will not look for size or scale effects. They will target symbiotic effects that are supposed to occur when idiosyncratic types of resources are pooled. Again, in the automotive industry, exogamic alliances arise when a car manufacturer and an aluminium producer explore the opportunities for making greater use of aluminium in car bodies. Exogamies are also created when big pharmaceutical companies establish partnerships with small dedicated biotechnology firms (Jolly & Ramani, 1996). Another case of exogamic partnerships are joint ventures created between Chinese and Western companies for doing business in China (Jolly, 2001). In summary: Unrelated profiles => distinctive resources brought by the allies => combination of differentiated resources in the alliance => symbiotic effects. The origin of this dichotomy can be tracked in the literature. Table 4.1 shows the typologies of various authors. It is striking that, despite semantic differentiation, it is in fact possible to infer that the common thread amongst these typologies is the resources brought by the allies. Table 4.1: Two types of inter-firm alliances ENDOGAMY
1
EXOGAMY
Joffre&Koenig(1984)
Similarity cooperation
Difference cooperation
Hennart(1988)
Scale Jvs
Roberts & Mizouchi (1989)
Resource accumulation ventures
Resource complementing ventures
Dussauge & Garrette (1995)
Additive & joint integration alliances
'Complementary' alliances
Sakakibara(1997)
Cost-sharing
Skill-sharing
Link Jvs
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Do endogamies and exogamies raise different managerial issues? As firms engaged in endogamies are, by definition, sharing similar profiles, they have to face different managerial issues from firms involved in exogamies which, by definition, exhibit asymmetrical profiles. Let's consider four specific issues. (a) The competitiveness issue. Firms involved in endogamies belong to the same industry. Firms in exogamies do not necessarily belong to the same businesses. As a consequence, competition is always latent in an endogamy while it is not an issue in exogamy. (b) The Janus issue in exogamies. Inter-firm alliances are places where flows of intangible assets, like knowledge, can move from one ally to another (Kogut, 1988; Hamel, 1991, Richter & Vettel, 1995). When teams from different companies work together, they can learn from each other and then duplicate this knowledge when they are back in their respective companies (Inkpen, 1996). The more companies involved in an alliance have specific profiles, the more they can learn from each other. Learning opportunities are usually minimal in endogamies, where resources brought into the alliance are very similar. However, such opportunities exist far most strongly in exogamies. This means that one of the main challenges of firms involved in exogamies is to protect their contributions to the alliance, but at the same time, to accelerate their own learning process concerning the resources, competences and expertises that their counterpart brings to the alliance. This situation has a strong impact on the stability of the alliance (Inkpen & Beamish, 1997). As soon as the learning process is completed, the future of the alliance is challenged. (c) The lack of differentiation in endogamies. The achievement of size effects in endogamies implies a reduction in the diversity of output. So, the other side of the coin is that the output of the joint production is weakly differentiated. That is not very important when the alliance conveys components or parts to which the customer does not pay much attention. But it becomes extremely sensitive when the products of the alliance go straight to the market through the respective distribution networks of the allies. (d) The cultural issue. Endogamies do not cause severe cultural problems as the firms involved come from the same industry, mix people with the same background, have related histories, etc. On the other hand, because there is, by definition, a gap between partners in exogamies, differences between partners can seriously hurt the relationship, as the allies do not share the same background.
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THE VIZZAVI CASE Vizzavi is the 50/50 joint venture created in May 2000 between the British mobile phone firm Vodafone Airtouch Pic. and the French firm Vivendi-Universal. This Internet venture aims to be the European equivalent of Yahoo, the world's leading portal - but it offers an enlarged number of access modes. This deal will be presented along four lines: (2.1.) What is the joint action? (2.2.) what are the resources brought by the partners to the alliance? (2.3.) what are the advantages resulting from the alliance? (2.4.) what are the interdependence and dependence relationships between allies? What is the joint action? The joint venture was set up for the launch of a branded Internet portal throughout Europe. Geraldine Wilson, the Managing Director of Vizzavi UK said, "We want Vizzavi to become an essential part of people's lives by becoming their diary, address book, mailbox and increasingly the place to find whatever information they need, or to make whatever transactions they require". The objective is to provide customers with a consistent environment for web-based interactive services: e-mail, news, sport, finance, educational and professional information, travel, entertainment, music, movies, television programming, games, etc. As such, the core business of Vizzavi is to aggregate contents and services from different sources into a homogeneous and personalized interface. About 50 % of the almost 200 services offered are produced in-house. The other half is outsourced to experienced and well-known providers. The main technical feature of this portal is that it is multi-access. It was intended to work across a variety of platforms, such as mobile handsets, fixed telephony networks, personal computers and personal digital assistants (such as palmtops), as well as television sets. Vizzavi became the default home page for Group's, Canal's and Vivendi's national operating companies throughout Europe. During the 2000 starting phase, Vizzavi re-branded existing Internet portals in different countries: vizzavi.fr was launched in June 2000, the vodafone.net site was re-branded in September 2000 in UK, and the vizzavi.nl website started in the Netherlands in October 2000. Then, a new technical platform of vizzavi.co.uk was developed in the UK and re-launched in December 2000. This new platform was progressively rolled out in all the other countries during the course of 2001 all over Europe, i.e. in Germany (vizzavi.de), Italy (vizzavi.it), Spain, Sweden, Switzerland, etc. It is also accessible through WAP (Wireless Application Protocol) mobile phones such as the Motorola Talkabout and Timeport, and was accessible on TV sets with Canal Satellite decoders at the end of 2001. Access with Personal Digital Assistants was also planned for 2001. In Europe, Vizzavi was the only one to offer a
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multi-access portal in 2000. But companies such as France Telecom (that launched its WAP in May 2000), Bouygues, Yahoo, Mviva (The Phone House) or Mageo (Pinault) are potential competitors. What are the resources brought to the alliance? The partners announced that they had to invest 1.5 billion Euros in order to reach the break-even point — resources being equally provided by the two partners. VivendiUniversal brought to the alliance: Access to its mobile and fixed telecommunications subscribers thanks to its direct shareholding control over the French SFR operator and its headquarter Cegetel (also involved in fixed telecommunications) which is the second largest telecom provider after France Telecom in France (10 million customers); Its European subscriber-base in the Canal + TV network (13 million); -
The audiovisual and multimedia programs elaborated by its publishing and Pay TV subsidiaries Havas and Canal +; A vast range of music publishing rights and musical repertoire with one of the world's largest record companies (Universal Music) and a large Hollywood movie studio (Universal Studios) thanks to its recent $34bn deal with the Canadian company Seagram, announced in June 2000 (Vivendi-Universal now shares some similarities with the AOL-Time Warner merger announced in January 2000); Its experience over the Internet and interactive television.
Apart from its experience with data services, Vodafone Airtouch Pic. brought a single asset to the deal. But, this asset is extremely valuable: its subscriber-base of nearly 70 million users in the mobile phone business. This means powerful brand names, extensive commercial and distribution networks and customer services that will sustain the development of Vizzavi. For example, in the UK, Vodafone UK has a network of 350 points of sales of its own. Each of these stores is supposed to promote the Vizzavi portal, i.e. to help its commercialisation. To sum up, the new France Vivendi Universal is providing media and service content to the venture with a major portfolio of music and film assets. Meanwhile Vodafone brings its worldwide experience and leading position in the wireless world. What are the advantages resulting from the alliance? The profiles of the allies, as well as the resources brought into the alliance or the advantages that the allies are looking for show the exogamic character of the deal.
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Each partner lacks what its counterpart has under control. The client base of VivendiUniversal is too narrow to sustain its ambitious Internet strategy. Thanks to this cooperative deal, Vivendi-Universal gains access to the large telecommunication network of Vodafone. On the contrary, Vodafone controls the telecommunication lines but has no content to feed the machine. It was unable to launch a portal of its own alone. The attractive feature of the Vodafone deal with Vivendi-Universal was to find a content to nurture its networks, to gain a return on its huge customer base and to increase the loyalty of its customers at the same time. According to the partners, the Vizzavi multi access portal should reach 80 million customers. The company expects to reach more than 100 million users over the next five years. What are the interdependence and dependence relationships between allies? Regulatory clearance by the European Commission was made possible in July 2000 after the companies submitted commitments to ensure rival Internet portals would have equal access, from a technical point of view, to the parent companies' set top boxes and mobile handsets (one of the key EC concerns is to prevent a business from having so much market power that it can significantly affect competition in the market). Vizzavi Ltd. is a pan European company whose headquarters are based in London (UK). It has domestic subsidiaries in most European countries. It holds a dominant share of the equity while a 20% stake was given to local access operators. This repartition of the equity allows straightforward involvement of minority shareholders of these companies in the Vizzavi venture. For example, in France, Vizzavi holds 80% of the shares of Vizzavi France and 10% are held by SFR (itself a subsidiary of Cegetel) and 10% are held by Canal. The board of the Vizzavi joint venture is composed of eight administrators and two executive directors. Jean-Marie Messier, CEO of Vivendi, was designated as Chairmen of the joint venture for the first two years. Chris Gent, his counterpart for Vodafone, was intended to be the next Chairman in 2002. The partners agreed that Vodafone was responsible for designating the Chief Executive Officer (CEO) and the Chief Technical Officer (CTO) and that Vivendi-Universal is responsible for designating the Chief Financial Officer (CFO) and the Chief Marketing Officer (CMO). The European strategy as well as the technical platform are defined in London. The distribution of revenues has been defined for the next two years. Revenues gained from access and transportation are kept by domestic operators but revenues generated by the Vizzavi platform through advertising, commissions from ecommerce and subscriptions are shared 50/50 between Vizzavi and the operators. A
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revenue of a few Euros per subscriber was expected in the frame of the next three years.
WHAT HAVE W E LEARNED? Why is this deal an exogamic partnership? The Vizzavi joint venture exhibits the characteristics of an exogamic partnership. This can be verified either by looking at the relatedness between the profiles of the allies or by considering the relatedness between the resources that they bring to the alliance. Comparing the profiles of the two allies, there is no significant overlap between Vivendi-Universal and Vodafone. The two companies were already involved in the e-economy before they settled their alliance; nevertheless, their involvement in this sector was a new one and positions in these domains are still very fluid, hi the mobile phone sector, the two companies share similar value chains. But they differ in terms of the size of their respective mobile phone network. They are in fact not competitors since Vivendi is focalised on the French territory and Vodafone is everywhere - except in France (it has interests in mobile communications networks in 25 countries on five continents). The deal even includes a non-competition clause that prevents Vodafone from making an entry in France. On the other hand, Vodafone lacks the type of assets that Vivendi has in the publishing, TV and entertainment industries. As a consequence, the profiles of Vodafone and Vivendi differ significantly. As the two companies exhibit unrelated profiles, they pool distinctive resources in the alliance. The resources brought by each ally into the partnership do not strongly overlap: in this joint venture, Vodafone is the prime contributor of customers with the access to its base of subscribers and Vivendi is the sole provider of content for the web sites. What benefits are the allies looking for? The rationale of this deal is to assemble different parts of the same puzzle. This combination of differentiated resources allows for the creation of an extensive range of services over the Internet to an already existing large customer base. The main common goal is not quantitative accumulation, like in a car plant where two car manufacturers join similar forces for jointly reaching a critical mass. The partners are looking for symbiotic effects. Complementarities occur in this case primarily in qualitative aspects. In a nutshell, Vivendi brings the software whereas Vodafone bring the hardware. Secondly, complementarities also occur because of the different geographical coverage of their respective mobile phone networks.
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Nevertheless, the formation of the joint venture also has an impact on operating costs. The development cost of a common platform is, in this case, shared by all the European subsidiaries that will adapt this platform to their domestic conditions. This case shows that scale effects and their impact on cost do not occur solely with endogamic partnerships. Exogamic alliances might also have some positive impact on costs. What are the managerial issues raised by the cooperation? Four issues related to cooperation were presented in the first section: (a) exocompetition on the market, (b) endo-competition for learning, (c) lack of differentiation in endogamies, (d) cultural gap in exogamies. How important are these issues in this case? (a) As has already been stressed, the business portfolios of the two companies are very different and overlap only slightly in mobile phone services. This means that the allies have a very limited set of straightforward competitive issues to deal with. The probability that each partner will enter into the business of its counterpart is very low. This is a guarantee for the stability of the JV. But the distribution of revenues between Vizzavi and the operators might be discussed in the future. Once again, we are very far from the situation of two car manufacturers jointly producing one car model, but selling it independently in their own networks. (b) The companies commit a very limited portion of their staff to the joint venture. This means that the number of human vehicles for knowledge transfer is low. Neither is disclosing secret skills in the alliance. The consequence of this is that competition for learning seems to be limited in this case. (c) The allies have chosen to jointly design and develop services. But the most important point is that they have decided to go into the market together. Once again, competition is limited because they do not have to market the services produced in the alliance separately. (d) Most of the personnel of Vizzavi were hired on the job market, or were attracted from different companies. Only a few members of the staff came from Vivendi or Vodafone subsidiaries. Obviously, this makes for a very heterogeneous mix of people. The real challenge to the Vizzavi joint venture might be developing a new culture from scratch, considering that the people working for the joint venture come from very different backgrounds. Other cultural challenges might also arise at the operational level in the day-to-day management of the relationships between each domestic subsidiary and its local operator.
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To sum up, the companies face no space for direct competition in their existing businesses, few opportunities for developing competition inside the joint venture on knowledge transfer, and no competition at the commercialisation stage. Nevertheless, one major challenge will be to build a new culture from scratch.
CONCLUSION & EPILOGUE It has been stressed that endogamies and exogamies differ in several dimensions: profiles of the allies, resources brought to the alliance by partners, and finally, advantages gained through the partnership. The example studied in this paper shows that the complexity of the new economy, the technological and regulatory risks, the uncertainty about demand and the large span of highly differentiated resources and skills required to succeed in this business has forced companies to set up partnerships. Nevertheless, the main limitation of the study is that the partnership is too young and that too little experience has been accumulated in the alliance to draw definitive lessons. The position of Vizzavi is still weak and needs to be compared to the overwhelming portals of AOL or Yahoo. Vizzavi still exist in 2003. But, its shareholding has changed after the complete reversal of Vivendi Universal. The major economic difficulties encountered by the company seriously impacted its stock value. The announcement of abyssal losses (13.6 billion euros) for the year 2001, as well as a huge debt, has dramatically reduced the credibility of it flashy CEO, Jean-Marie Messier. He was forced to give up in July 2002 and was replaced by Jean-Rene Fourtou. The new management team decided to significantly modify the company's strategy - with a special emphasis on selling businesses to reduce debt. As Vizzavi was not supposed to generate cash before a few years, Vivendi Universal decided to sell its 50% share in it. An agreement was found to sell its share for 143 million euros to its British partner in September 2002. Vodafone is now the sole owner; one of the first decisions has been to reduce staff from 900 to 600. The Vizzavi websites from United Kingdom, the Netherlands, Italy, Spain, Germany, Portugal and Greece went to Vodafone; they now use about the same standardized presentation under the umbrella of Vodafone. Nevertheless, Vizzavi France went to Vivendi Universal still under the umbrella of SFR.
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BIBLIOGRAPHY Ansoff, H.I. (1965). Corporate Strategy, McGraw-Hill Inc. Dussauge P. and Garrette B. (1995). Les Strategies d'Alliances.
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d'Organisation, Paris. Galbraith, J.R. and Kazanjian, R.K. (1986). Strategy Implementation, Structure, Systems andProcess. (2d edition), West Publishing Company, St. Paul (MN). Hamel, G. (1991). Competition for competence and inter-partner learning within international strategic alliances. Strategic Management Journal, vol. 12, 83KB. Hennart, J.-F. (1988). A Transaction Costs Theory of Equity Joint Ventures. Strategic Management Journal, vol. 9, 361-374. Inkpen, A.C. (1996). Creating Knowledge through Collaboration. Management .Review, vol. 39, n° 1 (Fall), 123-140.
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Inkpen, A.C. and Beamish, P.W. (1997). Knowledge, bargaining power, and the instability of international Joint Ventures. Academy of Management Review, vol. 2 2 , n ° l , 177-202. Joffre, P. and Koenig, G. (1984). Strategies de Cooperation et d'Alliance InterEntreprises. Enseignement et Gestion, Nouvelle Serie n° 31 (Automne), 6773. Jolly,
D. (1995). Le champ des alliances interentreprises. Gestion - Revue Internationale de Gestion, vol. 20, n° 4 (decembre), 40-47.
Jolly, D. and Ramani, S. (1996). Technology creation in the biotechnology sectors: the French connection. International Journal of Technology Management, Special Issue on Resources for SME Innovation, volume 12, n° 7/8, 830-848. Jolly, D. (1997). Co-operation in a Niche Market: The Case of Fiat and PSA in Multi Purpose Vehicles. European Management Journal, vol. 15, n° 1, February, 35-44. Jolly, D. (2001), France-Chine - Joint-ventures et transferts technologiques, Revue Francaise de Gestion, n° 133 (Mars-Avril-Mai), 32-48. Kogut, B. (1988). Joint ventures: Theoretical and Empirical Perspectives. Strategic Management Journal, vol. 9, 319-332.
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and Bolton, M.K. (1988). The Logic of Joint Research and
Development. California Management Review, vol. 30, n° 3, Spring, 9-33. Porter, M.E. (1985). Competitive Advantage, New York, The Free Press, Macmillan Pub. Co. Ramanujam, V. and Varadarajan, P. (1989). Research on corporate diversification : a synthesis. Strategic Management Journal, vol. 10, pp. 523-551. Richter, F.-J. and Vettel, K. (1995). Successful Joint Ventures in Japan: Transferring Knowledge Through Organizational Learning. Long Range Planning, vol. 28, n° 3, 37-45. Roberts, E.B. and Mizouchi, R. (1989). Inter-firm technological collaboration: the case of Japanese biotechnology. International Journal of Technology Management, vol. 4, n° 1, 43-61. Sakakibara, M. (1997). Heterogeneity of firm capabilities and cooperative research and development: An empirical examination of motives, Strategic Management Journal, vol. 18 (Summer Special Issue), 143-164. Spencer, W.J. and Grindley P. (1993). SEMATECH After Five Years: HighTechnology Consortia and U.S. Competitiveness. California Management Review, vol. 35, n° 4 (Summer), 9-32. Very, P. (1993). Success in Diversification: Building on Core Competences. Long Range_Planning, vol. 26, n° 5, 80-92. Werner, J. (1992). Technology transfer in consortia. Research & Technology Management, vol. 35, n° 3, May-June, 34-43.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
FACING THE FUTURE: COMPETITIVE SITUATION IN TELECOMMUNICATIONS IN TERMS OF REAL OPTIONS Jan Edelmann, Lappeenranta University of Technology, Finland Kalevi Kyldheiko, Lappeenranta University of Technology, Finland * Petteri Laaksonen, Lappeenranta University of Technology, Finland Jaana Sandstrom, Lappeenranta University of Technology, Finland""
INTRODUCTION Despite the huge changes in the telecommunications industry since the 1980s, it is widely believed that more changes are yet to come, with profound implications for operators, manufacturers, software and service providers, and users. The telecommunications business requires large assets that can create tremendous sunk costs for the company. In order to be able to avoid these sunk costs, the real options approach suggests for example delaying the investment in order to decrease the uncertainty by obtaining additional information or increasing competencies through learning. As Copeland & Antikarov (2001:12) put it: "A deferral option is an American call option found in most projects where one has the right to delay the start of a project. Its exercise price is the money invested in getting the project started." Companies can also create joint ventures or other forms of partnerships, such as real options (flexibility options) to expand in response to future technological and market developments (Kogut 1991:19). These examples provide the potential for flexibility through learning and easy funding (Belanger, 2001:2).
M.Sc. (Econ) Jan Edelmann is Researcher of Technology Research at Department of Business Administration in Lappeenranta University of Technology, Finland, Email:
[email protected]. Dr. Kalevi Kylaheiko is Vice Rector of Lappeenranta University of Technology and Professor of Economics, esp. Technology Research at Department of Business Administration, Finland,
[email protected]. ** M.Sc (Tech) Petteri Laaksonen is Researcher of Industrial Economics at Department of Industrial Engineering and Management in Lappeenranta University of Technology, Finland, Email: petteri. laaksonen @ sonera. inet.fi. **** Dr. Jaana Sandstrom is Professor (acting) of Accounting at Department of Business Administration in Lappeenranta University of Technology, Finland,
[email protected].
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It has been argued that none of the traditional valuation approaches to deal with uncertainty, such as decision-tree analysis, simulations, and sensitivity analysis have the capacity to deal with (radical) uncertainty as effectively as real options. Besides avoiding the sunk costs, the real options thinking is a means of capturing the flexibility of the management to address uncertainties as they are revealed. The traditional discounted cash-flow approaches (e.g. Net Present Value) to value projects (or assets) fail to account for this flexibility. While much of the discussion in telecommunications is focused on the irreversibility of investments, the flexibility that the management can obtain goes beyond deferring, and includes abandon, shutdown temporarily, expand, contract, and switch use as well. The success of companies is influenced not only by the actors within the firm who are able to react as new information becomes available, but also by the actions of other agents or players outside the firm. They can be, for example, rivals, consumers or politicians deciding on new technologies, on new product types or on deregulation of markets. From this perspective, the strategic success of the company can be viewed as the outcome of an ongoing game. In this paper we will illustrate (in terms of real options) some basic strategic interactions and interdependencies among operators, manufacturers and software providers in the telecommunications industry.
DYNAMIC CAPABILITY VIEW OF THE FIRM AND EMERGENCE OF STRATEGIC ACTION SPACE Our point of departure in this paper is based on the dynamic capability view of the firm. According to this, the competitive advantage of firms lies in dynamic capabilities which, "...are the capacity to sense opportunities, and to reconfigure knowledge assets, competences, and complementary assets so as to achieve sustainable competitive advantage" (Teece 2000, 27). Teece, Pisano and Shuen (1997) emphasize both the internal (strengths and weaknesses) and external (threats and opportunities) dimensions to this approach by stating that dynamic capability consists of "...the firm's ability to integrate, build and reconfigure internal and external competencies/capabilities to address rapidly changing environments. They reflect firm's ability to achieve new and innovative forms of competitive advantage given path-dependencies and market positions." The dynamic capability concept here refers basically to the capacity to renew existing capabilities and routines and to generate new capabilities in a way that enhances the organization's strategic responsiveness (Andersen et al 2001, 5). The basic idea is to utilize internal routines and capabilities in order to be able to achieve congruence with the changing, often turbulent the external business environment. This congruence idea (i.e. balancing internal capabilities with external environment)
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emphasizes the key role of strategic management in appropriately adapting, integrating and reconfiguring the internal and external organizational skills, resources and functional capabilities to match the requirements of a changing environment. In this view, the firm's competitive advantage lies in the dynamic capabilities rooted in high performance routines operating inside the firm, embedded in the learning processes and conditioned by its history. However, these internally explained core capabilities are always conditioned by existing and emerging opportunities in the external market and institutional environment. The interplay between internally generated capabilities and their replication mechanisms (i.e. learning and innovating) and externally conditioned opportunities and threats (together with good or bad luck as a stochastic factor), determines the ever changing and uncertain strategic action space where the strategic real options are to be found. Figure 6.1 below illustrates this strategically crucial interplay. In our view, in the future particularly the dynamic capabilities - like the ability to choose the right R & D portfolio, to find a winning standard or mutually useful partnerships - will be major determinants in the success of companies, since strategies have to be based on the ability to create new growth options. On the other hand, the turbulent circumstances of the external market and institutional environment often make it necessary to use other growth options. Sometimes deferral, abandonment, or switching options may prove to be efficient strategy options. In fact, we can regard the firms and networks as reserves which generate flexibility to overcome the main problem faced by every firm, namely the fact that there is no complete set of contingent forward markets (cf. Sanchez 1993). This brings us to the crux of our paper.
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Figure 6.1: Strategic options as results of interplay between internal capabilities and external market and institutional environment. In our view, from the real options perspective the dynamic capability view can be reduced to; (i) future-related choices between various projects, products, factors of production, partners, and customers in a way which makes it possible to achieve competitive advantage over rivals and to; (ii) learning processes which make it possible to sustain the competitive advantage obtained through replication (cf. Blomqvist and Kylaheiko 2000). These choices always dictate the heart of strategic management, and must be based on (usually implicit) evaluation of various strategic options. In our view, however, this implicit evaluation needs more explicit methods that are prospective, capture the most relevant variables behind the decisions, and result in at least partly quantitative comparisons between the alternatives. We assume that the real options approach as a method can fulfil our expectations. Just in this area, the comparative advantage of using the real options approach is at its greatest (for a similar view, see Foss 1998). One cannot cope with prevalent uncertainty and relatively transitory windows of strategic opportunity without
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grasping the mechanism creating strategic options thoroughly. In our view, firms and the inter-firm networks (e.g. strategic alliances) can be interpreted as institutions, which try to generate strategic flexibility in the use of the most important, i.e. strategic, options. Interestingly, in this fairly abstract strategic options framework we can directly utilize the basic definition of an option, which is a right to choose whether or not to take some action now or at some future time. Another well-known lesson that derives from the basic financial options theory is: the more volatile the cashflow, the more valuable is the option. The reason is, of course, that the more volatile the price of the underlying asset is, the greater the potential positive returns (upside potential) are, whereas potential losses (downside risks) are limited to the exercise price of the option, which for example in the R&D context normally covers only the cost of development in all the sequences needed.
REAL OPTIONS APPROACH AS A STRATEGY MAKING TOOL While real options reasoning has traditionally been seen as an advanced valuation tool in the domain of finance, the strategic management oriented research focuses on the benefits it provides to strategy formulation. To be strategically responsive an organization must commit resources and build its dynamic capabilities within flexible structures, thus avoiding over-commitment in fixed assets. Consequently, in assessing the real-option literature we can distinguish two different paradigms: using the realoption-approach in strategic decisions, and using it as a valuation model in unique investment decisions. In this paper we use the real options approach in the strategic context. Briefly, in the strategic context the option theory supports option modelling features in choice mechanism underlying strategy and helps defining strategic options suitable for the strategic action space (e.g. Bowman and Hurry, 1993, Sanchez 1993, Foss, 1998; McGrath, 1997; Amramand Kulatilaka, 1999). The option theory always copes with uncertainty: the greater the value of the option is, the greater the uncertainty. In the strategic context uncertainty is mainly related to environmental uncertainty (Bowman and Hurry, 1993:766-767). Dixit and Pindyck (1994:47) distinguish between two forms of uncertainty: technical uncertainty and input cost uncertainty. In addition, McGrath (1997:977) defines a third form of uncertainty, lying between the two forms Dixit and Pindyck (1994:47) identify. It is present when the sources of uncertainty are largely "external" to the firm (i.e. not technical in nature) but can be influenced by strategic actions. This kind of "endogenous" uncertainty cannot be dealt with using the traditional Black and Scholes options valuation models but is of great importance in our dynamic capability-based strategic options realm.
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When controlling uncertainty and utilizing the opportunities opened by it in terms of the real options theory, the downside risk can be assessed and thus rejected alternatives may be avoided. If the downside risk is realized, the sunk costs will rise. In order to avoid the downside risk the investment can be delayed (a deferral option), or the size of the investment can be decreased (time-to-build option/stagzd investment). If the initial large investment is split, the small investments support learning before large investments (learning option). Also, the above option alternatives always include the option to abandon the project. On the other hand, the upsides that are rejected in traditional discounted cash-flow approaches (e.g. NPV) can be taken by identifying growth options through learning and innovating during the project. To summarize, real options provide flexibility through limiting the downside risk while maintaining access to upside potential at the same time. Sanchez (1993) stresses the flexibility of strategic decision making. According to him the flexibility concept can be considered from two different aspects: uncertainty and uniqueness. The greater the (mainly externally determined) uncertainty, the more flexibility there exists - first, because of a wide range of final outcomes of the strategic process, and second, in making decisions so that the downside risk will be eliminated. Uniqueness is based on firm-specific internal capabilities relevant for strategy decisions. Belanger (2001:4) analyzes flexibility with the timing of options as follows: "...the wait and see attitude embodied in a flexibility approach may reduce the lifetime returns of a strategic direction (denying the firm any benefits of first mover advantages and potentially locking out opportunities in some industries), but is expected to increase the probability of a successful course of action being pursued". However, in our research subject, the telecommunications business, we often face the opposite case mainly due to strong network externalities in consumption and lock-in tendencies in technologies (because of standards etc.). Hence, it can often make sense to forget the wait and see options and undertake an outright and immediate launch in order to gain first-mover advantages. Steinbock (2001:96-97) analyzes the importance of first-mover advantages in the Finnish telecom/mobile cluster and draws a conclusion that typical first-mover advantages can explain the success of the Finnish telecom companies during the 3G mobile era. The Finnish firms have managed to exploit the advantages derived from the first mover's reputation effects, high switching costs, economies of scale associated with marketing mix and brand creation, continuous capability-enhancing learning and asymmetric information due to privately shared information within the culturally united scientific/engineering community. As a result, the Finnish telecom/mobile cluster has grown, expanded, specialized, and diversified amazingly during the last ten years.
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COMPETITIVE SITUATION IN TELECOMMUNICATIONS INDUSTRY The present competitive situation in the telecom market is much more complicated than it has ever been. The question is how the emerging technological change affects in the competitive situation of the telecom industry when the outcome will probably be the Mobile Internet. In this situation technologies and large companies will collide when two huge markets - the Internet and Mobile market - are combined. As noted by Christensen (1997), technologies can be either sustaining or disruptive from the industry's capability point of view. When the two above markets will merge, the technologies sustaining the Mobile market, like EDGE (Enhanced Data rate for GSM Evolution) and UMTS (Universal Mobile Telephone System) will be disruptive from the Internet operators' perspective and similarly the prevailing Internet technologies, for instance W-LAN (Wireless Local Area Network), will be disruptive for the mobile operators (Figure 6.2). Steinbock (2001:97) illustrates this kind of development succinctly as follows: "The rise and expansion of the Finnish [telecom] cluster coincided with the second-generation digital cellular in which Nokia dominated handset sales and Sonera became the pioneer of mobile commerce and services, hi the 3G environment, however, the competition would be highly complex, intensive and global"
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Figure 6.2: Description of technological change in the Mobile Internet.
Figure 6.2 does not illustrate the whole complexity of the competitive situation in the merged market, because it excludes both the terminal market (PC and Mobile phones) and the operating system (Windows, Linux and Symbian) market. The forces of the user groups (like operator forums) or customers, especially large industrial ones, are also excluded in this context in order not to complicate the picture. If these matters were taken into account, the decision would be very complicated because the decisions would be compromises or agreements between the players rather than independent decisions of a party. TECHNOLOGY CHOICES IN TERMS OF REAL OPTIONS IN TELECOMMUNICATIONS Figure 6.3 below illustrates the main players and interactions within the whole telecom industry. The interdependencies between various players are not described here in detail. However, some more illustrative examples as to the strategic options open for the players in the changing competitive situations will be given later in this paper. It is worth mentioning that the diagonal of the game matrix shows the gray cells where traditional inner industry-based competition rules. Interestingly enough,
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the most interesting and valuable strategic options cannot be found there. They lie somewhere else, which will be analyzed later.
Figure 6.3: Interaction matrix of main player types of the telecom market (the names of the firms are just illustrative). All the players in the telecommunications business are becoming more and more dependent from each other. At the moment, it can be roughly said that network and operating system manufacturers earn their money from the operators and the operators from the end customers, i.e. consumers and companies. But the game situation is rapidly changing. To give an example, we can look at the rapid convergence of the mobile and computer (internet) world which opens up new opportunities especially for the end users. So far the mobile usage has been centralized on normal mobile phoning and short message sending (SMS), thus benefiting the operators. In the brave new world, however, the mobile phone users will be able to utilize PDAs (Personal Digital Assistant) - in other words handheld computers - and comparable devices as mobile phones as well. This will change the game set-up dramatically in favour of users. Their bargaining power will be increasing, which will have repercussions over the whole game matrix presented above. All this can be traced back to the rise of new technologies called GPRS and W-LAN. The handheld computers contain more and more technologies that make it possible to use them as a mobile phone; the old circuit-switched network was inefficient and expensive. To recap, the old definition of the mobile phone is changing. The external technology-induced threat faced by the telecom operators will be a threat for the network and mobile phone manufacturers as well. They are also losing their bargaining power and therefore the opportunities to exploit their former first
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mover advantages. Even the traditional Porterian externally biased strategic framework gives a first clue as to what to do: if the source of main revenue dries up, and in other words, rival techniques corrode the existing ones, new business models, earning logic and/or shielding techniques have to be launched. In terms of strategic options we can conclude that so far the business runs fine from the perspective of an operator as it enables all the players to operate with the old business models due to old path-dependent capability enhancing technologies. In this situation the bargaining power of an operator is based on the high switching costs and the lock-in phenomenon which hinders the users from exiting. However, the external threat is more current when all the pieces are ready for users to bypass the operator i.e. when new technologies make it possible to radically lower the switching costs, thus strengthening the bargaining power of the end users. In this new situation the manufacturer's position will also be in danger. It may lose its milking cow (i.e. the operator). Again we can look at this situation in terms of strategic options. If things go wrong for manufacturers their old path-dependent cumulative (dynamic) capabilities may be in jeopardy. They may face the rise of competence destroying (disruptive) technologies which can alter the whole bargaining power structure of our game matrix. This means that both the operators and manufacturers have to think about different strategic options to be able to overcome the new situation. Of course, they can wait and see but there are great risks to be overridden by new rivals. They can also try to bet on the winning horse and form a partnership or strategic alliance with it. The risk associated with this strategy is the danger of getting "held up" by the providers of new technologies. In the new situation the providers of the most important strategic complementary capabilities may take the whole jackpot. Of course, there is always a risk to bet on the wrong horse as well. Now we will take a more detailed look at how today's operators and manufacturers can be passed by customers. The handheld computers provided in malls, other than Nokias, can be boosted e.g. with the W-LAN function. This means that these handhelds can be used in the limited area as mobile phones with appropriate software. To expand this LAN the areas have to be linked somehow together and this means nodes. We will not get into more technical details here but the most important fact from the game matrix perspective is that wide LANs are possible. The users today's lead users, really can pass the operator. The more open the system is, the more possibilities of this kind will be opened up to customers. But can the customers do the things described above? Of course they can. Linux users are a good example. About seven years ago Linux looked like Unix from the average person's point of view. Today's Linux looks more like motored and reliable version of Windows. The boom of Linux will likely happen in the near future.
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In turn, it is now reasonable to believe that all this could happen also in mobile phones. This depends on the actions of the Internet community. Due to uncertainties and the speed of the diffusion of new technologies, the capability to invest in all technologies simultaneously is limited, even for the largest operators in the world. The merging industries also lack knowledge in their disruptive technologies. In this situation the device manufacturers, for example Nokia, have an opportunity (i.e. strategic growth option) to continue in the old established GSM path, i.e. to use GSM and extend it with HSCSD and simultaneously take GPRS under development (i.e. to use the strategic deferral or even the learning option). The other strategic alternative for Nokia would be to take the other development path, i.e. the W-LAN path. However, the W-LAN has so far not been typical technology for mobile phones. This in turn means that for Nokia the W-LAN strategic option involves substantial technological uncertainty whereas the GSM path uses established technology. In this kind of environment the strategic use of real options connected to the technology choice can be at its best. Figure 6.4 below illustrates our Nokiainspired example.
Figure 6.4: A decision framework for a technology choice of device/network manufactu re rs. From Figure 6.4 we can see that a device manufacturer, for example Nokia, actually has three basic choices: 1. stay in the GSM-based established technology, 2. invest in the development of W-LAN technology to be used in the devices, or 3. make a strategic switching decision to change the technology from GSM to W-LAN. The company has the possibility to take a deferral option by staying at the GSM path and investing in the development of W-LAN. The opposite case, i.e. trying to take the first mover's advantage by committing to W-LAN technology includes a huge amount of
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uncertainty, but also opens up potential for a tremendous upside, if the technology becomes a success among consumers. By taking a deferral option and investing gradually in W-LAN technology the company can learn more about the new technology-related capabilities and gain more information about the reactions of the market. Taking the switching option would need much more development as the XYLAN technology has to be ready if it is to be a real substitute for GSM. Consequently, the size and the risks of the development investment in W-LAN technology determine the readiness of the company to adopt this new technology and its devices. If the W-LAN-related development investment is assumed to be little, the company can take the option to learn and the option to wait. On the other hand, if the company invests heavily in the research and development of W-LAN, it takes a switching option which enables it to use either GSM-based technology or W-LAN technology later. The device manufacturer can also abandon the new technology, i.e. W-LAN, during the course of the time, and continue the business with GSMapplications only. The operator faces a different decision situation related to the technology choice (see Figure 6.5). The crucial decision the operator faces is the decision about the capacity level it intends to operate with. Figure 6.5 illustrates this decision situation in terms of strategic options.
Figure 6.5: A decision framework for the technology choice of the operator. Figure 6.5 is fairly straightforward. Only one comment is worth explaining. By postponing the decision (deferral option), the operator can gain more information and learn more about the behavior of the customers. The value of this learning option can be calculated.
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DISCUSSION AND CONCLUSIONS In this paper we have analyzed the possibilities of utilizing the real options approach when trying to shed light on the complicated issues of strategic alternatives in the ICT sector. In our view, the real options are especially valuable for projects that involve both a high level of uncertainty and opportunities to dispel it, as new information becomes available (Kylaheiko 2001). Within these projects the options to defer and learn, abandon, expand, extend, or switch can all be applied. However, in the telecommunications business there is little time to learn about the volatile markets or constantly emerging new technologies. Considerable first mover's advantage-related rewards may be gained, but the players also face considerable risks. In such a turbulent business the players need to have flexibility in their strategic decisions for example by making strategic alliances, i.e. using the option to contract. The firms can also use growth options e.g. by acquiring high performance high tech companies with good teams in order to get the needed programming capacity for product development. One implication especially stressed by Foss (1998) seems to be worth mentioning in this context where uncertainties are high. In such a situation the use of networks seems to be very important because they make it possible to obtain new dynamic technological and organizational capabilities that are not normally easily available in the open markets. "Networks can be viewed as a pool of resources, constituting a greater variety of reserves than can be accommodated within the necessary constraints of a single firm" (citation of Loasby, see Foss 1998, 16).
BIBLIOGRAPHY Andersen, T. B, P. Schierstaedt, T. A. Carroll and N. Tromholdt (2001). A Real Options Approach to Strategy Making. Paper presented at the Strategic Management Society 21st Annual International Conference, San Francisco, US. Amram, M. and N. Kulatilaka (1999). Real Options. Managing Strategic Investment in an Uncertain World. Harvard Business School Press. Belanger, K. L. (2001). Real Options are not the Cure-all: When Managers Use Flexible Investment Structures. Paper presented at the Strategic Management Society 21st Annual International Conference, San Francisco, US. Blomqvist, K. and K. Kylaheiko (2000). Main Challenges of Knowledge Management: Telecommunications Sector as an Example. In the CD-ROM of the 8th International Conference on Management of Technology, Miami, USA, 21-25.2.2000.
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Bowman E. H. and D. Hurry (1993). Strategy through the option lens: an integrated view of resource investments and the incremental-choice process. Academy of Management Review, 18, 760-782. Christensen, C. M. (1997). The Innovator's dilemma. New York. Harper Business. Copeland, T.E. and V. Antikarov (2001). Real Options. A Practitioner's Guide. Texere LLC. Dixit, K. A. and R. S. Pindyck (1994). Investment Under Uncertainty. Princeton University Press. Foss, N. J. (1998). Real Options and the Theory of the Firm. Paper presented for Sanchez, R. (ed.). Options Theory in Strategic Management, Sage, London, published in the Working paper series 1998-3 of Copenhagen Business School, Department of Industrial Economics and Strategy. Kogut, B. (1991). Joint Ventures and the Options to Expand and Acquire. Management Science, 37, 19-33. Kylaheiko, K. (1998). Making Sense of Technology: Towards Synthesis between Neoclassical and Evolutionary Approaches. International Journal of Production Economics, 56-57, 319-332. Kylaheiko, K., J. Sandstrom and V. Virkkunen (2001). How to Deal with Dynamic Capabilities using Real Options Approach. Paper in the proceedings of the 16th International Conference of Production Research, Prague, August 2001. McGrath, R. G. (1997). A Real Options Logic for Initiating Technology Positioning Investments. Academy of Management Review, 22, 974-996. Sanchez, R. (1993). Strategic Flexibility, Finn, Organization, and managerial work in dynamic markets: a strategic-options perspective. Advances in Strategic Management, 9, 251 -291. Steinbock, D. (2001). Assessing Finland's Wireless Valley: can the pioneering continue? Telecommunications Policy, 25, 71-100. Teece, D. (2000). Managing Intellectual Capital. Oxford University Press, Oxford, UK. Teece, D., G. Pisano and A. Shuen (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18, 509-533.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
EMERGENCE OF A NEW E-INNOVATION PARADIGM
Ping Lan, School of Management, University of Alaska Fairbanks, USA1
INTRODUCTION Dealing with new technologies and handling changes brought about by innovations are equally important to both developed and developing countries in embracing the Internet economy (Cairncross 1997, DOT Force 2001). Due to the rapid development of the Internet, innovation itself has been changed or is being transformed in a networked environment (Quinn et al. 1996, Kogut et al. 1999, 2000, Sawhney et al. 2000, Rayport et al. 2001, Lan 2002, Mitchell et al. 2003). Corresponding to the change, distributed innovation, or online innovation, or open innovation, or E-innovation has quietly become widely used industry terms in the recent years. More and more enterprises have positioned themselves in this emerging paradigm (Chesbrough 2003). The industrial embracing of new innovation is leading to a growing academic focus on the topic, although a gap between industry and academia still exists in this area (Lan et al. 2002). Given the fact that there is only a vague understanding of E-innovation while its role becomes more important, this article aims to examine the efforts made by industry and academia in using the term "E-innovation" and promoting the concept of E-innovation. Based on the analysis, it intends to paint a picture about E-innovation by highlighting the associated features such as digital form, distributed nature, 1 Dr. Ping Lan is an Associate Professor of Business Management at University of Alaska Fairbanks, Alaska, USA. Email:
[email protected].
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decoupling activities, dedication to channel change, and deployment of different rules. At the same time, the direction and challenges of E-innovation development will be discussed. Following the above design, this paper is divided into the following sections. The first section sets the background for tracing the efforts regarding promoting Einnovation by briefly reviewing the development of E-business, and features of the current digital platform. The second section examines industrial usage and academic usage of the term E-innovation and promotion of the concept of E-innovation. It finds that E-innovation is widely used in industry as enterprise or section names, product or service features, innovation capacity indicators, and, most interestingly, new battlefields for competition. The underlying meaning of industrial efforts is to introduce new products, services, processes, or solutions in an E-business environment. It also finds that E-innovation is treated by academics as a new way or model to organize innovation, which is characterized by its distributed nature. The underlying meaning of academic efforts is to use the Internet to plan, initiate, conduct, run, facilitate, and promote innovation. Combining the above two-sided examinations, the third section explores the convergence of the industrial and academic efforts in promoting E-innovation. It argues that the combination of the two orientations initiated by industry and academia drives E-innovation towards a more complicated paradigm, which is module-rich and opens widely to outsiders. The fourth section discusses the challenges faced by E-innovation. It suggests that a simplified ruling framework with different working mechanism is needed to put E-innovation into mainstream business operations. The final section summarizes the research and suggests topics for future exploration.
E-BUSINESS DEVELOPMENT ON A DIGITAL PLATFORM Due to the rapid development and overlaps of different initiatives in E-business, people tend to view the process of E-business development from different angles. Some treat E-business development as a five-wave process by emphasizing the functionalities of business initiatives from Brochureware, E-commerce, Eprocurement, E-marketplaces, to the Digital Economy (Fingar et al. 2001). Some indicate that E-business is an expansion cycle of business from person-confined to wired then further to wireless operations, with a focus on freedom created by technology to both customers and enterprises (Keen et al. 2001). Others suggest that E-business development follows a path leading to a higher company's IQ or smarter network intelligence resulted from combining information and networking (Sawheny etal. 2001 and Nolan 2001).
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Synthesizing the different ideas, a three-stage-development process can be identified: brochureware stage, E-commerce stage, and E-synchronization stage. Prior to 1996 is referred to as the Brochureware stage. In this stage, the Internet technologies started to penetrate into business world. The main usage was confined to establishing Web presence and publishing company and product information online, although the role of electronic data interchange (EDI) as a special channel for external linkage was also noticeable. At the same time, Intranet was developed to share internal documents, and accelerate information flows. The importance of the Brochureware stage was reflected in showing Network Intelligence. This legacy has been kept and expanded in the follow-up stages. The time period from 1996 to 2000 is referred to as E-commerce stage, which can be divided into two segments. 1996 to 1998 was the first period or early Ecommerce period, while 1998 to 2000 was the second period or full range Ecommerce period. In the first period, the Internet was adopted for mass-scale commercial transactions, which started at Amazon.com. The business is mainly confined to Business-to-Consumer (B2C) initiatives. In this period, many stand-alone retailing B2C were established. They promoted sell-side transactions while taking advantage of global reach and round-the-clock reach. The second period was the heyday of dot-com companies. It was also the period of rapid penetration of the Internet, particularly in Business-to-Business (B2B) usage, ranging from Eprocurement to value chain restructuring. In this period, various E-marketplaces or Enterprise Portals were established. Both sell-side transactions and buy-side transactions were promoted. The importance of the E-commerce stage was reflected in displaying the society-wide freedom brought about by the electronic interfaces. This legacy has been woven into the late stage in both active and passive ways. From 2000 to present is referred to as a stage of E-synchronization. In this stage, much hype about E-commerce platforms was fading. In returning to basics, more attention is being paid to profitable usage of the Internet, such as saving costs through sharing infrastructure among different business activities, serving customers better by synchronizing different channels, and opening enterprise's boundaries by integrating with outsiders. The importance of the E-synchronization stage is reflected in building the relationship between the Network Intelligence or a company's IQ and its performance in an E-business environment. This synchronization, on the one hand, keeps the legacies of previous stages. On the other hand, it calls for new ways for dealing with the pressure raised from increasing the network intelligence and realizing freedom-generation opportunities. The development of E-business shows obvious fluctuation (Mullaney et al. 2003). However, it is tied closely to a new production platform, i.e. a digital platform, which has been forged by the advances in information and communication technology
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(ICT) during the last fifty years. For example, the three stages of E-business development are corresponding to the three basic usages of the digital platform. The same as previous production platforms, the current platform is built on a unique technological foundation, which demonstrates special usages. At the same time, it requires or offers new opportunities for human beings to interact with their natural and social environments. The current technological foundation consists of several sets of technologies such as digitizing technology, networking technology, and authoring technology. Digitizing technology originated from the development of computers, and expended to software engineering and digital information handling. The development of digitizing technologies, on one hand, dramatically increases computing power. On the other hand, it offers possibilities for shifting business operation from a materialsbased paradigm to an information-based paradigm (Shapiro and Varian 1999, Lan 2000). Networking technologies result from the convergence of telecommunication technology and electronic technology (Panko 2001). The development of networking technologies enables information exchange to enjoy unimaginable freedom, judged by bandwidth, connectivity, accessibility, and diversity. This freedom is based on universal protocols for information exchange, and a layered operating structure (Kalakota et al. 2001, Davis et al. 2003). Authoring technology is a collection of various tools associated with the development of the Internet, particularly with World Wide Web. The development of authoring technologies provides solutions for changing interactions between an organization and its stakeholders by adding a virtual dimension, so that mass creation and decoupling of the front-end and back-end of an operation can be realized. These technologies determine either the capacity of the platform or the way it functions. The new technology capacities display a spectrum of applications. Within this spectrum, three usages are pervasive: digital messaging, digital transaction and digital integration. All of them are information oriented and can be measured by indicators such as scalability, reliability, hosting, storage and security. Digital messaging is mainly reflected in accelerated information flows through the Internet. One direct role of digital messaging is to reduce the existing asymmetry of information between buyers and sellers (Zott et al. 2000, Huizingh 2002). Another role is to improve efficiency of coordinating activities and reduce operation costs (Tapscott 1999). The third role of digital messaging is to change peoples' behaviors towards information (Sawhney 2001a) and decouple many traditionally bounded activities (Sawhney 2001b). Digital transaction is characterized by electronic payments and related information flows. It involves financial institutions and countless businesses and individuals. The simplicity of the application either diminishes the spatial and temporal gaps in conducting transactions or intensifies the battle for securing the transaction channel. Digital integration is reflected in structuring and restructuring
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activities, functions and organizations which happen at different levels. The vertical integration shows the changes of linkages along a value chain (Afuah 2003). The horizontal integration shows the convergence of traditionally separated activities, such as cultural activities and commercial activities (Mitchell et al. 2003). The realization of technological capacities and pervasive employment of these capacities bring new realities to the world such as virtuality, intelligence and globalization. Virtuality means that products, services or delivery of these objects are not confined to their physical dimensions or material existence. Virtuality results from the digitization of activities and processes, and it follows a different set of rules in creation, exchange, delivery and consumption of products and services (Shapiro and Varian 1999, Gulati and Garino 2000). Intelligence means that the operations of many activities can be conducted in a distributed, synchronized or flexible way through capturing, retrieving, conveying, creating, processing, and distributing information (Sawhney 2001b). Globalization is one of the network externalities exhibited. It means that the operational reach of an interface in the digital platform is without boundaries in the world. Global connection and unified networking protocols or standards make information distribution spontaneous. Easy access and the virtuality of operations enable interactions between different players continuously and ubiquitously. These faceless, stateless and round-the-clock interactions, on one hand, are forces for homogeneity or scale economy by linking scattered niches. On the other hand, they are catalysts for creating or increasing conflicts by releasing various intrusions.
EMBRACING E-INNOVATION: INDUSTRY VS. ACADEMIC A preliminary search on popular Internet search engines, online directories, academic databases and academic publications shows differences between industry and academia in embracing E-innovation. There differences are reflected in both attitudes and orientation in dealing with changes to innovation brought about by information and communication technology. Industry's Efforts in Promoting E-innovation In the E-business development process, two trends can be identified from the industry's efforts in promoting E-innovation. One is to set a venue with electronic media. The other is to keep trying different new innovation models for synchronizing networking and innovating. Checking the Internet reveals the former, and reviewing the open source movement displays the latter. Using popular Internet search engines and directories such as Altavista,
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Google, Lycos, and Yahoo for searching the keyword "E-innovation", over a thousand hits turn up respectively. Scrutinizing the search results, some popular names appear on the list, such as ICL, GE, IBM, Arthur D. Little, Cap Gemini Ernst & Young, Oracle, among others. These results show that E-innovation has been used by industry since the E-commerce stage, and the term was been quietly incorporated into some enterprises' operations. In order to gather in-depth knowledge about how E-innovation has been used by enterprises, 1060 search findings from Yahoo for E-innovation were examined one by one. A usage pattern of E-innovation among the enterprises is emerging (Lan and Du 2002). E-innovation is mainly used to show new features of products/services (51.6%), a special field of E-business (21.5%), a company or a project name (18.7%), and a new capability of innovation and "other" (8.2%). The survey found that about half the industrial usage of the term E-innovation is related to labeling new products or services. Among them, most emphasize that new features are related to the E-business environment. Although many companies treat Einnovation as a frontier, a special field or an emerging area, there is not a commonly held idea about what it is. Some companies apply E-innovation broadly to indicate an area related to the Internet. In contrast to such a broad coverage, some companies use the term in a narrow sense with certain reference. Arthur D. Little, develops an Einnovation hierarchy in its handling of E-business activities. In its framework, there are five levels of E-innovation based on the combination of market innovation, channel innovation, product and service innovation, and business model innovation. The five levels, from bottom to top, are Desperado, Integrator, Architect, Core Focus, and Virtual (ADL 2000). When E-innovation is used to show a capability, it is usually placed in the center of operations, which has a wide linkage and an orientation towards results by having such a capacity. At GE, a popular E-business forerunner, Einnovation is used to refer not only to new features of services and products, but also to capabilities, progress, and results. It is not popular to use E-innovation as a component of a company's name, although a handful of enterprises are doing so. A lot of companies use E-innovation as a project name, a department name, or a section within their Websites. The above classification is only a rough indication of the main usages of the term E-innovation. It is difficult to paint an accurate picture due to the interwoven nature of innovation and the overlaps in the term's usage within individual companies. For example, searching ICL's web site www.icl.com, 68 documents were found using E-innovation extensively. Among them, some involve promotion and some involve classification. However, under the title of E-service, there is also a special section called E-innovation paralleled with Infrastructure, Applications and CRM Integration. In addition to forging the term E-innovation, and using it to indicate new features, new capacity, new organization and, most importantly, a new battlefield,
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industry has been very active in applying the new concept of E-innovation in the business operations. These efforts are reflected in the open source movement and similar initiatives. The open source movement started from the development of the operating system Linux. In its development, Linux resembles a free "knowledge market," completely open and unstructured. It does not limit participation of any interested individual. In fact, it benefits from the creativity and collaborative efforts of a large number of developers. An individual developer can freely download Linux for further development. As a condition, all the developers should clearly specify every change they made in a file. In this process, intellectual property rights are not controlled by any single entity. It is called "copyleft" (Sawhney and Prandelli 2000). Based on the model, IBM initiated the AlphaWorks project, which offers free commercial licenses to developers for products such as its XML Parser and the source code of its compiler for Java. In addition to content and commercial opportunity, AlphaWorks also provides Web developers with a community environment. Sun developed the Sun Community Source Licensing (SCSL), which offers an early example of an "emergent self-organization" community where it is closed to outsiders of the community and it is open to insiders of the community. In November 2001, IBM officially started the Eclipse Project, which placed $40 million of its software tools in the public domain as the first step toward founding an open-source organization for developers. Summarizing the above analysis on industrial usage of the term E-innovation and promotion of the concept, it is fair to say that the industry is quite active in meeting the challenges brought about by the Internet and is willing to embrace the new domain of E-innovation. The diversified usage of E-innovation, on one hand, increases the awareness of E-innovation; on the other hand, it indicates an orientation behind these usages. E-innovation is related to introducing products, services or tools based on information technologies. The introduction of the new product and service is empowered by electronic media, which sets up a new platform or new area for competition. Academic's Efforts in Promoting E-innovation In contrast to wide industrial usage of the term E-innovation, academic research on this topic is quite limited. Not many articles address this issue. For example, search engines produce over a thousand hits of industrial listings. However, only two articles turned up when both "E-innovation" and "online innovation" were entered in Academic Search Elite, which provides full text of over 1,530 journals covering the social sciences, humanities, general science, multi-cultural studies, and education, among others. No use of the term could be found in the Elsevier Science Server, a database that includes over 1000 full text academic journals published by Elsevier. It
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is apparent that academia is lagging behind industry in embracing the term or concept of E-innovation, at least judged by quantity of output. Among the limited academic research which deals with the changes to innovation brought about by the Internet, two streams can be identified. One focuses on differences between traditional innovation and E-innovation. The other concerns the distributed nature of E-innovation. In order to show the differences between online innovation and offline innovation, Rayport and Bernard (2001) employ previous studies on co-evolution of technology and market (Christensenl997, 2000, and Leonard-Barton 1998) to examine innovation frameworks and processes in the Networked Economy. They identify five variables: investment required, time-to-market, flexibility, decisionmaking mechanism, and innovation constraints. They argue that online innovation differs from offline innovation in the following aspects: (1) investment required to launch new products and services is moderate; (2) choices about the future of new innovations can easily be made by markets; there is no need to make these choices internally; (3) first mover imperative can be aligned with gathering more customer input; (4) launching beta-versions allows for re-visioning or customization, actually benefiting the innovator; (5) a tighter link between technological innovations and performance is demanded by online customers; (6) online innovation is technology and market co-evolution, and (7) distributed innovation becomes a fluid, organic process, which links the inside of an organization with the sources of online evolution. Based on his experience in assisting the development of First Tuesday, a global entrepreneurial network, Loudon (2001) ad vacates a separation between traditional innovation and new innovation - webs of innovation. He suggests that traditional innovation is corresponding to a mature market which weighs more on process innovation; while new innovation is corresponding to an immature market which focuses on product innovation. He claims that innovation in immature markets is a networked process. In contrast to Rayport and Bernard's efforts to paint an overall picture of online innovation, Von Hippel (2001) focuses on discussing online innovation practices, with particular reference to participation of users in innovation. Using Open-Source software as an example, he argues that user communities engaged in innovation are most likely to flourish when the following three conditions are met: (1) at least some users have sufficent incentive to innovate; (2) at least some users have an incentive to voluntarily reveal their innovations and the means to do so; and (3) user-led diffusion of innovations can compete with commercial production and distribution. Also dealing with Open Source software development, Kogut et al. (1999, 2000) suggest that E-innovation is a new model or a new way to conduct innovation. In examining the practices of global software development, they present two models.
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One is a traditional model which emphasizes cost and speed. The other is Einnovation or "linuxation", which emphasizes the effort to improve innovativeness. As the terms suggest, E-innovation results from the fact that Linux is developed by people from anywhere with Web access. They argue that E-innovation is not only a new way for developing software in a distributed environment, but also a powerful model for future organization of innovation. Furthermore, they pointed out that the usage of E-innovation is not confined to a particular industry, but occurs in all fields in which cooperation can be arranged by module and there exists a wide understanding of a common language and culture. In the stream of academic research on the distributed nature of E-innovation, Sawhney and Prandelli's work (2000) further explores the practices of deploying distributed innovation. In their innovation spectrum, the traditional "closed" innovation system is one end, and a completely "open" innovation system is the other end. In the knowledge economy, the former has no way to renew itself, while it obtains its goal to minimize disturbances, perturbations, and change, this "machinelike" system tends to wind down and finds it difficult to innovate. The latter benefits from the creativity and collaborative efforts of a large number of participants. However, the lack of strong governance and the absence of coordination mechanisms tend to make such open systems unstable and susceptible to chaos. Based on their observation that either too closed or too open innovation systems tend to be ineffective in turbulent environments, Sawhney and Prandelli (2000) suggest a third way: "community of creation." The community of creation is a permeable system, with ever-changing boundaries. It lies between the closed hierarchical model of innovation and the open market-based model. The entire community owns intellectual property rights. A central firm that acts as the sponsor and defines the ground rules for participation governs the community. Within the community, explicit knowledge as well as tacit knowledge can be shared because participants build up a common context of experience, allowing them to socialize knowledge developed in specific contexts. The community functions as a complex adaptive system, changing its configuration as a fractal entity on the basis of the specific contributions it is able to attract and select. It is neither closed nor completely open. The locus of innovation is no longer within the firm; it is within a community of members in an opportunity arena. Every member of the community of creation can access and contribute to the community. However, the community has specific rules for membership, and it needs a sponsor as well as a system for managing intellectual property rights that allows members to extract rents from the intellectual property they help to create (Sawhney and Prandelli 2000). Summarizing the above analysis on academic research on E-innovation, it is apparent that most attention is paid to a new way or model for organizing innovation, which is characterized by its distributed nature. The meaning behind the academic
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arguments on E-innovation can be interpreted as using the Internet to plan, initiate, conduct, run, facilitate, and/or promote innovation. This usage of the Internet enables E-innovation significantly differentiates itself from traditional innovation and show unique advantages.
FEATURES O F THE NEW E-INNOVATION PARADIGM Synthesizing the above discussions on the industrial and academic efforts in promoting E-innovation, it is apparent that industry and academia are positioning themselves differently in embracing E-innovation. Industry has been trying to identify a new battlefield for demonstrating novel functionalities of products or services, new capacities of synchronization and collective competition among value clusters. Academic research has been trying to display or release the power of distributed innovation from the software industry to other sectors, so as to increase innovativeness. Although the two efforts have different orientations, their synergy does exist in a root: providing solutions by using the Internet for E-business. This common root coincides with the development requirement of E-business at the current stage mentioned in Section 1: setting linkage between Network Intelligence and Freedom-generati on. E-innovation's burgeoning from providing solutions by using the Internet for E-business suggests that both the content and method of innovation has been changing and will be continuously changed by the Internet. The major changes can be observed from two expansions, i.e. E-innovation is expanding traditional innovation in application of innovation and delivery of innovation. These expansions are leading Einnovation to become a more complicated, and module-rich platform. In terms of the change of innovation usage, E-innovation shows a feature of bi-focus instead of the traditional single-focus innovation process. Single-focus innovation means that the purpose of innovation is to provide or introduce a new product or service with a new functionality. In carrying out a single-focus innovation, traditional innovators adopted a "push" strategy to meet sales quotas while relying on the customers' desire to improve productivity through technology acquisition and advancement (Shepherd and Ahmed 2000). Bi-focus innovation means that while it provides or introduces a new product or service with a new functionality, it also creates a new channel or environment for delivering or upgrading a traditional or a new functionality. In pursuing the bi-focus innovation, "solution" oriented innovators lie at the customer-supplier interface. They realize that customers' needs are becoming increasingly more sophisticated and customers' understanding of the technology available is improved. Both of them result in a greater market "pull". By combining the market "pull" and "push", bi-focus innovation is working with related stakeholders
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to uncover, or better define problems for which a total solution can be developed. In this manner, E-innovation realizes freedom-generation opportunities based on the network intelligence, since combining product and channel innovation could greatly facilitate process automation, operation simplification or standardization, input and output realization, and system synchronization. The bi-focus feature of E-innovation results from and also results in digitalization of traditional physical activities/processes, the convergence of different activities, and corresponding creation of new value chains or threads. IBM's initiatives in E-business services can be seen as an example of such bi-focus innovation. In terms of the delivery of innovation, E-innovation shows a feature of dualeffort instead of uni-effort as with traditional innovation. Uni-effort means an innovation is conducted or completed within a firm. The assets used to deliver the innovation usually are limited to what the firm owns. As suggested by Sawhney and Prandelli (2000), uni-effort innovation has difficulty to renew itself in a knowledge economy although it is effective in minimizing disturbances, perturbations, and change. Clearly, in a highly complex environment, it will be unlikely that any single organization will possess, or wish to possess, all the necessary skills and technological collateral to meet the broad, enterprise-wide needs of its customers. Dual-effort means that an innovation is conducted or completed through both internal and external efforts of an enterprise. The assets used to deliver an innovation can come somewhere out of its control. This expansion of E-innovation regarding delivery makes Einnovation a new catalyst and a new channel for organizing innovation activities. In pursuing a dual-effort innovation, synergy is required to build not only a strong knowledge base, and a solutions-based portfolio, but also a mechanism for coordinating co-creation. By doing so, the horizon of an innovation is enlarged from within the boundary of a firm to the boundary of a reachable or manageable network. At the same time, the delivery channel of an innovation is increased from a linear path to a non-linear net. The dual-effort feature of E-innovation results from both distributed networking and the E-business culture. The former enables the synergy of both internal and external creation through the Internet. The latter is accelerating or driving the transformation of firms from targeting primarily end-users to targeting at both end-users and their customers as well as other service providers. The experiences of Linux, Netscape, IBM, and SUN have shown that dual-effort innovation offers great possibilities for a firm to capitalize on the creativity of its partners, customers and other parties. The expansions of innovation in application and delivery have not only changing in number, quantity or dimension, but also transforming in characteristic, linkage and mechanism. Examining both industrial and academic promotion in Einnovation, and the underneath convergence of the two streams, an overall picture about E-innovation can be painted. Firstly, E-innovation is creative activities which
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are conducted through the Internet and through operations enabled by the Internet. This close relationship with the Internet makes E-innovation not only to inherit the nature of the Internet, but also possess some characteristics of online operations. Secondly, some key factors are driving apart E-innovation from traditional innovation; they are: enabling technologies, changes of customer requirements, increasing of knowledge sharing, and clustering or restructuring of value-added activities. Thirdly, organizational changes for innovation are accelerating the formation of the E-innovation platform and will finally change the momentum of Einnovation. Based on the overall picture, several features of the emerging E-innovation platform can be drawn. They are organized as 5 D's: digital form, distributed nature, decoupling activities, dedication to channel change, and deployment of different rules. Digital form means that E-innovation limits its scope within the reach of the Internet or electronic media. Differing from traditional innovation, in which the sharing of coded knowledge is not permeable, but its coverage is ubiquitous, Einnovation greatly shares coded knowledge and deals with mainly digital objects. The task, process and delivery of the creation activities in E-innovation are related or transformed to information flows, which can be finally converted to the flows of digital signals. The digital form of E-innovation does not mean that E-innovation cannot be involved in physical jobs such as having physical experiment, or introducing physical products and functionalities. However, it does suggest that Einnovation focuses on the information and its flows companied with these physical works. It is information and its flows that constitute very unified building blocks of Network Intelligence. Digital form, combining with other features of E-innovation, lays down the foundation of the two expansions of E-innovation on traditional innovation. Distributed nature means that E-innovation is open and decentralized to a much higher degree. This nature is inherited from the basic nature of the Internet. It enables E-innovation to act in two distinguishable ways as mentioned in some academic research. Firstly, it allows E-innovation to accommodate creative efforts in a larger scale, no matter these efforts reside inside an organization or outside the boundary of the organization. Secondly, it allows E-innovation to progress in a nonlinear way, which offers more interface opportunities. Due to its distributed nature, Einnovation is horizontal-oriented instead of vertical-oriented. Decoupling activities means that E-innovation has smaller basic building blocks for carrying out creative activities. The combination of digital form of objects and powerful computing and networking technologies make individuals free agents to a certain degree. They can undertake different activities without much limitation of time and space. This freedom in fact "chops" a typical innovation activities chain into many pieces spatially and temporally. The feature of decoupling activities makes E-
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innovation portable. It could be installed and dismantled quickly. At the same time, more value could be generated from coupling different activities and functions, and decoupling previous linkages. Dedication to channel-change means that E-innovation emphasizes on the transformation of traditional channel to electronic channel of business operations. As suggested by Arthur D. Little (ADL 2000) several items can be identified from Einnovation practices: it uses electronic media to replace traditional media; introduces new products and services for electronic media; and forges new models to change both products and channels. Dedication to channel-change not only displays the focus of E-innovation, but it also indicates the direction of E-innovation evolution: replacing people-confined media by electronic media to generate a higher degree of freedom for the human beings. This freedom is embedded in automation, simplicity, convenience, and efficiency. Deployment of new rules means that E-innovation is changing the practice of organization structure, incentive mechanisms, and intellectual rights protection in innovation governess. In the traditional innovation management paradigm, an inwardoriented innovation process was surrounded by an absolute monopoly firewall. In the E-innovation paradigm, innovation management aims to balance "copyright" and "copyleft" by sharing creative fruits, to make "inward-oriented-process outward" by absorbing or leveraging external innovation efforts. It also synchronizes technology development and adaptation by dismantling barriers of knowledge flows (Chesbrough 2003). Deployment of new rules in E-innovation results from the other features of the E-innovation platform. It results in many initiatives in reorganizing the innovation activities.
BARRIERS F O R PROMOTING E-INNOVATION Promoting E-innovation is not a word game or a fashion for putting a prefix "E" in front of everything. E-innovation indicates the reshaping of innovation as a tool for dealing with reality in the current world, such as interconnected systems, exploded information and collective competition. To cope with or survive in such an environment, one has to follow, reap or create migrating values by using appropriate tools (Sawhney et al. 2000, Nolan 2001). E-innovation has the potential to become such a tool due to its features mentioned in the last section, and its roles in accelerating E-business development by linking the Network Intelligence and Freedom-Generation opportunities. However, before E-innovation become a big gun in the next battlefield of E-business development, a sound theoretical framework and toolkit have to be developed for synchronizing E-innovation and other business functions and activities.
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Challenges are raised from both the supply side and the demand side. All of them have to be dealt with carefully. Judged from the supply side, three problems hinder the development of E-innovation: the lack of a workable framework to differentiate E-innovation from traditional innovation, an inadequate number of organizations running their innovation in a distributed way, and the lack of software tools to support the development of E-innovation. The lack of a workable framework is reflected in the following aspects. Firstly, there is no clear definition of E-innovation. In most industrial usage, Einnovation is a label representing a certain novelty. However, there is no clue what this novelty could be, and how the novelty of products and services links to capacity or to a certain area of E-business. Secondly, there is not a bridge to link the two orientations in E-innovation promotion. Although we have suggested merging the two streams by providing solutions by using the Internet for E-business, it is still too vague and lacking operational guidance. Thirdly, there is not a platform for providing a channel for incorporating E-innovation to traditional business functions and emerging business activities such as Knowledge Management, and E-learning example. The lack of a suitable framework makes it difficult for E-innovation to stand on its own feet. The lack of a large number of enterprises to practice distributed innovation is another supply side barrier. Although academic research paints a clearer picture about the new innovation, it is highly concentrated on the distributed nature of innovation without much consideration on the contents of innovation. With such a limitation, many enterprises are out of the game, because most enterprises do not pursue a "Linuxation" and do not carry boundaryless operations. In this environment, enterprises do not benefit greatly from academic research, while academic research also suffers from a deficiency of cases. In addition to insufficient concept development in E-innovation, there are also technical problems hindering E-innovation, i.e. there is not an appropriate toolkit, particularly a software package, for conducting E-innovation. As we know, software innovation plays a central role in current innovation, and it is very often that introducing a solution means introducing a software package, and time-to-market is reflected in time-to-software (Quinn et al. 1996). As long as there is no software to marry E-innovation with enterprises' legacy system and other activities, it will be difficult to embed E-innovation in the enterprise system. As in the supply side, three problems exist in the demand side: the strong inertia of the closed innovation system, the trend to standardize in E-business applications, and the difficulty of measuring return on investment (ROI). The strong inertia of the closed innovation system means in all business functions in an enterprise, innovation is one of the activities, in which it is most difficult to involve outsiders. First, innovation itself is very complicated, although the
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logic of innovation is simple. Second, innovation is usually a tool, a means, or even a hope to get or maintain competitive advantages. Therefore, it is usually subject to tight control. Third, innovation has been handled case-by-case in a labor-intensive way, so electronic media have not shown much influence for cost saving in innovation activity. Therefore, the legacy in this area still dominates. Standardization in E-business applications means that enterprises are changing their value chains in an identical way. After a rush to electronic channels, enterprises' E-business applications show strong cost saving and synchronizing orientations, which are mainly delivered through purchasing pre-packed software. Although this brings integration into an enterprise system, it does not offer incentives to innovation. Difficult measurement of return on investment in E-innovation means a low accountability of E-innovation at this moment. There are two reasons for this low accountability. One is the interwoven nature of E-innovation, which involves not only internal interaction, but also external integration. Therefore, it is difficult to separate the gains of E-innovation from others. The other is the lack of tools to measure the assets flowing through a distributed system, because our accounting toolkits are made for a closed system. The melt-down of dot-com companies has shifted overall management focus from creating functionality back to securing profitability. Given this background, innovation initiatives related to E-business are difficult to finance.
CONCLUSION This chapter systematically examines the development of E-innovation paradigm based on the linkage of the current digital platform and changes to innovation. During the last fifty years, a digital platform has been forged by the advances of information and communication technology. The digital platform is built on a unique technological foundation of digitizing technology, networking technology, and authoring technology. The applications of the digital platform are mainly reflected in enabling pervasive digital messaging, digital transaction and digital integration. The realization of technological capacities and broad employment of these capacities bring bout new realities such as virtuality, intelligence and globalization to the world. Based on the interaction of digital platform's technology foundation and applications, Ebusiness development can be divided into three stages: Brochureware stage, Ecommerce stage, and E-synchronization stage. Corresponding to the development of the digital platform, both industry and academia made efforts in promoting E-innovation during the last decade. Examining from the industry side, E-innovation is widely used as enterprise or section names, product or service features, innovation capacity indicators, and, most interestingly, new battlefields for competition. The underlying meaning is to introduce new
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products, services, processes, or solutions in an E-business environment. Examining the academic research, E-innovation is treated as a new way or model to organize innovation, which is characterized by its distributed nature. The underlying meaning is to use the Internet to plan, initiate, conduct, run, facilitate, or promote innovation. Combining the two-side efforts, the chapter argues that E-innovation is expanding traditional innovation in two aspects: application of innovation and delivery of innovation. These expansions are leading E-innovation to become a new paradigm, which are characterized by five D's: digital form, distributed nature, decoupling activities, dedication to channel change, and deployment of different rules. However, the development of the new E-innovation paradigm has been hindered by several barriers. For the industrial initiatives, there are two constraints. One is a lack of an agreeable framework to accommodate the diversity of different usages. The other is a trend toward standardization in E-business applications. For the academic efforts, there are also barriers. The major one is the lack of a mechanism to marry the distributed nature of E-innovation with the legacy of a traditional innovation. To overcome these barriers, an effort to effectively combine industrial and academic promotion has to be made. It requires to deal with the industrial promotion with a clearer focus, and to deal with academic research with an open mind. To have a clearer focus means that it has to figure out how E-innovation emerges out of interconnectivity. To be more inclusive means that it has to incorporate distributed innovation into the upgrading movement of enterprises in the ladder of freedomgeneration. Given this background, further research on the following questions is needed: what are conditions for an enterprise to use the new E-innovation paradigm? How could an enterprise shift from a traditional innovation paradigm to the Einnovation paradigm?
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
E-COMMERCE BETWEEN NATIONS OF DIFFERENT GUARANTEE SYSTEMS: CASE FOR TRADING VEGETABLES FROM CHINA TO JAPAN
Masamitsu Moriyama, Kinki University, Osaka, Japan Takio Shimosakon, Osaka Institute of Technology, Osaka, Japan Huang Jing, Link Internet Service Co., Ltd., Wuxi, China. Yoshinori Nishino, NBL Co., Ltd., Osaka, Japan" Shinichi Tamura, Osaka University, Osaka, Japan
INTRODUCTION The influence of the Internet has spread throughout the world and became the infrastructure technology in the field of information and communication. Bolero.net [1] realized EDI (Electronic Data Interchange) for trade finance on the Internet and has put it into worldwide practice since 1999. In Asian countries, EDI is studied for trade finance and used practically on a national scale, for example, TEDI [2] in Japan, Trade-Van [3] in Taiwan and KTNet [4] in Korea. In addition, GBDe (Global Business Dialogue on Electronic Commerce) [5] is developing policies that promote global e-commerce for businesses and consumers under the leadership of the world's most dynamic companies. However, global e-commerce policies still vary in procedures, customs duties, excise taxes and intellectual property rights (IPR) between countries. It is said that the realization of e-commerce is especially difficult for China, even though China has such a big market scale in the world. This is because legal Dr. Masamitsu Moriyama is Assistant Professor of Kinki University and a President of CHN Co., Ltd. Email:
[email protected] Mr. Takio Shimosakon is Assistant Professor of Osaka Institute of Technology. Email:
[email protected] "* Mr. Huang Jing is a President of Link Internet Service Co., Ltd. Email:
[email protected] **** Dr. Yoshinori Nishino is a President of NBL Co., Ltd. Email:
[email protected] Dr. Shinichi Tamura is Professor of Osaka University. Email:
[email protected]
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directives such as reparation by the state - a civil action, free access to information and IPR are not finalized as yet in China. In the case of trading with China there is no general concept for guarantee. Many trades between private enterprises have been obstructed by troubles such as breach of contract. At present private enterprises conduct transactions using their empirical knowledge. In addition, one of most difficult trades is dealing with perishable foods. The main reasons are that price variances between suppliers and consumers are large; quality control is difficult, physical distribution is complex, and handling is sensitive. Therefore, trade controls and quarantine controls are difficult in a business sense. In order to overcome the above problems, we propose considering the benefits gained by suppliers and consumers by using the Internet, and take in a general idea of guarantee in the business model for e-commerce. We organize an international consortium, including Chinese and Japanese enterprises and universities, that we call CHN project [6], and highlight methods for guaranteeing such as preparing security funds for trade and inspecting a product before a quarantine inspection. In addition, we developed a prototype system of this web-based service, and actually experimented with the distribution of vegetables from China to Japan in 2000. We describe the web service from our business model and report the experimental results in the case of trading vegetables from China to Japan. During the experiments we utilized knowledge and experience from both Chinese and Japanese collaborators. In this paper, however, our results focus on importations and sales on the Japanese side only.
CHN
SYSTEM
In order to realize e-commerce between nations with different guarantee systems, we propose methods for guaranteeing such as preparing security funds for trade and inspecting a product before a quarantine inspection. Figure 8.1 shows a diagram of the business model. The model consists of users (suppliers and consumers), distribution companies, banks, insurance companies, quarantines, inspection companies, and the CHN system. The CHN system has a web service and a database. The web service was developed using Java Servlet programming in order to deal with XML. The database is RDBMS (Remote DataBase Management System). In addition, the system establishes a secure connection to users and each company via the Internet.
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Figure 8.2 shows the structure of the CHN system's database. Each database consists of a list, a log, and/or schema for users and companies. Our consortium defines each schema as a set of fields within the database table in order to display similarities in trade information and to covert it to electronic data. The transaction data is classified by the goods, distribution, settlement and insurance schema. The database for contracts keeps key fields of instances or logs in all other databases for one transaction.
Figure 8.1: Diagram of business model. The procedure of the business model can be described as follows (See Figure 8.1): Step 1: The CHN system includes a membership system and users and each company become members by registering information. For example, users register their name, address, e-mail address, bank account details and so on. Distribution companies register costs, capacity and schedules of transportations. Inspection companies register the costs of inspection.
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Step 2: Banks open an account for settling to the CHN system. Insurance companies assess a deposit on the members of the CHN system. Step 3: Suppliers register their goods to the CHN system and then they decide how to guarantee their goods. The first way is by having insurance linked with the CHN system. The second way is by using the existing insurance of the users. The third way is by putting security money in the bank linked with the CHN system. The security money is 130% of the goods price. Notice that goods are not registered to the CHN system until the supplier, who provides the security money, finishes depositing. Step 4: Consumers buy goods registered in the CHN system. Then users, distribution companies and insurance companies make a contract. The total price consists of the goods price, the transportation fee, the premium, the inspection fee and the charge for the service of the CHN system. The charge for this service is between 3 and 12 % of the total sum according to the decrease of the sum of money. Step 5: The consumer that makes the contract pays the fee to the bank linked with the CHN system. Notice that we adopt an advance payment. Step 6: When payment is complete, the supplier takes the goods to an inspection company linked with the CHN system. Step 7: If no problems arise during the inspection the goods are sent to quarantine and go to the next step. Otherwise go to step 13. Step 8: If there are no problems discovered in quarantine, the goods are taken to an international distribution company and go to the next step. Otherwise go to step 13. Step 9: If the international distribution is completed, the goods are taken to quarantine and go to next step. Otherwise go to step 13. Step 10: Again, if no problems are found during the quarantine period, the goods are taken to a domestic distribution company and go to next step. Otherwise go to step 13. Step 11: If the domestic distribution process is completed the goods are taken to the consumer and go to next step. Otherwise go to step 13. Step 12: If the goods are delivered to the consumer, the bank remits money to the supplier, the inspection company, the international and domestic distribution companies and the insurance company (if the supplier selects one), the contract is complete. Otherwise go to step 13. Step 13: The problem is reported to the CHN system and the guarantee system is introduced by the contracted insurance company or the security fund. Then the contract is finished. In the contract database a time stamp is recorded according to each step. Users can confirm the progress of their transaction by referring to the contract database.
E-Commerce Between Nations of Different Guarantee Systems
Figure8.2: Structure of CHN system's database.
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EXPERIMENTAL RESULTS
The CHN system (Redhat-linux-6.0), which was introduced as the interface, used the following software as shown in Figure 8.3. •
Apache-1.3.12
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J2sdk-1.2.3
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Jakatra-Tomcat-3.1
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Java Servlet-2.2
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PostgreSQL-6.5.1
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JDBC-2.0
Fig. 8.3. Structure of CHN system
The CHN system was applied to the trade of vegetables from Wuxi, China to Osaka, Japan in November and December 2000 as a practical experiment. In this experiment cabbages and broccoli were shipped out four times from Shanghai port to Osaka port by using a 40 ft. container whose size is 2.4(m)x2.35(m)xl2(m). The capacity of a 40 ft. container is about 1000 cartons. The carton is used for packing 3 kg of cabbage or broccoli respectively. Cabbage and broccoli were sold in Osaka at wholesale markets and their price was estimated per carton in order to evaluate the Japanese market. Table 8.1 shows a summary of imports by applying the CHN system in 2000. In the experiments, we only contracted with an insurance company in the case of container 4. Containers 1, 2 and 3 were experimented especially distributions. Figure 8.4 shows the price variations of cabbage and broccoli sold at auction in Japanese wholesale markets. The price is the estimated value of a vegetable transported from China by applying the CHN system.
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Table 8.1. Summary of imports by applying CHN system (2000)
Case of container 1 Container 1 was loaded with 1076 cartons containing cabbages and it arrived at Osaka port on November 11. The cabbages were quarantined on November 15 and sold in Osaka wholesale markets on November 16. 962 cartons were sold at an average of US$0.95, 27 were distributed as samples and 87 were not sold because of cargo damage, as shown in Figure 8.5. Thereafter, the cargo damage to the vegetables was reduced by using a waterproof carton. Case of container 2 Container 2 was loaded with 400 cartons of cabbage and 600 cartons of broccoli and this arrived at Osaka port on November 27. The cabbage and broccoli was quarantined on November 30, and sold in Osaka wholesale markets from December 2 - 5. The 400 cartons of cabbage were all sold at an average of US$ 3.53. 590 cartons of broccoli were sold at an average of US$ 3.42, 10 were distributed as samples. Case of container 3 Container 3 was loaded with 399 cartons of cabbage and 624 cartons of broccoli and it arrived at Osaka port on December 14 and the vegetables were quarantined after a short time. All 399 cartons of cabbage were sold at an average of US$ 3.66 in Osaka wholesale markets on December 16. However, the 624 cartons of broccoli had to be fumigated because insects were found. Case of container 4 Container 4 was loaded with 400 cartons of cabbage and 624 cartons of broccoli and it arrived at Osaka port on December 12. The vegetables were quarantined on
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December 15. 394 cartons of cabbage were sold at an average of US$ 5.20 in Osaka wholesale markets on December 17 and 18, the remaining 6 were not sold because of mould. 549 cartons of broccoli were sold at an average of US$ 2.79, and 75 were not sold because of flowering, as shown in Figure 8.5. The unsold cartons were covered by the insurance. Figure 8.4: Price variations of cabbage and broccoli.
Fig. 8.5 Cabbages and broccolis transported from China to Japan DISCUSSION AND CONCLUSIONS We proposed the global e-commerce by introducing an original guarantee system. The system integrates suppliers, consumers, banks, distribution companies, insurance companies, inspection companies and quarantines via the Internet. It was based on information disclosure by opening schema about goods, distribution, settlement and insurance. In this paper, we detailed the results concerning imports and sales on the Japanese side. One of greatest problems was the delay from when the goods arrived in the port and when they went to quarantine. The bill of lading (B/L) that proves the right
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of ownership of the goods arrived later than the ship at Osaka port, except for in the case of container 4. The delay meant both an increase in mooring costs at the container yard (CY) and devaluation of the vegetable due to decay. We believe that it makes equivalence between vegetables transported by the CHN system and produced in Japan, where cartons containing cabbage and broccoli were an average of US$ 4.00 and US$ 5.68 respectively, if vegetables were not spoiled. The main cause of the problems was trading based on paper documents. In order to solve the problem, electronic documents for trade finance should be used instead of paper documents. TEDI Club [2] is starting to use EDI for trade finance in Japan. Hopefully China will also adopt the EDI framework for trade finance in future. We have learnt about decreasing the cost of distribution, special insurance systems for information technology (IT), trust of EC, development of a web service and so on. In addition we found that this system was able to administer the amount of trade under government control. We will report on those results in other papers.
ACKNOWLEDGEMENTS The authors would like to thank the members of the CHN international consortium for undertaking the experimental trades, and Mr. Fujita and Mr. Tanoue, Faculty of System Engineering, Wakayama University for developing the programs. This work was partly supported by a Grant-in-Aid for Scientific Research from the Ministry of Education, Science, Sports and Culture (Japan).
REFERENCES [1] Bolero.net, http://www.bolero.net [2] TEDI (Trade Electronic Data Interchange), http://www.tediclub.com [3] Trade-Van, http://www.tradevan.com.tw [4] KTNet, http://www.ktnet.co.kr [5] GBDe (Global Business Dialogue on Electronic Commerce), http://www.gdbe.org [6] CHN Project, http://chn.ac
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SECTION II
KNOWLEDGE MANAGEMENT
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
THE STRATEGIC VALUE OF TECHNOLOGICAL KNOWLEDGE: AN INTEGRATED AND DYNAMIC MODEL Martin de Castro, Gregorio, Universidad Complutense de Madrid, Madrid, Spain1 Garcia Muina, Fernando Enrique, Universidad Rey Juan Carlos, Madrid, Spain2 Navas Lopez, Jose Emilio, Universidad Complutense de Madrid, Madrid, Spain'
INTRODUCTION Strategic management literature concerns sources of competitive advantage and better results. Several empirical studies show us that performance differences are greater and more sustainable within industries than across industries. This means that idiosyncratic knowledge-intensive firm resources are the ones that influence more. In this paper we try to identify the necessary characteristics that technological resources and capabilities must be acquired in order to create value. In this sense, our objective is to improve previous theoretical models that in a too much inductive way simply named knowledge as a strategic asset (Kogut & Zander, 1992; Nonaka & Takeuchi, 1995; Zander & Kogut, 1995, Grant, 1996; Spender, 1996). Developing these issues lead us to the following key aspects. Firstly, we present a conceptual proposal concerning the technological resource and capabilities evaluation criteria. We, then, develop a model including the different expressions in which technological knowledge may exist within organizations. This issue was developed by the means of meetings among scholars and practitioners during 2000 and 2001. Finally, we present a model evaluating the strategic role of technological knowledge in creating and sustaining competitive advantages and appropriating 1 Martin de Castro is Associate Professor of Business Administration at Facultad de Ciencias Economicas y Empresariales, Universidad Complutense de Madrid, Madrid, Spain. Email:
[email protected] 2 Garcia Muina is Associate Professor of Business Administration at Facultad de Ciencias Sociales y Jurfdicas, Universidad Rey Juan Carlos, Madrid, Spain. Email:
[email protected] 3 Navas Lopez is Professor of Business Administration at Facultad de Ciencias Economicas y Empresariales, Universidad Complutense de Madrid, Madrid, Spain. Email:
[email protected]
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extraordinary returns. This analysis shows us, in a hierarchical sense, three core criteria explaining its strategic value: external complexity, internal complexity, and scarcity. Finally, we will analyze the behavior of different technological knowledge in value-creation model.
CRITERIA T O STRATEGICALLY EVALUATE TECHNOLOGICAL KNOWLEDGE
Several studies consider the strategic role of technological knowledge in valuecreation process, but they not develop an in-deep analysis exploring or justifying why technology is important to obtain and sustain competitive advantage and appropriating returns. The model presented bellow will let us identify the attributes that technological knowledge must satisfy in order to be strategically relevant. Our proposal must be considered as a complete, integrated, hierarchical, and dynamic model. Complete: it includes a jointly analysis about the role of technological knowledge not only in creating and sustaining competitive advantage but also in appropriating returns. Integrated: the strategic evaluation process of technological knowledge takes as first step an environmental analysis where firms develop their activities. Therefore, both external and internal approaches are integrated in order to improve somehow the partial views of previous ones. Hierarchical: the model presented tries to identify the genesis or roots of value in firms. So, in a different way from previous studies, we focus in differentiating between causes and effects. Likewise, we identify to wide kinds of strategic evaluation criteria that hold hierarchical or dependent relationships: roots and derivatives. Root criteria are those where technological resources and capabilities behaviour do not depend on the behaviour experimented in any other. Likewise, root criteria explain which are the reasons that explain the role of technology in creating value. Otherwise, derivative criteria are those where technological resources and capabilities behaviour are determined by the behaviour experimented in other superior root one. Establishing these derivatives criteria let us to relate the effects of roots criterions in creating and sustaining competitive advantage and appropriating generated rents. Dynamic: the model presented includes a dynamic view of environment that considers that environment behaviours, as a dynamic variable whose evolution and change patterns are not well known. Likewise, let us to identify not only the characteristics that strategic technological resources and capabilities must have but
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also their role in accumulating the technological assets that will create value in future environmental conditions. Root criteria: external complexity, internal complexity and scarcity Complexity refers to follower firm's difficulty to identify the real contribution of technological resources and capabilities to firm success. We can define two complexity dimensions: external complexity and internal complexity. External complexity refers to the difficulty originated by an environmental high change rate. The higher industry change rate the lower information about strategic market factors will be given. Treatment of external complexity has become a very interesting aspect as a consequence of process school development (KnowledgeBased View: Kogut & Zander, 1992; Nonaka & Takeuchi, 1995; Zander & Kogut, 1995; Spender, 1996; and Dynamic Capabilities Theory: Nelson & Winter, 1982; Teece et al., 1997). Internal complexity refers to the difficulty originated by the global resources and capabilities density network. Internal complexity concept integrates and surpasses causal ambiguity approach as a critical factor of competitive advantage (Lippman y Rumelt, 1982; Reed y DeFillipi, 1990; Black y Boal, 1994; Vicente-Lorente, 2000). As we show in Figure 9.1, we identify three variables that explain the density level of global net: number of levels number of components in each level number of relationships among levels A detailed study about internal complexity criterion will let us conclude that the higher internal complexity level of the system the greater strategic value of the technological resources and capabilities that constitute it. Each level is integrated by a different kind of resource or capability. Specifically, first level is formed by resources -tangible and intangibles-, that is, individual and independent assets necessary to develop firms activities. The others superior levels are integrated by capabilities, in others words, well coordinated combinations or resources or capabilities whose use will let the activities development, intrinsically intangible (Grant, 1991).
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Fig. 9.1: A system of resources and capabilities Resources and capabilities scarcity refers to its rigid offer; likewise not all firms will be satisfied. Therefore, organizations that have or control these scarce resources or capabilities will sustain competitive advantages until followers found other strategic assets as substitutes. Derivative criteria: relevance, reproducibility, and substitutability
attractive,
durability,
transferability,
Strategic implications of root criteria concerning creation and ex ante or expected appropriation can be analysed by the means of technological relevance and attractive derivative criterions. Technological relevance is an industry objective criterion about which technological resources and capabilities are essential to firm success in a specific industry (Amit y Schoemaker, 1993). Technological attractive refers to a subjective firm evaluation about the real possibilities to use any theoretically relevant technological resource or capability.
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Similarly, the effects of root criteria over sustainability and ex post or certain appropriability can be analysed as derivative criteria of technological durability, transferability, reproducibility, and substitutability. Technological durability includes the lasting-period in which the economic value of an asset is greater than zero. Jointly treatment of transferability and reproducibility let us to define asset imitation (Zander y Kogut, 1995). Finally, substitutability refers to the follower firm's possibility to search and find other alternative assets that led firms to similar returns.
A
MODEL
TO
IDENTIFY
AND
MEASURE
TECHNOLOGICAL
KNOWLEDGE
Our technological measurement model shows the conclusions of the workshop held during last two years at Escuela Superior de Direction del Conocimiento (Instituto Universitario Euroforum Escorial-Universidad Complutense de Madrid). This research includes the analysis of several intellectual capital previous theoretical models (Kaplan & Norton, 1992; Bontis, 1996; Brooking, 1996; Sveiby, 1997; among others) and the suggestions obtained through interactive discussions held between Spanish practitioners and academics. The interest of the identification and measurement of technological assets is to improve the knowledge-creation process which let firms to accumulate the more important value-creation factor. Technological knowledge can be defined as a bundle of intangible assets about the way basic activities must be done, that is, the know-how that firms have or control (Nieto Antolin, 2001). Therefore, we conceptualize technological knowledge in a wider sense overcoming other focused proposals as Woodward (1965) one. Variables that represent technological knowledge Taking into account our wide technological knowledge definition, it is necessary to identify the different variables that integrate it. Following the Euroforum Model structure (1998) we grouped technological variables in two categories: present and future variables. Present variables. It refers about the technological infrastructure endowment that firms have or control. R&D effort: theoretical or empirical studies to create new knowledge or improve previous one.
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Innovation effort: financial, human resources, operations or marketing activities that suppose an important novelty degree from the market point of view. Technology acquisition: activities oriented to accumulate new technology developed by others external agents. Intellectual property accumulated: stock of knowledge (legal or naturally) protected. Information technologies accumulated: stock of instruments to support the knowledge or useful information transfer processes. Operation technologies accumulated: technological infrastructures to support the management and control operation processes. Documented processes: written references concerning core or essential functions used to improve knowledge transfer processes.
Future variables. Technological innovation results: new success knowledge application in product, services or processes. Intellectual property internally obtained: stock of new knowledge protected after technological innovation process has occurred. -
Technology sold: includes rents generated by the means of technological knowledge sold. Informs about the acceptation level of knowledge among users in monetary terms. New documents: new processes documented in order to facilitate their learning.
The Strategic Value of Technological Knowledge AN INTEGRATED AND DYNAMIC MODEL T O
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STRATEGICALLY
EVALUATE TECHNOLOGICAL KNOWLEDGE The complete character of our proposal implies the distinction between two situations: firstly, the role of root criteria in creating technological competitive advantage and appropriating ex ante generated rents and, secondly, the role of root criteria in sustaining technological competitive advantage and appropriating ex post generated rents. The role of root criteria in creating technological competitive advantage and in appropriating ex ante expected rents: the technological relevance and attractive Previous literature (Barney, 1991; Grant, 1991; Amit & Schoemaker, 1993; Peteraf, 1993) has identified value (or relevance) and scarcity as the attributes that resources and capabilities must accomplish fulfill in order to create a competitive advantage. Nevertheless to analyze the relevance criterion we should identify the strategic market factors (Amit & Schoemaker, 1993) or resource efficiency degree (Peteraf, 1993). This information only would be available to most industry firms in low external complexity circumstances. These models consider that environment set as a stable variable. This situation reduces the analysis of strategic value to stable environments. To include the dynamic environment influence in the strategic evaluation process it is necessary to consider high external complexity situations -in absence of a dominant technological paradigm-, where relevant technological resources or capabilities cannot be identified. In these circumstances, only the entrepreneurial managers will be capable to identify the real value of technological assets (Priem & Butler, 2001). Likewise, the auction will be imperfect (Barney, 1986) and the price does not reflect the real value of it contribution to competitive advantage. This gap let firms to appropriate expected schumpeterian rents before exploiting technological resources and capabilities. Otherwise, when external complexity degree is low the other root criteria must be studied: internal complexity and scarcity. The higher internal complexity degree the more difficult it is to determine the specific contribution of each technological asset to firm success. Then, auction will be imperfect too. The expected generated rents must be considered as quasi-rents. Finally, in absence of internal complexity the only way to obtain competitive advantage will be its scarcity. The expected generated rents must be considered as ricardians.
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The role of root criteria in sustaining technological competitive advantage and in appropriating ex post generated rents: the technological durability, transferability, reproducibility and substitutability Previous literature indicates that durability is a prerequisite to sustain competitive advantage. Non-fulfillment of this criterion makes no sense in analysing of rest of derivative criteria: transferability, reproducibility and substitutability. Our proposal upholds that resource and capability based behaviours upon this four derivative criteria depends again on external and internal complexity and scarcity again. External complexity contributes to the obsolescence of the resource and capability that once were source of competitive advantage. Then, the higher the external complexity degree, the lower the durability of advantage. When external complexity is low, leader firms will maintain its privileged position while competitors cannot clearly identify the causes of superior performance. This occurs when leader firms possess or control a complex resource and capability network (internal complexity) with a high complementary degree too. Finally, facing situations faced with low complexity degree (external and internal), the competitors can find out what resource or capability to buy, reproduce or substitute. In this situation, only scarce assets are able to sustain competitive advantage. The analysis of sustainability must be complemented with appropriating considerations. When property rights on resource or capability are not clear or are incomplete (the organization only controls it), problems about ex post rent allocation arise. This process depends upon bargaining power of implicated agents. Nevertheless, technological capital is the knowledge stock that an organization posses remaining unnecessary and in deep-study of this issues.
CONCLUSIONS
From our previous reasoning, some conclusions can be remarked as a new proposal to model the knowledge-based competitive advantage, based on the Resource-Based View, owing a special role to external complexity, internal complexity, complementarity and scarcity. Our model main contribution resides on the jointly treatment of the three stages of the competitive advantage: creation, sustainability, and ex ante and ex post appropriability of returns.
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BIBLIOGRAPHY
Amit, R.; Schoemaker, P. (1993). Strategic Asset and Organizational Rents. Strategic Management Journal, 14, 33-46. Barney, J.B. (1986). Strategic Factor Markets: Expectations, Luck, and Business Strategy. Management Science, 32, 1231 -1241. Barney, J.B. (1991). Firms Resources and Sustained Competitive Advantage. Journal of Management, 17, 99-120. Black, J.A.; Boal K.(1994). Strategic Resources: Traits, Configurations and Paths to Sustainable Competitive Advantage. Strategic Management Journal, 15, 131-148. Bontis, N (1996). There's a price on your head: Managing Intellectual Capital Strategically, Business Quarterly, Summer, 41-47. Brooking, A (1996). Intellectual Capital. Core Assets for the Third Millennium Enterprise, International Thomson Business Press, London. Euroforum Escorial (1998). Modelo de Medicion del Capital Intelectual: Modelo Intelect. I.U.Euroforum Escorial, Madrid. Grant, R.M. (1991). The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review, 33, 114-135. Grant, R.M. (1996). Toward a knowledge-based theory of the firm, Strategic Management Journal, 17, 109-122. Kaplan, R.S.; Norton, D.P (1997). Cuadro de Mando Integral. Gestion 2000, Barcelona. Kogut, B; Zander, U (1992). Knowledge of the Firm, Combinative Capabilities, and the replication of Technology, Organization Science, 3 , 383-397. Lippman, S.A.; Rumelt, R.P. (1982), Uncertain Imitability: Am Analysis of Interfirm Differences in Efficiency under Competition, Bell Journal of Economics, 13,418-438. Nelson, R.R.; Winter, S.G. (1982). An Evolutionary Theory of Economic Change, Belknap Press, Cambridge, M.A. Nieto Antolin, M (1999). Innovacion y Aprendizaje Tecnologico en la Empresa, hi: Introduction a la Administration de Empresas (Cuervo Garcia, A, Eds), pp. 151-169. Civitas, Madrid. Nonaka, I.; Takeuchi, H. (1995). The Knowledge Creating Company, Oxford University Press, New York. Peteraf, M.A. (1993). The Cornerstones of Competitive Advantage: a Resource-Based View. Strategic Management Journal, 14, 179-191.
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Priem, R.L.; Butler, J.E. (2001).Tautology in the Resource-Based View and the Implications of Externally Determined Resource Value: Further Comments, Academy of Management Review, 26, 57-66. Reed, R.; DeFillippi, R.J. (1990). Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage. Academy of Management Review, 15, 88-102. Spender, J.C. (1996). Making Knowledge the Basis of a Dynamic Theory of the Firm, Strategic Management Journal, 17, 45-62. Sveiby, K-E. (1997). The New Organizational Wealth: Managing and Measuring Knowledge-Based Asset. Berrett-Koehler, San Francisco. Teece, D.J.; Pisano, G.; Shuen, A. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18, 509-533. WoodwardJ. (1965), Industrial Organization: Theory and Practice,
Oxford
University Press, New York. Zander, U.; Kogut, B. (1995). Knowledge and the Speed of the Transfer and Imitation of Organizational Capabilities: An Empirical Test. Organization Science, 6, 76-92.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
TECHNOLOGICAL KNOWLEDGE ILLUSTRATED VIA MAPS
Marianne Horlesberger, ARC systems research GmbH, Seibersdorf, Austria* Alexander Kopcsa, ms.GISInformationssysteme GmbH, Modling, Austria** Edgar Schiebel; ARC systems research GmbH, Seibersdorf, Austria*"
INTRODUCTION The sources of information for technology are various. Publications in relevant journals stored in respective databases or on the Internet are of interest to knowledge seekers and development trackers. Protected technology on the other hand, is typically filed as a patent. Therefore newly filed patents show the state of the latest technology, and information in these patents is of greatest interest to R&D departments. In this paper the emphasis is on technological knowledge contained in patents. To assess the "state of certain technology" there is a great number of patents to be analysed. The question then becomes, how can we get this information synthesized and structured in a way to extract the relevant information that will indicate the technology state? Furthermore and of particular interest is the connection of the development of technologies to respective companies. Technological knowledge can be illustrated in different ways. Various methods of content analysis have been developed with varies degree of success. In this paper we introduce the technological knowledge maps. We start by introducing an analysis to the patent contents, followed by the technological knowledge maps concept, and its associated system as applied to the Marianne Horlesberger is researcher in the department Technology Management of ARC systems research GmbH, Email:
[email protected] Alexander Kopcsa is project manager at ms.Informationssysteme GmbH, Email:
[email protected] Edgar Schiebel is Head of the department Technology Management of ARC systems research GmbH, Email:
[email protected]
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patents. The system has the ability to answer the question of what technology is dominated by which company. CONTENT ANALYSIS Bibliometric methods were developed for analysis of specific fields of technology or for identification of experts and institutions leading in technology by surveying literature and patent information available from databases. Relations between technological developments, different fields of application and leading experts can be determined by using bibliometrics. Upcoming technologies can be identified and trend analysis of future developments can be performed. Therefore bibliometric analysis is applicable for strategic decision support as well as for the daily work e.g. in R&D (Grupp et al., 1990). Due to the manifold possibilities of analysing large amounts of information and documents bibliometric analysis is also extremely important for other fields of application like competitive analysis of companies and their products, analysis of the co-operative behaviour of institutions and persons, analysing news from press agencies or the internet, patent analysis or structuring of internal documents for knowledge management. Bibliometric methods are tools for structuring and analysing information which is stored electronically in databases. The structuring is based on the calculation and visualisation of relations between objects. Such objects are for example the documents themselves or keywords describing the contents of the documents, or IPC codes describing technologies in patents. The structuring process is performed by calculating indicators for the relation between those objects. For calculation of the indicators several models can be applied (Van Raan, 1992).
CREATING OF KNOWLEDGE MAPS USING BIBTECHMON™
The bibliometric method BibTechMon™, developed at the Department of Technology Management of ARC Seibersdorf research GmbH, uses the co-word analysis (Kopcsa and Schiebel, 1998). This method is based on the calculation of the co-occurrences of words, that is the common occurrence of words or groups of words in documents (Callon et al, 1983; Kostoff, 1993; Rip and Courtial, 1984; Turner et al., 1988). The basis for structuring documents and information are therefore objects, namely the considered content of the documents (Leyersdorf, 1989). Before calculating the co-occurrences the words describing the content - the key-terms have to be identified. While literature quotations are described by key-terms, patents, internet information or other documents do not have any descriptive terms. Therefore
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the software contains an automatic key-term generation module which allows the computer based generation of the relevant key-terms (Widhalm et al., 1999). Those key-terms are the input for the co-word analysis and for calculating the cooccurrences. The more often two key-terms are used together in documents the stronger is the relation between them. Using those co-occurrences, indicators can be determined which correspond to the intensity of the relation of any two key-terms identified. Through this procedure a network of relations is determined which is based on the content of the documents. Since the result of those calculations is a large matrix of numbers the analysis would be rather difficult. In order to allow an easy interpretation of the results the relations based on the indicators are transferred into graphical information and so called knowledge maps are generated (Kopcsa and Schiebel, 1995). In addition to the maps, the tool BibTechMon™ delivers several more possibilities of analysing. Special analysing with regard to patents are shown here.
The scheme of the map Before describing the special analysis the scheme should by discussed.
Fig. 10.1: Scheme of a map
Each node stands for a word. On each node there is a circle. The size of a circle symbolises the occurrence of the word, that means, in how many different quotations the considered word turns up. The width of the lines shows how closely a couple of words are connected, or in other words, how often the considered couple of words turns up together. The nodes (circles) find their positions on the map on the basis of their relationship to all other circles. Therefore the position of a node (circle) shows the relation to all others.
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MAPS FOR PATENT ANALYSIS The classical maps are "word maps", which means, the nodes in the map symbolise keywords. But the method can be applied to other objects as well. Patents have a very strict bibliographic structure. There are different kinds of classifications, therefore described technology can be compared. Basic data like patent number, date of publication, application number, date of filing, Int. Cl. (International Patent Classification FPC; The Strasbourg Agreement), designated contracting states, priority, applicant, inventor, representative, title, abstract can be used for visualisation and analysis. So there are different possibilities of creating knowledge maps. The nodes in a map can symbolise keywords, patent numbers, IPC codes, applicants or other objects of contents of patents. A lot of information can be found in the IPC codes. In this application the emphasis is on IPC maps, maps where the nodes symbolise ICP Codes. Furthermore it is shown how BibTechMon™ can visualise and analyse the connection of IPC codes with keywords and applicants. IPC
MAPS
Maps where the nodes are IPC codes are so-called IPC Maps. An IPC map can be computed in different ways. Two nodes in the IPC map can be near if they occur in similar patents, or if they are used by the same applicant. There are various ways of computing the map. We chose the following one. Two IPC codes are near if they are used with the same words in patents. First some basic information about IPC Codes are given. The Organisation of IPC. The International Patent Classification is a hierarchical system and represents the whole body of knowledge which may be regarded as proper to field of patents for inventions, divided into eight sections. (For detailed information see: http://www.wipo. int/classifications/fulltext/new_ipc/index.htm): A B
Human necessities Performing Operations; Transporting
C D E F
Chemistry; metallurgy Textiles; paper Fixed construction Mechanical engineering; Lighting; Heating; Weapons; Blasting
G H
Physics Electricity
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The structures of the sections. classes: e.g. A 61 subclasses: e.g. A 61 N main group: e.g. A 61 N 1/00 subgroup: e.g. A 61 N 1/36 The topic of the considered search strategy here is "plastic in car interiors". We chose the following search strategy: "(plastics OR polymer) AND (automobile OR automotive OR vehicle OR car) AND (interior OR interieur)" in the English abstracts from 20 Dec. 1978 to 30 May 2001 all EPA patents and from 19 Oct. 1978 to 31 May 2001 all WO patents (ESPACE, European and PCT International Patent Application Bibliography). BibTechMon™ has been developed for many thousands of document. But for showing the functionality we discuss the IPC map of only 52 patents. IPC Codes: developments over a period of time The following map shows the occurrence of IPC codes for the first time in the considered search strategy. So we can conclude that younger IPC codes describe a younger technology. First a survey is given of all IPC codes. Then we analyse the IPC codes of the year 2000 as an example.
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/•Vg. 70.2: A/a/? of IPC codes. First year of occurrence in the considered search strategy
The dark circles symbolise new IPC codes, the light ones are old. The table shows in which year how many IPC codes occur for the first time. For example there are six new codes in 2000 in the considered search strategy. In 1999 there are only two new codes. Figure 10.2 shows that there are 31 new IPC codes in the year 1984. Which IPC codes are new, which are old? IPC codes describe technologies, and so the year of IPC codes in the map inform us about when technologies were developed and tested. When we select the respective IPC codes of a certain year in the layer "Themes" of BibTechMon™ the operation "select" adds small flags to the nodes (circles) in the map automatically, (see Figure 10.3).
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The selected IPC codes are listed in "Terms". For the year 2000 the IPC codes are listed in the following figure.
Fig. 10.4: Tableof IPC codes of the year 2000
Figure 10.3 shows the location of the IPC codes which occurred in 2000 for the first time. Three of them are clustered in the north west of the map. The other three are spread in the north east. The names of the IPC codes are listed in the table (Figure 10.4.). The subclasses of the IPC codes of 2000 are defined in the following way:. B60G: Vehicle suspension arrangements C08G: Macromolecular compounds obtained otherwise than by reaction only involving carbon to carbon unsaturated bonds F16F: Springs; shock-absorbers; means for damping vibration F25B: Refrigeration machines, plants, or systems, combined heating and refrigeration systems heat pump G01B: Measuring length, thickness, or similar linear dimensions; measuring angles; measuring areas; measuring irregularities of surfaces or contours G02F: Devices or arrangements, the optical operation of which is modified by changing the optical properties of the medium of the devices or arrangements for the control of the intensity, colour, phase, polarisation or direction of light, e.g. switching, gating, modulating or demodulating; techniques or procedures for the operation thereof; frequency changing; non-linear optics; optical logic elements; optical analogue/digital converters More details can be find under http://www.wipo. mt/classifications/fulltext/new_ipc/index.htm
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Which kevwords do the selected IPC codes occur with?
We go to "Query" an then to "list... selected terms" and we get the list of keywords.
Fig. 10.5: IPC map of 2000 with the keywords to the selected IPC codes
In addition to the selected IPC codes we get the list of keywords shown in Figure 10.5 The figures of the column "hits" shows how often the word in the next column together with the selected IPC codes occurs. IPC sections in the map and their location There are different IPC codes on the map. Now we consider the distribution of the sections of the IPC codes. Figure 10.6 shows how the sections are located on the map. Then section B is specified.
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Fig. 10.6: IPC map, the distribution of the sections of the IPC codes Which IPC codes are part of the section B in the considered search strategy? We select section B with BibTechMon™ click "Terms" and the list of IPC codes to section B is given.
Fig. 70.7: /PC codes of section B The column "freg" in the list in Figure 10.7 shows in how many patents the respective IPC codes turn up.
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Which applicants file their patents in the section B? We get the answer by BibTechMon™
Fig. 10.8: IPC map with seleceted IPC codes of section B and the list with the applicants to the selsected IPC codes We go to "Query" and "User Specified Queries ..." to find the applicants whose patents contain selected IPC Codes (Figure 10.8). The figures of the column "hits" show how many of the selected IPC codes are in patents of the applicants. We see that applicant ALKOR GmbH KUNSTSTOFFE has 5 IPC codes in section B in our considered map. Which IPC subclass is dominated by which company? Provided that a company with the highest number of a special IPC subclass in their patents is dominating the considered subclass, Figure 10.9 shows that FINDLAY INDUSTRIES INC. dominates the subclass B32B. FINDLAY INDUSTRIES INC. has 8 IPC codes of the subclass B32B in the considered patents. The database behind BibTechMon™ provides the table in "Themes" under "maximaler Anmelder" (dominated applicant) (Fig. 9). For each company in the considered patents the IPC subclass is counted and allocated. In column "elem." in Figure 10.9 the numbers of IPC codes of the dominating subclass are listed. If we go a company name, we can see the IPC codes with the small flags on the map, and so we see the respective subclass and IPC codes.
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Fig. 70.9: IPC map with dominating applicants Which applicants file their patents in the same IPC codes like FINDLAY INDUSTRIES? As Figure 10.10 shows ALKOR GMBH KUNSTSTOFFE and GENCORP INC. file patents in the same IPC subclass as FINDLAY INDUSTRIES.
Fig. 10.10: Applicants to the IPC codes dominated by Findlay Industries INC. The selected IPC codes are used together with keywords and so the keywords of the selected IPC codes can be listed described in Figure 10.5.
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Which patents contain the selected IPC codes? "Query" and then "User Specified Queries ..." and "list information to selected term!" provides a list. The list of the patents containing the selected IPC Codes is shown in "Data Search". For more details see Noll (2000).
CONCLUSION Various documents give us different possibilities of structuring, visualisation and analysis. According to the strict structure of patents there are more chances to get detailed information of the contents by bibliometric methods. There are maps of keywords, patents, IPC codes and furthermore applicants or inventors too and to each map we get different lists of detailed information. In this case IPC maps are analysed more accurately. The considered IPC map is computed based on the keywords. This means that two IPC codes are close in the map, if they occur in patents with the same keywords. And so the connection between IPC codes and keywords are given. But there are "User Specified Queries ... " in the tool BibTechMon™, so special lists like "applicant to selected terms" and special analysis like the leader of IPC sections (Figure 10.9). This example shows one special analysis of content. But BibTechMon™ can be used in manifold fields: • •
further patent analysis, where keywords or patents are the circles literature analysis, where the contributions are from special journals or data bases
• in- house documents For each application there are a lot of possibilities of visualisation and analysing, general or to given specific questions. Up to now BibTechMon™ has been realised as a stand-alone version on the PC. In the course of a running project BibTechMon™ is developed as a client/server solution which supports the application of the tool for groups. Besides this the further development of BibTechMon M focuses on the improvement of the analysis capabilities, like automatic report generation, and the operator convenience.
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BIBLIOGRAPHY Glanzel, W., Kretschmer, H. (1992) Special issue on bibliometrics, informatics and scientometrics. Part 1. Research Evaluation, 3, 122. Glanzel, W., Kretschmer, H. (1993) Special issue on bibliometrics, informetrics and scientometrics. Part 2. Research Evaluation, 3, 1. http://www.wipo.int/classifications/fulltext/new_ipc/index.htm. Kopcsa, A., Schiebel, E. (1995) Theory and mathematical methods for bibliometrics and applications in industrial R&TD management. ARCS Report A-3494 (confidential), Seibersdorf. Kopcsa, A., Schiebel, E. (1998). Science and Technology Mapping: A New Iteration Model for Representing Multidimensional Relationsships. Journal of the American Society for Information Science (JASIS), 49, 1, 7-17. Leyersdorf, K. (1989). Words and Co-Words as Indicators of Intellectual Organizations, Research Policy, 18, 209-223. Noll, M., Schiebel, E. (2000). Bibliometric Analysis for Knowledge Monitoring. Proceedings R&D Management Conference, 10-12 July 2000, Manchester. Noll, M. (2000). Patentmanagement with BibTechMon™. Proceedings Epidos Annual Conference, 18-20 Oct. 2000, Vienna. Rip, A., Courtial, P. (1984). Co-Word Maps of Biotechnology. An Example of cognitive Scientometrics. Scientometrics, 6, 6, 381-400. Turner, W.A., Chartron, G., Laville, F., Michelet, B. (1988). Packaging Information for Peer Review: New Co-Word Analysis Techniques. In: Handbook of Quantitative Studies of Science and Technology (A.F J. van Raan, ed.), Elsvier Science Publishers B.V., 291-323, Amsterdam. Widhalm, C , Kopsca, A., Schiebel, E., Miiller, H.G., Balling, N. (1999) Conceptual development of a text import and automatic indexing procedure. ARCS Report S-0051 (confidential), Seibersdorf. Van Raan, A.F.J. (1992) Advanced bibliometric methods to assess research performance and scientific development: basic principles and recent practical applications. Research Evaluation, 3, 3, 151-166.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
UNDERSTANDING CORPORATE PORTALS: KEY KNOWLEDGE MANAGEMENT ENABLING APPLICATIONS Dr. Jose Cldudio Terra, CEO TerraForum, Brazil Dr. Cindy Gordon, CEO Helix Commerce International, Canada
ABSTRACT
Corporate Portals (CP) represents an important collaboration software advancement that can be used to develop and implement Knowledge Management (KM) initiatives. CPs are fundamentally changing how information, and collaboration responsibilities are shared in an organization: from a narrow, functional and uncoordinated focus to a broad, project and collaborative approach. CPs can also be designed and deployed to generate connections between people and knowledge/information sources (internally and externally). Thus, sparking knowledge creation, reuse of documented (explicit) knowledge or finding and locating people who can apply their tacit knowledge to specific business situations and increasing innovation capabilities within an organization. Whereas we acknowledge that information technology plays only an enabling role in KM efforts, we also believe that it is important for organizations to have a good understanding of the technology landscape in order to choose the most appropriate solutions to support their KM projects. In this research paper, we will discuss, Corporate Portal's in relation to specific KM processes: personalization and search; access to information sources in a web-friendly environment (from highly unstructured to highly structured digital data; internal and external information); communications and collaboration; and ease of publishing and access to a vast amount of data, information and knowledge. Readers of this research paper will have a clearer understanding of the technology landscape and its impact on KM and be better prepared to development their own firms' technical requirements.
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CORPORATE
PORTALS,
COLLABORATION
CAPABILITIES
AND
KNOWLEDGE MANAGEMENT There are no standard definitions about which collaboration capabilities a CP platform should include (Terra & Gordon, 2002, Collins, 2001; DavyDov, 2001; and PriceWaterhouseCoopers & SAP, 2001). At the end of 2002, there are numerous software vendors providing portal solutions (from very large software companies to start-ups). Indeed, because of the modular nature of standard Internet development, many companies are relying on a number of software vendors to integrate into a portal solution. Consequently, the description of a CP platform for this research paper is not based on any standard vendor solution. Rather, it is based on our understanding of the overall software market and our selection of collaboration capabilities that are relevant for deploying Knowledge Management initiatives. We are also aware that technology is changing rapidly and that many new CP solutions will emerge. There are a number of key software capabilities that are integrated into a CP architecture. These are grouped according to the following: •
The Presentation and Personalization Layer defines how the users see and customize information delivered or accessed via the portal. The intuitive solutions offered allow users to access information in more relevant, contextcentric environments. The ability to access information that is personalized to each individual is key for KM efforts. As the volume of information expands exponentially, individuals should be alerted, informed and have access to pieces of information that they choose or that are chosen for them by content managers or knowledge brokers according to their profile or identity.
•
The Search Solution determines how easy it will be for users to find relevant information based on a set of search criteria. This is a core functionality that has improved significantly over the last few years. At the same time that it has evolved to integrate various different information sources, it has also become much more sophisticated, intuitive and adaptable to different organizational needs;
•
Web Applications for the enterprise have evolved from "green fields" and also from existing legacy systems. While many applications were developed to leverage the web (often based on B-to-C examples), most legacy systems have developed an Internet front-end (while maintaining a legacy architecture). Sophisticated portal platform solutions provide a number of resources that make it very easy to seamlessly integrate both sorts of applications, including both structured and unstructured data. In the case of more traditional systems,
Understanding Corporate Portals: Key KM Enabling Applications 141 the integration, at the presentation layer, is being facilitated by the use of standard Application Program Interfaces (API)s developed by the portal vendors and/or the users' community. These APIs allow access to structured (data warehouses, ERP, CRM, etc) and unstructured information (Web, Desktop Applications, Content Management Systems, etc) called "Connectors", "Web Parts", "Gadgets", etc. Web services are also a recent development and promise standardized access to specific applications regardless of the portal platform calling the application. Indeed, CPs can integrate an almost unlimited number of applications. Therefore, in this research paper, we will focus on applications closely related to KM, and collaboration capabilities. We will, particularly, highlight the recent developments that help employees collaborate: •
Finding explicit knowledge;
•
Codifying and Publishing their Knowledge;
•
Collaborating Online.
FINDING EXPLICIT KNOWLEDGE A well-implemented CP simplifies access to information, knowledge, and highlights important internal and external knowledge sources relevant for specific audiences. CPs are the latest access solution for an ongoing trend in business towards making information and knowledge more easily accessible to management and employees at large. Prior to the Internet, much of the focus was on the deployment of "Enterprise Information Systems" (EIS) and "Decision Support Systems" (DSS). These efforts were very expensive and aimed at helping employees find answers and information about the performance of firms. However, these solutions were mostly aimed at providing access only to structured, transactional data and due to the high cost and complex and specific nature of most of these systems, very few employees were allowed to use them, and typically only senior management had access, reducing their collaboration value. Few employees with access had the time or necessary training to properly learn how to use these systems. Importantly, usage was further impeded by the fact that the interface and navigation tools of these early systems were not as intuitive as the web-based tools currently available. The technical and economic barriers remained an important obstacle. Finally, the hierarchical, and bureaucratic reality in many organizations decision-making did not help increasing accessibility to organization information and knowledge, and often internal management incentives or
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cultures impeded organization's ability to share unstructured information and knowledge easily. Unlike EIS and DSS, CPs allow a diverse spectrum of employees to access pre-defined and pre-scheduled reports, as well as customize and develop ad hoc reports, without the help of the Information Technology department. The most advanced CKPs make it easy to leverage "Business Intelligence" (BI) and datawarehousing solutions to allow employees to customize their reports. These customized reports can be based on pre-parameterized value ranges and formats or be completely new reports based on employees' personalized formats/views and sophisticated queries and data mining. The recent and rapid migration of traditional BI/ERP software to the web environment demonstrates the importance being placed on helping a large number of employees use and interpret the results from these applications. In addition to allowing access to web-based reports from BI or ERP software packages, CPs provide employees, partners and clients, a web-based interface to access all types of information. This trend is in line with one of the core management practices supported by the KM literature: multi-dimensional analysis and ease of access to information. The BI and ERP systems no longer require end-users to know any query language to define how they want to analyze the data. These types of systems allow for web-based analysis and facilitate employees' understanding of the correlation between the variables that affect their business. This is particularly important as KM is also related to efforts to measure business results from various perspectives and to disseminate those results throughout the organization. The current findings and insights of many authors and companies engaged in assessing various dimensions of intellectual capital and company performance is reinforced in the literature (Kaplan & Norton, 1992 & Edvinsson & Malone, 1997). One of the key research findings is to help employees quickly understand the drivers of intellectual value and the inter-connection of results from different areas of the organization reinforcing the strategic importance of collaboration linked to corporate growth In most cases, CP platforms provide integration of the systems discussed above only at the interface or publishing level through Application Programs Interfaces (APIs). Different vendors use different names for these APIs: adapters, connectors, gadgets, modules, portlets, web parts, etc. Often, when applications are integrated at the portal, only small pieces are integrated (e.g. reports from the ERP system). Most of the relevant and strategic information in organizations, however, also includes unstructured information that before the web-based applications was hard to publish widely and even much harder to find. This is changing now in a CP environment. In order to understand how employees can more easily and efficiently find this kind of information, it is necessary to examine technology developments in:
Understanding Corporate Portals: Key KM Enabling Applications 143 (i) Categorization and Taxonomy; (ii) Search Engines; and (iii) Personalization Engines.
CATEGORIZATION AND TAXONOMY In order to simplify searches and navigation, organizations need to develop information structures and categories that make sense to their own businesses and specific communities that will be using the system. Regardless of the power of the search engine deployed and the number of functionalities implemented, any organization will need to deal with the issue of categorizing and organizing information. Categorization adds fundamental indexing information to documents, in order to make it easier to find them later on. Taxonomies are high-level rules for organizing and classifying information. Although very relevant for the web environment, the discipline of taxonomy is not new. It has always been at the core of library sciences. However, it become increasingly important as companies realize the untapped value of unstructured information available in their organizations and the key role that taxonomy plays in facilitating information and knowledge exchanges. Taxonomies provide an effective way to organize and access unstructured information and also people with specific skills. They classify information into logical categories that allows users to readily browse through content. They are often used with search technology to help locate target information. They are also necessary to tag (information about the information) the documents created. The tagging is an important step to ensure that search engines will find required documents and also for the distribution of documents based on personalization rules. Metadata, which is defined as information about information and a core feature of HTML and XML files, is at the center of the Internet revolution. It provides the necessary context for information making documents easily located by search engines regardless of any previous information to their physical location. Metadata also plays an important role by allowing different documents to be grouped together easily. The capture of metadata should ideally occur right after content creation. Increasingly, this occurs through a combination of automatic (typically author, name, date, etc) and manual processes (keywords, category, etc). The taxonomy should make it intuitive for employees to browse for specific information and "bump" into related, but not anticipated topics or categories. Employees should find common names, categorizations and signals that are familiar to them. In this respect, the online experience should not be much different from the offline experience. Good taxonomies also make it much easier to search for internal and external documents, people and communities by allowing searches to be conducted based on various different criteria (e.g. author, date, file format, knowledge
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domain, etc). There is, however, no scientific way to find out whether the chosen taxonomy really works. There are a few rules of thumb (such as categories with too many or too few documents will probably not work), but, ultimately, it will be the users that need to tell whether it makes sense or not (Can they find the required information with only a few clicks?). The ongoing challenge with taxonomy/classification structures is maintaining a structure that makes sense for the people in the organization. In this respect, it is very different from how taxonomy was traditionally developed in a typical Library environment. Library classification systems were used developed without the input of users. In a portal environment the development of taxonomies should be a much more collaborative effort between information science professional and domain experts. Keeping indexing structures is also a challenge in organizations with huge amount of data. There are, however, new software tools on the market which allows an administrator to see how all the documents would flow into new classifications. Advanced analytical tools are also required to help companies to know when it's time to make appropriate changes. There are indeed many recent advances in tools helping organization to develop and maintain large and complex taxonomies. Taxonomies can now be developed: •
Automatically according to customized rules;
•
By end-users;
•
According to patterns of usage of information;
•
By reputation and ranking;
• etc Automated categorizations based on frequency of words may not provide good results. Some new software solutions allow automatic re-categorization of schemas based on user feedback. Preferably, building a taxonomy should start with some inputs developed jointly by content "owners" or domain experts and information architects. In many cases, this is an important collaboration because many experts are not too concerned about how their knowledge is organized, classified and linked in meaningful ways to other codified knowledge, experts and communities. Taxonomies and categorizations are usually hierarchical. However, new forms that are more visual, for instance, spatial or hyperbolic trees, are becoming more common. Some CPs also import the category hierarchies from existing applications, such as ERP or CRM. This can make the transition to a web environment easier for users already familiar with the existing applications. Ultimately, the true test of any taxonomy is the efficiency that it provides to the group of users it was designed for: Are the users able to find meaningful and relevant information in a time-efficient manner?
Understanding Corporate Portals: Key KM Enabling Applications 145 SEARCH ENGINES If one of the objectives of KM and CPs is to make it easier for employees to find relevant information and knowledge sources, then search engines are an important enabling tool. The goal of a search engine is to provide relevant results (not the highest number of results) for a query, in the least amount of time. However, in many cases, users may need assistance defining exactly what they want. Documents also frequently refer to similar subjects using different terms in varied levels of depth. This may generate results that are not very precise (too many, very few results or irrelevant ranking). To respond to these various individual circumstances and the exponential growth in the amount of information and types of data and knowledge sources, there have been advances in search mechanisms.. Many search options, features and levels of sophistication are now available. They include the following (from the most common to the more sophisticated or specific): •
•
Keyword and Exact Phrase Searches are very common search features available in most search engines that list results based on the occurrence of chosen words or phrases. These types of search engines have been used extensively in libraries and allow for users to target their search to specific areas of documents, such as the title, keywords and author. Such search engines now often include URL and existing links as well; Boolean Searches return results based on the use of logical operators such as AND, OR and NOT;
•
Bayesian Inferencing Searches present results based on the frequency with which the chosen words appear in each document;
•
Concept Searches return results in which the most relevant documents shown may not necessarily contain the chosen keywords. This is because the search mechanism looks for additional words that are related to the chosen keywords based on a thesaurus or statistical approach;
•
Context Searches: certain engines can be calibrated to understand the researchers' context and show search results accordingly. This is useful when words can have very different meanings, depending on context (e.g. the word "SAP" can mean "the fluid of a plant" or refer to the ERP software company SAP);
•
Natural Language Searches. This type of search engine is exemplified by AskJeeves in the consumer market. This natural language based software engine allows users to post queries using plain English (or any other language). More sophisticated solutions, however, are being developed that
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include agents that mimic real, intelligent human conversations (as provided, for instance, by MangoMoon); •
Knowledgebase Searches: these kinds of search engines are closely related to the "natural language search engines". They are able to automatically build structured cases that let users tap into previous responses to similar questions. These engines learn every time a new interactive "Q & A" session occurs. If the searcher does not find the appropriate answer they can be programmed to direct the user to talk to a person who will try to answer the question (this is being deployed particularly in call centers);
•
Popularity-Based Searches automatically change the ranking of links that are displayed, based on various types of algorithms that aim to evaluate users' own perspective of the document or site. It may, for instance, consider the number of times that previous users have checked the link or information source or how many other users link to that specific site (the popular site google.com uses this technology). It may also display documents based on users' direct and pro-active evaluation of the document or site;
•
Collaborative Filtering Searches are based on the idea that individuals that share similar interests will also find similar documents relevant. Amazon's suggestions of books exemplify this type of search mechanism;
•
Affinity Searches are similar to collaborative filtering searches. However, they take the idea of linking people and documents even further. It discovers many levels of commonalities amongst different kinds of documents, based on the people who author, read or update them. They can be particularly useful for very large organizations that want to link people with similar interests and competencies;
•
Visual Mapping Searches allow users to see the results of their searches in a more graphical manner. Documents are aggregated and linked according to categorization algorithms that allow users to easily navigate through clusters of related information;
•
Peer-to-Peer Searches allow searches within a self-selected community without the need of any centralized document index. The emerging enterprise solutions are based on the consumer models originally developed by companies such as Napster and Gnutella;
•
Personalized Agents have strong dynamic learning capabilities based on each user's pattern of searches and choices of documents. Advanced agents combine concept and context search concepts (discussed above) to build relevant users' profiles.
Understanding Corporate Portals: Key KM Enabling Applications 147 PERSONALIZATION ENGINES The CP in its various facets and applications has to make sense for each individual and be clearly linked to specific business processes and goals. It must not be only about information sharing, since information overload can have a very negative impact on employees' creativity and productivity. Most people, especially those working in fast-paced wired environments, are increasingly swamped with irrelevant information, reinforcing the time-starved reality of most organizations today. If CPs are to be successful and become a fundamental tool for employees' work, they need to allow employees, regardless of location and means of access to personalize their access to vast volumes of information/assets stored in the companies disparate databases and digital formats. Ideally, CPs should allow employees to seamlessly explore, in the same browser window, information generated internally and externally. Personalization, or tailoring content, specific applications (or chunks of it) and/or individual experiences based on implicit and explicit data and information should appear transparent to users by incorporating them into regular browsing paths that minimize effort. The most advanced sites combine a "pull" and "push" approach to personalization. The "pull" approach means that the content and display of the site is dependent on choices made by the user. The "push" approach can be quite simple or quite sophisticated. The simple and most common "push" approach is to have the site personalized by web administrators, according to employees' profile (role, location or access rights). The more sophisticated push approach includes dynamic personalization or personalization "on the fly". This refers to personalization that is based on a number of sources of accumulated or real-time information, including the navigation path, device used for access, current location of user and available bandwidth, etc. The personalization engines use such information to make intelligent predictions about users' preferences and display content based on individuals' stated preferences, employees' roles and location, and behavior during visits to the portal.
CODIFYING AND PUBLISHING KNOWLEDGE - VALUE OF CONTENT MANAGEMENT SYSTEMS If one agrees that an important goal of any CP solution and/or KM initiative should be to empower employees to easily input information and knowledge and have access in a timely and effective manner for the targeted group or even the whole enterprise and its
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customers. As content continues to grow exponentially, companies continue to struggle with issues of aggregating, sharing and using various types of software solutions to support their business collaboration and knowledge management requirements. In fact, Gartner Group's 2003 survey confirmed content management was the number 2 priority next to security. Hence, Content Management System's (CMS) (associated with a CP implementation) represent a significant opportunity and challenge for organizations and consultants in the KM field. The processes related to CMSs are closely associated to those of KM. These processes include the creation, publishing, reuse and storage of content (or information). In that respect, good CMSs can play a very important role by making it much easier for knowledge holders to codify and distribute part of their knowledge and information sources. This is, of course, very relevant for experts that tend to be bombarded with the same questions repeatedly. CMSs, although initially developed for large online publishing operations, are, clearly, knowledge-sharing tools and should be treated as such. The most advanced CMSs allow for the seamless and dynamic integration of very structured data (from back-office systems) and unstructured data (input by individuals within and beyond the enterprise). They can also be deeply integrated with electronic workflow applications and other collaboration and project-management tools. A standard CMS process generally involves the following steps: 1) Document Creation; 2) Document Review; 3) Quality Assurance; 4) Publishing; and 5) Document Archiving or Document Deletion. CMS deployments can play a critical role in the implementation of CPs. They provide a centralized technical infrastructure and core processes and a decentralized publishing environment that allows content owners or co-owners to establish their own individual processes to manage their content portfolio. This is particularly important since different organizational units need to benefit from more robust CMS applications, but also need to attend to their specific timing, business needs and sharing goals. Although straightforward, at a conceptual level, the CMS platforms can be quite different in terms of their many technical features. Some of the features found in the most advanced CMS solutions include, but are not limited to, the following list: Design and Authoring Features •
There are very few layout and design limitations;
•
Content is separated from format;
•
They include graphical and intuitive tools to build a workflow;
•
They allow users not only to post information/content, but also to customize the interface of their postings;
•
They make it easy for non-technical people to continue to work with their desktop applications;
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•
They include sophisticated tools for template development;
•
They allow the creation of XML-based documents by users with no knowledge of XML;
•
They make it easy for users to organize, classify and cross-reference content that is being publishing;
•
They allow users to easily associate search terms (keywords) to their created content;
•
They support the publishing of many content file types (e.g. audio, video, image, presentations, HTML code, Java components, ZIP files for download, etc);
•
They allow content creators to include priority levels on the documents that are going to be published or distributed to selected groups;
Rules-Setting Features •
They allow easy changes of rules for authoring, editing, approval, publishing and removal of content;
•
Ordinary users can also easily define or change business processes and workflows;
•
They allow documents to be checked in and out by users;
•
Individual employees and/or webmasters can easily manage roles and access rights;
•
They allow both public and privately-controlled publishing (i.e., the users control who has access to their published pages);
Version & System Administration Control Guidelines (typical of robust document management systems) •
They provide many options for version control;
•
They allow the addition of comments to revised documents;
•
Pre-built interfaces are easily modified;
•
They allow roll-back published items if necessary;
•
They allow the view of the "change history" of any given item that has been published;
•
They automatically generate attributes associated with each published document (creation date, creator, document size, new item indicator, updated item indicator, etc); and
•
They offer many pre-built choices in terms of deletion/purging policies.
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Implementing a CMS includes both technical and non technical (process and organizational) issues. The latter is usually the most challenging one. Publishing information and keeping it up-to-date and relevant requires dedicated and disciplined work and an organization that fosters open communications and transparency. CMS implementations that precede the development a solid information policy for the organization tend to fail. Good information policy spells out rights and responsibilities and very clear guidelines about who can or should publish and who can have access to what.
COLLABORATING ONLINE The Internet provides both synchronous and asynchronous opportunities for individuals to meet, share information/knowledge, make presentations, and collaborative on real-time decisions such as voting on line or utilizing synchronous tools such (electronic meeting systems, electronic whiteboards, conferencing, and chat tools) which allow two or more people to work together simultaneously, whether they are together in the same place or in different places. These tools enhance collaboration and make meetings more effective. Asynchronous tools permit people to work together at different times (e-mail, knowledge repositories, document and content management systems and workflow tools). Asynchronous tools are particularly helpful for people who have busy schedules and participate in multiple projects. With asynchronous tools, it does not matter when or where a person is working; the tools replace meetings and may make them unnecessary for certain types of collaboration. Each type of tool has its place. Some of the most sophisticated digital workplace tools provide a seamless integration of structured and unstructured data and information, voice and synchronous and asynchronous groupware tools. It is clear that many of the tools that are now being implemented at the enterprise level have their roots traced back to the consumer sites, in particular large-scale portals that provided web-based discussion, communications and community tools. In fact, some of the software vendors now tapping into the enterprise market still have those mass-market portals as their flagship clients. Other software solutions were developed specifically for the corporate market: from low-end ASP solutions for small companies to robust enterprise-level solutions. Some of the most recent solutions are leveraging P2P platforms and also include wireless applications to keep members constantly connected to the community. In essence, many of these collaboration tools are integrated and customized to specific organizational environments; there is a set of functionalities related to six core areas:
Understanding Corporate Portals: Key KM Enabling Applications 151 1. Synchronous and Asynchronous On-line Discussions Capabilities Threaded and streaming (based on chronology) discussion databases; Discussion threads shown according to user profile or choices; Chats and instant messaging; Ability to work offline; Ability to easily set-up group, sub-group or private interaction environments; - Electronic meeting places with advanced presentation features: web tours, whiteboards, conferences, etc; Audio and video streaming; Instant polling and rating features; Anonymous postings; Ability to mobile and remote users to participate; and Guided brainstorm applications.
2. Sophisticated alert systems Ability to target questions to groups or sub-groups; Subscription facilities to content categories and/or published material with specific keywords; Ability to cluster alerts according to one's requested frequency; - Notification based on individuals' typical online behavior; Notification distributed through many channels: web, e-mail, pagers, etc
3. Rich User Identification Capabilities Manual and/or automatic profiling of individuals (by moderators and/or users); Knowledge-mapping and affinity-building tools to help people that share interests to meet; Ability for users to digitally express their moods and feelings through icons; Ability to easily assign and modify different roles for individuals of the community (e.g., administrator, moderator, core member, affiliate member, etc.) Tools for recognizing different levels of participation and for users to develop their individual digital reputation; Ability to create members' directories and sub-directories; and Ability for both administrators and individual users to define access rights to other members of the community; and
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Jose Cldudio Terra and Cindy Gordon Ability to personalize some elements of each group or community (e.g., color).
4. Knowledge-base Repositories Ability to upload, distribute and archive all kinds of document formats. In a way, including many of the advanced features of CMSs. These features were discussed in detail in the CMS section above; Ability to check same applications simultaneously (apps sharing). For instance, project plans, business intelligence, ERP, etc; Searchable databases of discussions and previous "Q & A" sessions; and Integrated search with the ability to search based on a number of criteria: author, date, subject, sub-groups, etc. 5. Events Management Invitation according to role and or choices; -
Notification according to role or choices; Calendar; Schedule; Inclusion of new members and groups; Site statistics (stats by users, location, topic, contributions, etc), etc;
6. Administration Tools Web-based environment administration cockpit; Online surveys; Ability to establish groups and communities that extend beyond the firewall; Ability to operate without client software; Ability to set up different levels and areas of site management; -
Ability to set up different access levels, etc.
LOOKING AHEAD Corporate Portals started as simple Intranet pages that were based on a broadcast approach and technology. As discussed in this paper, CPs have evolved tremendously over the last few years. They are becoming very sophisticated in their capabilities, in terms of integrating a broad range of integrated applications and tools, ranging from content management systems, categorization and taxonomy tools, search engine tools, collaboration online applications, workflow, etc. In addition, these new applications strive to integrate and balance the structured flow of information with the unstructured and organic flow of knowledge. In this technological context, they are no longer simple repositories of data and information, but an essential part of users' daily work.
Understanding Corporate Portals: Key KM Enabling Applications 153 And with new wireless capabilities, the new CP platforms are allowing knowledge workers to access their information needs regardless of their location. For organizations to remain competitive they need to apply more current and sophisticated tools that have only recently been integrated into portals in a corporate environment. However, creating organizational capabilities for portals, collaboration and knowledge management is a tough job that requires a well-planned governance model with clear responsibilities in terms of establishing standards, maintaining the IT infrastructure, evaluating results and users' interaction and constantly matching supply and demand for information, collaboration and decisionmaking. The glut of information online continues to grow at staggering growth rates. As information continues to rapidly grow, it becomes less defined, more dispersed and more complex to manage. The greater the number of online sources, the more difficult it becomes to keep track of which sources to read. The authors believe that many of these solutions will have an important impact on how organizations create, organize, provide access and reutilize knowledge. Many were transplanted from the publishing/media and other business-toconsumer (e.g. auctions) industries while others were created from the start to foster higher levels of collaboration across multiple constituencies within and outside the organization. Finally, it is important to highlight that contrary to previous IT waves, it is evident that this new breed of technologies are being developed with a strong social-technical perspective and taking into consideration many of the underpinnings of the Community of Practice Theory (Wenger, 2000).
REFERENCES Collins, H. (2001), Corporate Portals, AMACOM Davydov, D.M. (2001), Corporate Portals and e-Business Integration, McGraw-Hill Edvinsson, L. & Malone, M. (1997), Intellectual capital: realizing your company's true value by finding its hidden roots. Harper Collins Publishers, New York, NY. Gartner Group, CIO Concerns, February, 2003. Kaplan, R.S. & Norton, J.(1992), The Balanced Scorecard - Measures that Drive Performance, Harvard Business Review, Jan-Feb, 1992, p 71-79 Terra, Jose Claudio & Gordon, Cindy (2003). Realizing the Promise of Corporate Portals: Leveraging Knowledge for Business Success, Elsevier, Boston. PriceWaterhouseCoopers & SAP (2001), The E-Business Workplace, Wiley Wenger, E.C. & Snyder, W. M. (2000), Communities of Practice: The Organizational Frontier, Harvard Business Review, Jan-Feb, pages. 139-145
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
RAPID APPRAISAL O F ORGANIZATIONAL KNOWLEDGE MANAGEMENT NEEDS: THE CASE O F AN INFORMATION TECHNOLOGY SERVICES FIRM Charles H. Davis, University of New Brunswick- Saint John (Canada)* Fernando Pacheco, Pontificia Universidade Catolica do Parana, Curitiba (Brazil)"
INTRODUCTION The term Knowledge Management (KM) broadly refers to practices intended to find, create, or use knowledge for purposes of value creation.1 A huge KM literature has emerged, encompassing a wide variety of concepts with roots in a range of scientific disciplines and business practices including human resource management, information and communication management, information technology, business strategy, philosophy, psychology, sociology, and accounting. The core concepts of contemporary knowledge management theory are not difficult to grasp. However, KM concepts are notoriously challenging to put into practice; their ambiguity and the difficulty of operationalizing them can give rise to internal confusion and conflict over resources, responsibilities, and territory (De Long and Seeman, 2000). KM deals with intangibles that are difficult to observe, measure, value, and evaluate. KM processes cut across functional organizational boundaries. The technologies that support KM are often complex, unfamiliar to the adopting organization, and usually have unanticipated consequences. Furthermore, few KM reference management practices have been described and assessed. Consequently, even when organizations * Dr. Charles H. Davis teaches in the UNBSJ Faculty of Business. E-mail:
[email protected]. " Dr. Fernando Pacheco directs the Nucleo de Gestao do Conhecimento e Inteligencia Empresarial at PUC. E-mail:
[email protected]. 1 No generally accepted definition of knowledge management exists. For a survey of definitions see Beckman(1999). 2 The knowledge management literature has become so large and heterogeneous that machine-based bibliometric and data visualization techniques can helpfully map it for navigational purposes. For such an application to the domain of knowledge management see Frolich, Noll, and Schiebel (2001). Critical literature reviews by knowledgeable humans, as for example Levina (1999), Martensson (2000), or Shin, Holden, and Schmidt (2001), are also of great utility.
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are already practicing some form of knowledge management (as is often the case), they usually face a steep learning curve when they undertake explicit knowledge management initiatives. Quite a few prescriptive approaches have appeared in the scholarly and business literature to guide organizations' KM initiatives, offering guidelines, road maps, and diagnostic tools to support KM implementation.3 However, the organizational and cultural challenges of knowledge management practice are so complex that organizational capability to manage knowledge management must be explicitly fostered. Development of knowledge management capability requires an appraisal process in which organizational members share sensemaking about the organization's knowledge management strengths, weaknesses, and needs. The shared understanding can then be translated into projects or operations to improve or develop knowledge management practices and processes. The present paper relates such a diagnostic experience, based on an adaptation of the participatory rapid appraisal approach that is frequently used for purposes of natural resource or rural development or healthcare planning. Using Bukowitz and Williams' (1999) 140-item KM diagnostic questionnaire as a point of departure, about twenty-five middle and uppermiddle management participants in a program of executive KM courses and workshops in an information technology services company ("Infotech") were asked to assess their organization's KM processes, explain their assessments to each other, discuss convergent and divergent viewpoints, and propose ways to remedy shortcomings and share practices within the organization. Some of the results of this exercise are described here and interpreted in terms of Terra's (2001) seven organizational dimensions of knowledge management: organizational culture and values, information systems, management of human resources, organizational structure and roles, measuring results, learning from the environment, and senior management vision and strategy. In the following sections we present a brief portrait of Infotech and explain the rapid appraisal approach to diagnosing KM needs. We then describe Terra's seven organizational dimensions of KM, interpret our results in these dimensions, and discuss the KM capacity-building interventions that Infotech needs. INFOTECH: A PORTRAIT Infotech is a publicly owned company that provides data processing, information, and information technology services to customers in the public and private sectors in South America. It is one of the largest information technology service companies and one of the top non-financial companies in the region. Its 1999 revenues were about $480 million. It operates as a private enterprise while providing critical services to national, state, and local governments. This mandate means that Infotech must seek 3
For example: Bukowitz and Williams (1999), Dieng et al. (2001), and Tiwara (2001).
Rapid Appraisal of Organizational Knowledge Management Needs 157 efficiency, effectiveness, and quality in the delivery of services to its mandated public customers. In addition to the data processing and infrastructure management services that it provides, Infotech has been a key player in the introduction of new IT-based services. Infotech was involved in the development of an online tax-payment system, an online purchasing system for the national government, public key facilities for secure online commerce, and a secure online export sales portal. Infotech also has latitude to develop revenue through delivery of products and services to new customers. The company has proven to be adaptable and entrepreneurial in an environment of scarce financial resources. It has undergone significant downsizing in the last fifteen years, passing from 22,000 to 8,600 employees. To achieve greater customer responsiveness and increase added value, in 1995 Infotech reorganized into units dedicated to business management, infrastructure management, and corporate processes. Knowledge management practices are considered key to successful delivery of services, and Infotech's executives have given high visibility to KM. Infotech has sought to determine what it knows and what it needs to know, who possesses the knowledge and who needs to use it, and how the knowledge can be shared within the organization and with customers and suppliers. It has undertaken to map organizational knowledge and competences, identify best practices and communities of practice, and diffuse knowledge internally through teaching and communication. The results of the exercise reported below show that Infotech has mastered several of the formal technology tools, discourse, and organizational features and processes of knowledge management, but it still faces challenges regarding the development of a supportive internal culture and internal business processes necessary to sustain KM capability or derive demonstrable benefits from it. Appraisal of Infotech's main KM needs underlines the importance, to this organization, of developing initiatives to institute cultural change within the organization, to improve strategic planning and investment processes and asset valuation metrics, and to strengthen internal knowledge transfer processes, including those relating to knowledge management practices.
THE RAPID APPRAISAL APPROACH Rapid appraisal is a form of requirements elicitation that addresses program design and planned change management issues in "soft" or social systems. It aspires to encompass the entire cycle of planning, acting, observing, and modifying. Rapid appraisal belongs to a group of action research approaches that are intended to 4
For a review of issues and methods in rapid appraisal, see Kemmis and McTaggart (2000).
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produce actionable knowledge in ways that are participatory, collaborative, practical, critical, and reflexive. It emphasizes context, diversity, adaptivity, on-site learning, improvisation, and shared responsibility with goal of enabling rapid and continuous learning ("action learning") among all participants. Rapid appraisal thus seeks to involve participants as co-researchers in the identification of research problems, selection of methods, execution of the research, interpretation of results, and reformulation of problems. The information production costs of rapid appraisal initiatives are much lower than the costs of surveys or consulting investigations, and the approach's participatory dimension provides greater learning spillovers and opportunities to create shared understanding than unilateral knowledge extraction initiatives do. Rapid appraisal presents a way to stimulate complex organizational learning involving collaboration among persons with diverse knowledge bases who generally lack a common vocabulary, but who share the task of developing systemic initiatives whose features go beyond the purview of any group of persons. The deliverable of the present exercise in the case of Infotech was to return the results of the appraisal to the participants for determination of steps to be taken next.
THE SEVEN ORGANIZATIONAL DIMENSIONS OF KM Four distinct KM perspectives require integration to create KM strategy: a strategy/leadership perspective, a content/practice perspective, a technology perspective, and a change management/reengineering perspective (De Long and Seeman, 2000). These perspectives have given rise to an abundance of alternative ways, in the scholarly and practitioner KM literature, to slice, dice, conceptualize, classify, and measure KM activities in organizations. Our experience with various KM diagnostic tools and typologies in the context of KM seminars for executives and middle managers led us to seek action learning tools and processes that would allow KM strengths and weaknesses to be rapidly identified and assessed from the standpoint of an entire organization. Bukowitz and William's (1999) 140-item diagnostic questionnaire is designed to measure KM processes in a seven-step cycle of knowledge production and use, with 20 diagnostic questions addressed to each step in the cycle. We used this questionnaire in its original form during a KM workshop in Infotech in which middle and senior managers discussed Infotech's KM challenges at each step of the knowledge cycle and assessed its KM capabilities. Each item is assessed on a three-point scale from strong (3) to weak (1). Five groups of workshop
5 The seven steps outlined in Bukowitz and Williams are: getting knowledge, using knowledge, learning, contributing to knowledge, assessing knowledge, building and sustaining knowledge, and divesting knowledge.
Rapid Appraisal of Organizational Knowledge Management Needs 159 participants performed each assessment and the responses were compared and discussed. Average responses are those presented below. We found it useful to reclassify the 140 items into a small number of generic knowledge management dimensions, and for this purpose we selected Terra's (2001) seven-dimension model of knowledge management: •
•
Learning with the environment refers to the ability to engage in appropriate relationships with customers, suppliers, or alliance or network partners, and capture the learnings afforded by interactions with them. Information systems refers the organization's ability to use information and communication technologies as tools and a KM support system.
•
Management ofHR refers to capability of managing human capital.
•
Organizational structure and roles refers to the organizational arrangements for managing knowledge.
•
Senior management,
vision and strategy refers to leadership and its
articulation of goals that are supportive of knowledge management. •
Organizational
culture and values refers to the social incentives and
disincentives to knowledge flows within the organization. •
Measuring results refers to the ability to assess the costs and benefits of knowledge production or dissemination.
APPRAISAL
OF
INFOTECH'S
MAIN
KM
STRENGTHS
AND
WEAKNESSES Table 12.1 presents aggregated data from all panels of Infotech managers and provides an overall assessment of Infotech's knowledge management capability, as seen by these managers. Infotech's main KM strengths, according to its managers, lie in its ability to "learn with the environment" (learn from interactions with customers and suppliers), and in the quality of the organization's information infrastructure. Infotech's managers consider that the firm's KM shortcomings are areas having to do with culture, strategy, KM roles, HR management, and performance measurement. Below we provide a detailed appraisal of Infotech's KM capabilities along each organizational dimension of knowledge management. Each Table shows six or seven statements, representing the greatest strengths and weaknesses as determined by panels of Infotech managers.
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Table 12.1: average strength of Infotech's main KM capability in seven dimensions (3 = strong, 2 = medium, 1 = weak) Learning with the environment Information systems Management of human resources Organizational structure and roles Senior management vision and strategy Organizational culture and values Measuring results
2.3 2.3 1.9 1.9 1.9 1.8 1.8
Learning with the environment. As Table 12.2 indicates, Infotech's managers consider that it has developed strong competencies in using its upstream, downstream, and lateral relationships with customers, suppliers, and alliance partners to improve its value proposition. On the other hand, there are clear limits to Infotech's strategic positioning within its value network: Infotech appears not to work well with competitors, nor does it learn from its employees' non work-related activities. Moreover, it does not seek out demanding customers, thereby depriving itself of learning opportunities.
Table 12.2: Learning with the Environment: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) We frequently partner with suppliers to improve the value we deliver to 3.0 the customer. 3.0 Our product development process explicitly includes our customers. We form alliances with organizations that complement our skill sets as an 3.0 alternative to doing everything We view collaborating with competitors to grow the industry as a good 1.6 thing. We encourage people to think about how their non-work-related activities 1.2 could benefit the organization. We may refuse to work for a customer if doing the work does not build 1.0 knowledge that we can use in other ways.
Rapid Appraisal of Organizational Knowledge Management Needs 161 Information systems. Infotech's managers regard the organization's IT infrastructure as a source of strength in knowledge management (see Table 12.3). Infotech's information systems deliver the right information and are supportive of the organization's mission. Infotech's personnel are positive about IT tools. However, Infotech's information systems are largely unidirectional. They deliver information to users, but it is awkward and inconvenient to make contributions to Infotech's repositories of knowledge content. Processes for contributing to the organizational stock of knowledge are not well defined and are not part of the normal work routine. Established routines involve unidirectional distribution of information from a central repository. Moreover, it is not clear who is responsible for maintaining and distributing knowledge in Infotech or what the incentives for sharing knowledge might be. Table 12.3: Information systems: Infotech's main KM strengths and
weaknesses (3 = strong, 2 = medium, 1 = weak) People in our organization can use the information they get to improve their work.
3.0
We view information technology as a tool to help us get our work done.
3.0
Our IT systems connect us to information sources we need to do our work.
2.8
We acknowledge individual contribution to our groupware systems by linking it to the name of the original author Processes for contributing knowledge to the organization's repositories are seamlessly integrated into work. Electronic and physical spaces where we store our knowledge have an intuitive structure that helps people direct their contributions.
1.4 1.4 1.2
Management of human resources. Infotech's members, including its IT professionals, are members of a collective bargaining unit. The firm has developed a very strong orientation toward reskilling and redeploying its employees before hiring new employees or downsizing its work force (see Table 12.4). These features are regarded by Infotech's managers as a source of strength. However, Infotech has serious shortcomings when it comes to fostering learning among its employees. The training it offers is primarily technical, and this does not help employees to better understand the Infotech's core business, the information services business. Training methods used by Infotech do not extend to games or business simulation methods. Employees who share knowledge are not recognized or compensated, and no disincentives to knowledge hoarding are in place. Infotech does not usually
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reserve time for relatively unstructured knowledge exchange activities among its employees. Table 12.4: Management of HR: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) When a new opportunity arises, we first try to retool our existing skills before we hire a lot of new people Before we terminate people, we try to determine if their skills and expertise can be used elsewhere.
3.0 3.0
We prefer to use the resources and skills we have in places when testing a new business idea. We use work-related games and simulations to think more clearly about our business situations.
3.0
People who refuse to share knowledge do not get certain organizational benefits.
1.0
The performance appraisal system recognizes and rewards knowledgesharing behavior.
1.0
The organization has legitimized sharing knowledge by giving people time to do it.
1.0
1.0
Organizational structure and roles. Infotech's managers consider that the firm is capable of targeting resources on groups of specialists as needed. It is also strong in moving people into face-to-face situations in order to transfer tacit knowledge, and in general Infotech's employees find its virtual office capabilities to be relatively well developed (see Table 12.5). In other words, they find it relatively easy to access the information and documents they need for their work, wherever they happen to be. On the other hand, Infotech needs to improve the support services delivered by its information specialists, especially with respect to information that is outside the organization. The firm's knowledge management roles need to be better articulated. Meetings are regarded as too structured to permit creative problem solving. Table 12.5: Organizational structure and roles: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) The organization allocates resources to communities of specialists that wish to manage their knowledge Face-to-face interactions are used to transfer difficult-to-articulate 'tacit' knowledge. Our workspace provides us with the flexibility to take our work where we need to with very little effort. Corporate information specialists help people use on-line tools, including the internet. We have distinguished between knowledge management roles that are primarily administrative in nature, and those that are more content-focused. We make a point of not structuring some of our meetings because it helps us think more creatively about problem.
2.8 2.6 2.4 1.6 1.4 1.2
Rapid Appraisal of Organizational Knowledge Management Needs 163 Senior management vision and strategy. Infotech possesses visible leadership in the area of knowledge management - this is a strength. Formal policies are in place for knowledge sharing, and KM is visible in the firm's business plans (Table 12.6). However, these KM policies and plans appear not to have translated into strategic vision regarding Infotech's business objectives. It is not clear how KM will contribute to Infotech's intended strategic outcomes. Specifically, Infotech's middle managers are unsure about how to understand the strategic relationship between current knowledge assets, development of future knowledge assets, and Infotech's portfolio of products and services. Table 12.6: Senior management, vision and strategy: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) We have launched a group or appointed a person to lead our knowledge management effort. Our top executives ask all managers to include knowledge management in their business plans. We have a formal policy that insures we share technology and ideas across unit or group borders. Before we accept new projects or orders, we think about whether the knowledge we will build for our organization can be in used in other ways. We routinely ask ourselves how we can leverage our knowledge into other areas We have developed a framework that links knowledge management activities to strategic outcomes.
3.0 2.6 2.6 1.4 1.2 1.0
Organizational culture and values. Infotech's managers consider that the firm has a relatively open and tolerant culture characterized by "natural curiosity," flexibility, and willingness to learn. However, Infotech's culture is regarded as too conformist. It is believed to be intolerant of failure, internal disagreement, and out-ofthe box thinking (Table 12.7). Table 12.7: Organizational culture and values: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) People in our organization exhibit a natural curiosity. 2.6 It does not matter which group came up with an idea or technology, anyone in 2.4 the company can use it. People would describe our organization as flexible rather than rigid. 2.4 We seriously consider what others might call crazy or outrageous ideas as part 1.0 of our problem-solving process. When a failure occurs, our first response is not to assign blame. 1.0 We treat disagreement as an opportunity to learn from one another. 1.0
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Measuring results. According to its managers, Infotech has a tradition of deriving lessons from work experiences. It especially learns from successes. In its planning process it generates scenarios that provide useful frameworks for thinking about the business (Table 12.8). These allow the firm to measure results in qualitative terms. It is weaker in implementing formal performance measurement processes related to the firm's financial situation or KM indicators.
Table 12.8: Measuring results: Infotech's main KM strengths and weaknesses (3 = strong, 2 = medium, 1 = weak) Reflecting on lessons learned from work experiences is an established practice 2.6 in our organization. Our planning process includes looking at a number of scenarios so that we can 2.6 think through how to respond. 2.6 When we have a big success, we talk together about what we did right. Everyone in our organization can explain the basics about our financials. 1.2 Assessment of knowledge-based assets is part of our overall organizational 1.2 performance measurement process. People know what metrics are used to monitor the knowledge management 1.0 process and its results.
DISCUSSION: APPRAISING INFOTECH'S MAIN KM STRENGTHS AND WEAKNESSES It is not difficult, based on the foregoing appraisal, to understand where Infotech stands in its journey towards achievement of broad and effective KM capability. Infotech possesses a core of knowledge KM competencies related to the quality of its IT infrastructure, its formalized organizational relationships between employees and managers, its productive relationships with customers and suppliers, and visible senior management commitment to knowledge management. Infotech's IT infrastructure satisfactorily delivers information to customers and employees. The latter feel secure that they have opportunities to learn and to explore, and that senior managers are fully supportive of development of knowledge management capability within the company. Infotech has a degree of agility and its culture encourages learning from successes and access to innovation across the firm. The KM challenges facing Infotech also emerge clearly. The firm is perceived as having an excessively formal and hierarchical culture and administrative rigidities. It lacks an incentive system to encourage knowledge sharing and does not provide time for it employees to share knowledge among themselves. Its culture of experimentation is inhibited by the negative consequences of failure. Infotech's IT
Rapid Appraisal of Organizational Knowledge Management Needs 165 system in its present state does not effectively support intra-organizational collaboration and knowledge sharing. No specific knowledge management roles have been developed within the firm. Managers acknowledge the firm's abstract commitment to KM and but the vision needs to be translated into specific strategic options for development of new products or services. Relationships with suppliers and customers are comfortably predictable but are not sources of strategic learning. No performance metrics are in place with respect to management of Infotech's knowledge assets.
CONCLUSIONS The challenge facing Infotech is to define a number of KM initiatives that address identified shortcomings and visibly accumulate KM capability within the firm. On the basis of the rapid appraisal reported here, a short list of KM initiatives might include documentation and sharing, via face-to-face meetings and through an intranet, of effective, in-place KM practices and processes in some areas of importance to the firm, such as business development, human resource management, or information management. Formal knowledge management roles might be established within the firm. This might involve appointment of a Chief Knowledge Officer or the establishment of KM design and implementation teams, each chartered with mandates and deliverables. Finally, it seems advisable for Infotech to develop strategic learning initiatives on a pilot basis, with a view to making them models for later initiatives. These strategic learning initiatives, in addition to their substantive goals, should aim to address the cultural and organizational features that are deemed to hinder development of knowledge management capability in Infotech, such as incentives for knowledge sharing and consequences of failure. More generally, Infotech needs to address issues of internal cultural change, and explore ways to create and sustain cultural values that are supportive of new knowledge management practices and processes.
BIBLIOGRAPHY Alavi, Maryam, and Leidner, Dorothy (1999). Knowledge Management Systems: Emerging Views and Practices from the Field, Proceedings of the 32nd Hawaii International Conference on Systems Science (HICSS-32), Maui
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Beckman, Thomas J. (1999). The Current State of Knowledge Management, pp. 1-1 to 1-22 in J. Liebowitz, ed., Knowledge Management Handbook. Boca Raton: CRC Press. Bukowitz, Wendi R., and Ruth Williams (1999). The Knowledge Management Fieldbook. London: Pearson Education Ltd. De Long, David, and Patricia Seeman (2000). Confronting Conceptual Confusion and Conflict in Knowledge Management, Organizational Dynamics 29(1), 33-44. Dieng, Rose, et al. (2001). Methodes et outils pour la gestion des connaissances. Paris: Dunod. Frolich, Doris, Margit Noll, and Edgar Scheibel (2001). An Innovative Tool for Information Management, Proceedings of the Tenth International Conference on Management of Technology (IAMOT 2001), Lausanne. Harrison, Richard T., and Claire M. Leitch (2000). Learning and Organization in the Knowledge-Based Economy: Initial Findings from a Participatory Action Case Study, British Journal of Management 11, 103-109. Kemmis, Stephen, and Robin McTaggart (2000). Participatory Action Research, pp. 567-606 in N. Denzin and Y. Lincoln, eds., Handbook of Qualitative Research. Thousand Oaks: Sage. Levina, Natalia (1999). Knowledge and Organizations Literature Review, MIT and Society for Organizational Learning. http://www.mit.edu/people/natalia/Papers/Knowledge%20 Management%20Report.pdf [retrieved 10 June 2001]. Shin, Minsoo, Tony Holden, and Ruth A. Schmidt (2001). From Knowledge Theory to Management Practice: Towards and Integrated Approach, Information Processing and Management 37, 335-355. Terra, Jose Claudio Cyrineu (2001). Gestao do Conhecimento. O grande desafio empresarial. Sao Paulo: Negocio Editora. Tiwara, Amrit (2001). The Essential Guide to Knowledge Management. River, N.J.: Prentice Hall.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
A FRAMEWORK FOR APPLYING DISTRIBUTED TEAMS IN A COMMAND AND CONTROL ENVIRONMENT
Phillip T. Meade, Xodus Business & Technology Solutions, Inc. Ronald M. Fussell, Xodus Business & Technology Solutions, Inc.
INTRODUCTION In today's fast paced business environment, there are many drivers that create the need for distributed teams. Global competition is changing the scale of industry, and producing a need for quicker turn around, lower costs, and high technology. Additionally, the global market place is forcing many companies to distribute their operations and marketing teams. For technology-based industries, the drivers are much the same, including some additional drivers. The complex nature of technology is creating a need for highly specialized skills and knowledge. In order to obtain these specialized assets, many companies are looking globally to fill the need. Moreover, in technology-based operations, companies are being asked to respond faster to more data with less people. Consequently, to increase speed and operational flexibility with smaller teams, distributed collaboration is inevitable. The field devoted to studying and improving enabling technologies for distributed teams is Computer Supported Collaborative Work (CSCW). CSCW is defined as "a generic term that combines the understanding of the way people work in * Dr. Phillip T. Meade is the president of Xodus Business & Technology Solutions, Inc., a management consulting firm for high-tech companies. Email:
[email protected] Ronald M. Fussell is a principal with Xodus Business & Technology Solutions, Inc. and a Ph.D. candidate in Information
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groups with the enabling technologies of computer networking and associated hardware, software and techniques." (Schlicter et al. 1997) Closely coupled with CSCW is the use of groupware, which "is a generic term for specialized computer aids that are designed for the user of collaborative work groups." (Schlicter et al. 1997) The reason that CSCW has a research field devoted to it that has been going strong for over 12 years is simple: it's a very complicated issue. No singular solution or technology has yet to be discovered which will serve the needs of all, or even most users. This is largely due to the fact that CSCW is addressing a problem that is "wicked." A wicked problem is described as one in which "the aim is not to find the truth, but to improve some characteristics of the world where people live." (Fitzpatrick et al. 1998) Consequently, there is no "right" answer to the problem given current social and technical environmental dynamics. Furthermore, the problem can only be understood progressively as more solutions are developed. The human element injected into the problem requires the understanding of human relationships and how people work together to accomplish a task. It also requires an understanding of how knowledge is transferred. Knowledge is a uniquely human characteristic that cannot be duplicated by a computer. "What is read, seen, heard or felt isn't knowledge, rather it is the medium through which knowledge may be transferred." (Gundry and Metes 1996) Knowledge allows its possessor to "produce new and appropriate statements about a subject, not just reproduce the statements that were received." Whether Knowledge is transferred from one team member to another is a function of two very subjective constructs (Gundry and Metes 1996): 1. "The Similarity between the person's context and the context described" 2. "The degree of congruence between how material is structured and how the structure of the domain appears to the reader." Consequently, it is very important to have a shared understanding of team members' viewpoints. As previously mentioned, there are many challenges with implementing and managing a distributed team, hi the case of a Globally Distributed Team (GDT), there are cultural differences between team members, language barriers, and time zone differences. Additionally, of great importance to all distributed teams, especially distributed command and control teams, are the issues of group situational awareness, team stress management and crisis handling. All of these factors influence the cohesiveness of the team. Another challenge is the task of managing the distributed team.
Applying Distributed Teams in a Command and Control Environment 169 These challenges, in conjunction with the wicked nature of the problem, necessitate careful planning and forethought for the implementation of technologies and processes to support distributed teams. It is imperative that a planned, integrated approach be taken to solving this issue. All facets of the operations, as well as the effect of technologies on team members and on other technologies must be considered.
THE HUMAN FACTOR While various technologies are emerging to assist in the management of distributed teams (such as audio, video, XML, and biometrics), this paper will focus on the human interactions and their associated challenges. A large part of what makes the design and implementation of a CSCW system so complicated is the involvement of humans. Not only is this a human-machine system, but also computers are merely acting as the enabling agents for the human team interactions. The injection of human nature into the system adds a component that is both unpredictable and uncontrollable. In fact, the results of recent research indicate "the primary problems facing companies that use Globally Distributed Teams are not with the application of information technologies, but rather with their failure to effectively manage the human side of global teams." (McDonough and Cedrone 1998) A major contributor to this failure is the difficulty of building cohesive teams in the absence of face-to-face communication. One representative of a company struggling with implementing a GDT stated, "The combination of geographic dispersion of GDT members, lack of face-to-face meetings, and existence of multiple, important goals made it virtually impossible to establish a project team identity." (McDonough and Cedrone 1998) Because of this, the human must be recognized and treated as an integral system element. The characteristics of human nature must be analyzed and understood, and removing the unpredictability and adding control must bound the human portion of the system. This can only be accomplished through proper training of the users. Stress One of the greatest factors that influence behavioral response is stress. Stress can alter the thinking patterns of an individual, and lead to poor decision-making. Most people are used to dealing with stress on a daily basis, and therefore are generally adept at dealing with personal stress. Stress management can be taught if this is not the case.
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One of the greatest dangers of stress, however, is that it will propagate throughout the team leading to a series of successively bad decisions based on faulty information. This is especially dangerous in command and control situations where critical decisions must be made in a very short period based on the individual's understanding of the problem, environment, and data. In such situations, clear concise communication is essential to the successful solution of the problem. Human nature, however, works against such an ideal communications dynamic. If we accept the Darwinian view of a diachronic change in language, then we accept that language is an evolved behavior and subject to adaptive pressures. To further illustrate this point, prior to the relatively recent developments in communications, teamwork occurred in a common location at a common time. It can therefore be assumed that the members of the team shared both the same environment and the same general focus. Given a stressful situation under these circumstances, the most efficient means of communication is short, pronominahzed sentences. For example, to a team working in a single location on a lifting operation the phrase "Look out. It's going to fall!" would have great significance, and communicate all the necessary information. Again, this is because the team is all co-located, and focusing on the same activity. However, the advent of telecommunications and the physical distribution of teams make just the opposite true. Team members no longer necessarily share the same location or focus, and consequently may not share the same stimulus or environmental context. Without this common context, short pronominahzed sentences become ambiguous. This ambiguity leads to mistakes, and incorrect solutions to problems. The addition of complex, highly technical systems further exacerbates the problem. Consider the true-life example of an airplane that lost one engine and became unstable. The pilot shouted to the co-pilot "Throttle it back!" Without thinking, the co-pilot reached out and throttled back the one working engine causing the plane to crash and killing 47 people. This situation occurred in a common environment with a common focus Imagine the further complications that can arise when individuals working on technologically complex systems are physically separated and focusing on different subsystems. A study by the Space Coast Center for Human Factors Research at the Florida Institute of Technology (Stokes et al. 1997) has shown that under stress, an individual's use of pronouns increases. Furthermore, the type of pronoun used is predominately exophoric (referring to a noun external to the context of the conversation), which further obfuscates the message. Given that we know the affect stress has on human communication, and given that language is a learned behavior, it is not only conceivable, but also advisable that
Applying Distributed Teams in a Command and Control Environment 171 members of distributed teams be trained in the proper use of language for their situation. Furthermore, the antagonistic relationship of communication tends to increase the level of stress. The speaker wishes to say less to communicate his point, while the listener desires more information. Additionally, in the absence of non-verbal cues such as facial expressions, it is easy to misunderstand the tone of a team member 's voice. For these reasons it is also necessary to communicate in a manner which clearly conveys the tone of the message, and verbal reassurances become much more necessary. Situational Awareness In addition to effective communication, situational awareness, as discussed earlier, is essential to distributed operations and problem solving. Computers can both help and hinder this process. If the proper steps are not taken in the design of the CSCW system, the use of a computer will tend to conceal what people are doing, and how well they are doing it. Consequently, it is necessary to compensate for this by assuring a view of the team dynamics using the flow of information. Group awareness is defined as "an understanding of the activities of others, which provides a context for your own activity." (Schlicter et al. 1997) This type of awareness keeps the group members up to date with important events and contributes to the ability to make conscious decisions. Additionally, Greenberg (Greenberg and Gutwin 1996) identifies four types of group awareness needed to collaborate effectively: •
"Informal awareness of a work community is basic knowledge about who is around in general, who is physically in a room with you, and where people are located relative to you."
•
"Group-structural awareness involves knowledge about such things as people's roles and responsibilities, their positions on an issue, their status, and group processes."
•
"Social awareness is the information that a person maintains about others in a social or conversational context: things like whether another person is paying attention, their emotional state, or their level of interest."
•
"Workspace awareness is the up-to-the-minute knowledge a person requires about another group member's interaction with a shared workspace if they are to collaborate effectively."
These various types of awareness traits must be transferred to the user of a CSCW system in order to create situational awareness. To model this awareness in a
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program, an orthogonal array can be used as seen in Figure 13.1. It consists of two different classifications of awareness. Coupling refers to a situation in which two users are focusing on the same work and are aware of each other. Uncoupled means that the two users are unaware of each other. Synchronous refers to being aware of current events, while asynchronous refers to knowledge of past events.
Figure 13.1. Modes of awareness (Schlicter et al. 1997) In addition to group awareness, individual awareness must be taken into account also. This can be described by two characteristics: nimbus and focus. Nimbus refers to the location that a user is occupying. Focus, however, refers to the location where the user is looking or providing his attention. This means that two individuals can have different nimbus but the same focus, and visa versa. An extension of this concept is the metacognitive skill that allows an operator to understand and adapt to the frame of reference of other team members. In order for a team to work at optimum levels, each team member must maintain a mental model of every other team member's nimbus and focus. This will facilitate understanding between team members and greatly aid in communication and group problem solving. This skill should be taught to system users, just like the communication skills. Teambuilding for Performance Teambuilding provides the foundation for the team to work effectively. It is commonly accepted that team development is important to the success of a team, especially one operating in a distributed environment. In spite of this fact, however, "a significant number of companies tend to neglect team building, failing to include it as part of the corporate philosophy, objectives, or reward system." (Huang et al. 1998) This is a fact that must be corrected. In order for a team to function optimally, it must share common values and meanings among its team members. This is necessary to support the collaboration that makes teams powerful organizational tools. The team must be able to "think together"
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which requires a common basis for understanding concepts and discussing problem resolution. A key concept that is supported by the Dialogue Theory (Huang et al. 1998) for teambuilding is the "container". This is the concept that all the ideas, beliefs, and comments that team members have shared are housed within a common container. The larger this container is, the easier it will be for team members to communicate and solve problems. It is vital that an adequate level of psychological safety exist within the team to allow a large container to be constructed. Psychological safety refers to the freedom to brainstorm, present new ideas, and admit lack of knowledge without fear of ridicule. A shared team vision can be a powerful tool in creating long-term commitment in team members, as well as increasing the cohesiveness of the team. A common vision ensures that everyone is working together toward the same end, which fosters unity. This cohesiveness is a critical factor in the performance of the team. Research has shown that team cohesion and conflict have both a reciprocal and a causal relationship. Furthermore, it has been shown that cohesion and performance are co-related. Team building strives to take the individual skills of strangers and convert them into a group of interdependent team members. "Basics such as how to give and receive feedback, how to communicate concisely, and how to use effective listening skills are crucial to a group's effectiveness in tackling the challenge of team building." (Lewis-Clapper 1992) Successful teambuilding will lay the foundation for a successful team. Trust One of the major challenges of distributed teams is building productive relationships between team members. Because it is possible for team members to never meet face to face, barriers can form thereby creating difficulties in building trust. Trust, by nature, is the result of the interplay between cognitive resources and those of emotion that result in the appraisal of another's reliability, competence, and credibility. (Greenspan et. al, 2000) The free interchange of information and ideas in a collective environment may also be impaired as a result of any lack of trust. Ideally, it is necessary for team members to feel psychologically safe and possessing some level of transactional control within the team. Most often personal familiarity may provide the impetus of trust or element of certainty in situations requiring immediate trust. However, often there is little time for team members to interact on a personal level to get to know each other. This can lead to additional team stress and decreased performance. Therefore, an understanding of the role played by media in the development of trust is
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necessary. Specifically, trusted communications require less of a communication channel since a common understanding between the parties already exists. Trust can only exist in an environment where the team members believe the team will be mature and consistent in its behaviors and approach to problem solving. There must be mutual respect among the team members and they must feel valued by the team. "Trust increases as people learn (a) the rewards and punishments for trusting behavior, (b) who to trust and how predictable people are in their trusting behavior, and (c) the shared beliefs and values of the group's collective identity." (Iacono and Weisband 1997) Trust can be extremely hard to build in a distributed environment. However, research indicates that in such an environment trust can be built through actions rather than relationships. One such method of creating trust is through the communication interactions of the team. The theory of swift trust (Iacono and Weisband 1997) asserts that when an individual initiates an interaction, such as an email, trust can be built with those who respond to it. hi other words, team members begin to trust that when they send a message to the team it will be responded to. It is not important whether the response is in agreement or disagreement - but rather whether the team acknowledged it. This acknowledgement signals that the team values his or her contributions. Trust is also built when members of the team do what is asked of them. By demonstrating that they can be depended upon to complete the tasks that they are responsible for, trust is built with the team. In addition, the media in which communications take place provides differing levels of accommodation in the development of trust. The capacity of the media to accurately relay audio, written, and non-verbal cues between participants provides the key to optimum communication and acts as the foundation in the building of trust. (Au, Looi, and Ashley 2001) Studies have proven the existence of links between the delay of the formation of trust and any delay in the ability to gather non-verbal cues during an exchange. (Bos et. al, 2002) Also, elements of information synchrony during communication transactions as a result of media capabilities have been found to be of impact in the establishment of a trusted relationship. (Greenspan et. al, 2000) For example, transactions of an asynchronous mode may offer the most control during the creation of message content, as well as, providing an easy manner of archival and forward, however, synchronous exchanges offer the greatest opportunity for real-time feedback to dispel misunderstanding. (Greenspan et. al, 2000) The issue of trust must be addressed and answered by management in any activity in order to assure success. Activities should be continuously monitored and slowly transitioned from safe to areas with more risk as trust builds within the team. Understanding of the communicative process and the links between that process and the element of trust is fundamental in assuring organizational success. The proper
Applying Distributed Teams in a Command and Control Environment 175 employment of communication technologies in the correct manner to capitalize on the benefit of the human interaction is pivotal in securing trust within the team. Allegiance The manager has another important task when dealing with distributed teams (especially GDTs), which is to manage the team allegiances. Often the team is composed of members who work for different companies, live in different countries, and operate different subsystems. To pull all these different individuals together into a single team with a common goal is a daunting task. The manager must be aware that networks rather than the overriding goals of the project usually motivate members of GDTs. Networks are groups of individuals who share common interests and jargon. It is usually more important to the individual to look good in front of this group of peers than to meet the project goal. The manager must find ways to provide team members network recognition while working toward the goals of the project.
HUMAN FACTOR RECOMMENDATIONS Team building is a process and not an event. A process must be designed to intentionally create the behaviors desired from a team operating in a distributed environment. This process must be repeatable, and its outcome predictable. It must build trust, and create shared meanings, values and goals for the team. In this way the corporation can successfully and consistently create effective, high performing teams. This training is the only way to constrain the unpredictability introduced into the system by incorporating humans. The team should be introduced in an informal manner outside the structured environment of the team. Since it is not possible to have such interactions prior to the start of a meeting - perhaps over coffee - another means must be provided. One possibility is for each team member to construct a personal web page. This page should include items such as hobbies, interests, age, gender, a photograph, even favorite jokes or cartoons. In this manner team members can begin to feel as if they know the other members. The recommended solution is to arrange a meeting of the team at the onset of the project. The increased performance from the team may warrant the cost incurred, however, additional research is required to validate this belief. This initial meeting should be structured such that the team is taken through the teambuilding process. Regardless of whether the initial teambuilding occurs in a virtual environment or face to face, the use of a facilitator is strongly recommended. The facilitator should
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work parallel to the team and serve to assist in the team forming while not interfering with the decisions made by the team. This facilitator should use dialog theory to assist the team in creating a large container of shared meanings and ideas. The initial meetings often set the tone for the team, and the facilitator must work to empower the team members and release their potential. For teambuilding, it is necessary that the following conditions be met: •
Everyone on the team must be present.
•
Adequate time must be set aside with no interruptions.
•
The purpose for the training must be established with the team.
•
A structured format with clear and measurable objectives should be used.
•
Future actions for team members to take should be determined.
•
A follow up to measure the results and determine the next step should occur.
Since the basis of teambuilding is good communication, the facilitator should focus discussion on the various aspects of effective communication. In this way, the group awareness of the attributes of effective communication will be elevated. Furthermore, the special demands placed on communication in a distributed environment should be pointed out. The expectations for the manner in which communication takes place should be set forth, and explanations of how interaction can build trust should be made. Additionally, the facilitator should focus on the concepts of leadership, individual/group goals, norms, roles, cohesiveness, and situation.
CONCLUDING REMARKS This paper demonstrated the various complexities involved in implementing distributed teams in a command and control environment. Because of these complexities, it is recommended that a carefully planned process be formed to meet the needs of the distributed team. The proper tool or tools should be employed to ensure the proper communication pathways are present and provide adequate group situational awareness and decision support. This tool should be designed as an integrated system based on the specific use and end user requirements. Furthermore, the use of a facilitator to assist in teambuilding is highly recommended. The facilitator should have excellent communication skills, and be knowledgeable in the issues discussed within this paper. It is recommended that proper training be provided for team members in the form of an initial teambuilding session. Obviously a face-to-face session would be the best means for conducting this
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training, but if this is cost prohibitive, current technologies should be designed into the process to compensate for the decreased richness of the communication channel.
REFERENCES Au, R., M. Looi, P. Ashley (2001). Automated cross-organizational trust establishment on extranets. Workshop on Information Technology for Virtual Enterprises, Proceedings of, 3 - 11. IEEE Computer Society, Washington, DC. Bos, N., J. Olson, D. Gergle, G. Olson, and Z. Wright (2002). Effects of four computer-mediated communications channels on trust development. Conference on Human Factors and Computing Systems, 135 - 140. ACM Press, New York, NY. Caskie, R., Lewis-Clapper (1993). The Roles of Team Skills Training and Team Building in Improving Performance. Conference Record for 1992 IEEE fifth Conference on Human Factors and Power Plants, 1992, 356 - 358. Fitzpatrick, G., S. Kaplan, and T. Mansfield (1998). Applying the Locales Framework to Understanding and Designing. Computer Human Interaction Conference, 1998. Proceedings. 1998 Australasian, 1998, 122-129. Greenberg S., Gutwin C , and Cockburn A. (1996). Using distortion-Oriented Displays to Support Workspace Awareness. Technical Report, Dept of Comp. Science, Univ. of Calgary, Canada. Greenspan, S., D. Goldberg, D. Weimer, and A. Basso (2000). Interpersonal trust and common ground in electronically mediated communication. ACM Conference on Computer Supported Cooperative Work, Proceedings of 251 - 260. ACM Press, New York, NY. Gundry, J. and George Metes (1996). Team Knowledge Management: A ComputerMediated Approach, http://www.knowab.co.uk/wbwteam.html. Huang, W., K.K. Wei, B. Bostrom, L.H. Lim, and R.T. Watson (1998). Supporting Distributed Team-building Using GSS: A dialogue Theory-based Framework. IEEE Proceedings 31s' Annual Hawaii International Conference on System Sciences, 1998, 98-107. Iacono, C. S., Suzanne Weisband (1997). Developing Trust in Virtual Teams. Proceedings of the 30lh Hawaii International Conference on System Sciences, Vol: 2, 1997, 412 - 420. McDonough III, E. F. and D. Cedrone (1998). Managing Globally Distributed Teams: Beyond Technology Solutions. Engineering and Technology Management, 1998. IEMC '98 Proceedings, 1998, 529 - 534.
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Schlicter, J., M. Koch, and M. Burger (1997). Workspace Awareness for Distributed Teams. Proc. Workshop Coordination Technology for Collaborative Applications , Singapore, W. Conen (ed.). Stokes, A. F., J. A. Pharmer, and K. Kite (1997). Stress Effects Upon Communication in Distributed Teams. Systems, Man, and Cybernetics, 1997. Computational Cybernetics and Simulation., 1997 IEEE International Conference on,
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
KNOWLEDGE BASED VIEW ON INDUSTRIAL DISTRICTS
Kalevi Kylaheiko, Lappeenranta University of Technology, Lappeenranta, Finland Paavo Okko, Turku School of Economics, and Business Administration, Turku, Finland" Pekka Salmi, Lappeenranta University of Technology, Lappeenranta, Finland
INTRODUCTION "When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighborhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. " Alfred Marshall (1952, originally published 1896) Over the last twenty years considerable efforts have been made by regional economists to model the dynamics and path-dependent characteristics of regional agglomeration using the Marshallian "industrial district" idea as a point of departure. The catalysts for regional policy debates have been dramatic changes in economic development trends, which include a new wave of economic growth in a number of regions led either by spatially concentrated networks of small and medium sized enterprises (the so called third Italy case) or by a large high-tech company (the so called hub-and-spoke industrial district, see Salmi et al 2001).
Dr. Kalevi Kylaheiko is Professor of Economics, esp. Technology Research and Vice Rector of Lappeenranta University of Technology, Lappeenranta, Finland. Email:
[email protected] " Dr. Paavo Okko is professor of Economics and Vice Rector of Turku School of Economics and Business Administration, Turku, Finland. Email:
[email protected] Mr. Pekka Salmi is Researcher at Lappeenranta University of Technology, Lappeenranta, Finland. Email:
[email protected]
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Alfred Marshall stressed in the late nineteenth century that small firms in the same industry are able to realize economies of scale external to the firm through colocation in addition to internal learning effects called internalities by Marshall. For Marshall, market success was basically derived from increased specialization and the development of more effective industrial organization. One way in which this came about was from the concentration of production in particular areas, called industrial districts. Marshall proposed three main reasons for regional agglomeration of industry (or using his own concept "localization"). According to Marshall, localization a) provides a pooled market for workers with specialized skills (refers to a set of horizontally linked firms) b) facilitates the development of specialized inputs and services (refers to the development of vertical activities, in a chain of suppliers and buyers) and c) enables firms to benefit from technological spillovers (Maskell&Malmberg 1999) Furthermore, Marshall argued that industrial districts' effects are long-term, path dependent and cumulative. He stressed particularly that knowledge and its transfer to other economic agents is an important factor of industrial atmosphere (... "as it were
in the air"). The renewed interest in the industrial districts in the late 1970s was fuelled particularly by the empirical phenomenon called the "Third Italy". This concept was used to describe the fast growth of small firm districts of the North East and Center of Italy, mainly in the textile (Benetton), shoe, furniture, tiles, and mechanical engineering sectors (Schmitz & Musyck 1994). In addition to traditional Marshallian industrial district and Third Italy characterizations Markusen (1996) has identified three additional types of industrial districts, with quite disparate firm configurations, internal versus external orientations, and governance structures: a hub-and-spoke industrial district (revolving around one or more dominant, externally oriented firms), a satellite platform (an assemblage of unconnected branch plants embedded in external organization links), and the stateanchored district (focused on public-sector institutions). In the next chapter we'll show that these concepts can be interpreted within the Marshallian context as well. When dealing with the Finnish Nokia phenomenon the most interesting characterization is no doubt the hub-and-spoke industrial district, where an industry and its suppliers cluster around one or several core firms. In these districts, major export-oriented industries are dominated by large, vertically integrated firms or nonprofit institutions that form its 'hub' or core. The hub then generates a second tier of companies (suppliers and complementary activities) that form the 'spoke of a wheel'. There may be strong links between the core firm and suppliers, if suppliers are dependent on the hub, or weaker links, if spoke firms just benefit from sheer
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proximity and agglomeration economies. If over time the anchors evoke a critical mass of agglomerated skilled labor and business services around them, they may set off a more diversified developmental process where small firms in particular industry are able to start up and thrive in the shadow of a major firm. That is basically what really happened in Finland in the 1990s.
WHAT MARSHALL REALLY SAID? A RE-INTERPRETATION According to the basic distinction of Marshall there are both internal and external economies, hi terms of a modern knowledge type classification, this Marshallian distinction can be interpreted so that generic and codified knowledge generates external economies through spill-overs, whereas know-how-based tacit knowledge mainly generates firm-specific path-dependent internal economies. Together these two parts contribute to the rise of static and dynamic scale economies, which arise when technological and organizational changes result in capacity expansion and reductions in cost per unit. This relationship is often simplified as the learning curve that relates (decreasing) unit costs to output and thereby constitutes the basis for the product cycle and dominant design ideas widely used in strategic technology management literature. We start our more detailed analysis from internal economies ("internalities") which result from localized firm- or region-specific know-how. In addition to pure technical indivisibilities leading to increasing returns to scale, internalities are based on different forms of internal learning. Organizational routines coordinate processes through which organizations utilize their idiosyncratic assets in order to perform distinctive activities in radically uncertain conditions where rule-following behavior is needed in order to stabilize complexities and environmental disturbances. Clusters of these organization-specific performing activities constitute organizational capabilities (Chandler 1990). The organizational capabilities which are most critical to the survival of organizations can be called distinctive or core capabilities. A closely related concept is "dynamic capability" introduced by Teece et al (1997), which can be defined as an ability to realize an organization's latent competencies by renewing, augmenting and adapting core competencies over time by utilizing relevant external complementary
1
In Marshall's own words (1952: 221) "We may divide the economies arising from an increase in the scale of production of any kind of goods, into two classes - firstly those dependent on the general development of the industry; and secondly, those dependent on the resources of the individual houses of business engaged in it, on their own organization and efficiency of their management. We may call the former external economies and the latter internal economies."
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assets if necessary. Dynamic capabilities are needed when absorption and scanning processes of the so-called dynamic learning cycles are realized. External (dis)economies (or externalities) are defined by Antonelli (1992: 7) as "all forms of direct interdependence among the members of an economic system that do not operate through the market mechanism or that are not fully mediated by prices". They may be positive or negative, hi the context of technological change, the most important ones are technological, consumptive, and pecuniary externalities (Kylaheiko 1995). Technical economies are due to increasing returns to scale at the local firm level and we interpret them as "internalities", whereas technological externalities occur at the industry level where the behavior of a firm is affected by other firms through technological interrelatedness and complementarities. Technological externalities play a great role when we try to explain the emergence of the so-called regional networks/clusters. The networks make it possible for participating regional firms to exploit both the advantages of variety (through specialization due to internal technical economies of scale) and cooperative complementarity (through networking due to technological externalities). An important subset of technological externalities can be called adoption externalities that depend upon interdependencies between innovators and potential users (adopters). A situation where the early adoption of a new technology by the fastest firm decreases the profits of other firms in the industry is an example of a negative adoption externality. This externality gives rise to a first mover's advantage and may generate fierce patent races and problems of pre-emptive competition. On the other hand, if the adoption of new generic technological knowledge also benefits other firms, one can speak about technological spill-overs or positive adoption externalities. They may generate some Schumpeterian "swarming effects" through imitation-based diffusion mechanisms. As will be noticed in the next chapters, the main implications of the new growth theory are fundamentally based on the idea of endogenizing of technological externalities. Network infrastructure characteristics of a technology together with compatibility with users (or other technologies) generate frequency-dependency and lock-in tendencies, known as positive network externalities (Katz and Shapiro 1985) which increase as a function of the number of users (cf. the use of cellular phones or computer hard- and software). There are also demand or consumption externalities which depend upon the interdependencies of consumers' utilities so that a demand for a good is affected either by changes in the demand for other goods or the demand for the good itself. Pecuniary externalities occur when interdependencies at the industry level (say, networks between firms) affect the changes of relative factor prices so that the cost function of a single firm also changes, hi the regional network case, a firm's total costs are the function of the output of the whole network, which may be of great advantage. For instance, a network of small regional firms can as a collective have an access to lower-cost labor inputs,
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finance, advertising or generic R&D resources due to the increased bargaining power. This is even easier together with one large "hub" firm. As Marshall (1952) already pointed out, external and internal economies cannot be analyzed in the static competitive framework, since economies typically result in multiple equilibria and imperfect competition. For instance, the presence of non-rival generic technological knowledge necessarily implies a non-convex production set and leads to a situation where neither the static analysis nor perfect competition work any more because of positive spill-overs. Mainly for that reason these important phenomena did not receive much orthodox attention before the rise of the new industrial organization theory (the pioneers were Dixit and Stiglitz 1977) and new endogenous growth theory. When internalities and externalities do matter, the market mechanism cannot work optimally since prices no longer convey all the relevant information. The insufficiency of price information makes it necessary to adopt other forms of coordination (e.g. direct intervention, explicit cooperation, vertical integration), as Richardson (1972) managed to show. From this angle, the recent rise of regional networks and other trust-based cooperative solutions can partly be interpreted as devices to internalize technology-related externalities and to solve principal-agent problems deeply embedded in R&D management at the firm level.
RECENT TENDENCIES O F MODELING AGGLOMERATION Even though Marshall made his important contribution to the subject already in the late nineteenth century, the real progress in developing a truly dynamic theory of regional growth did not come until the 1950s. At that time economists working on both sides of the Atlantic discovered an association between Schumpeter's earlier writings on innovation and the idea that dynamically growing places are the locales of innovative firms and industries. In his influential article Perroux (1955) described 'growth poles' as regions in which 'lead firms' have an above average rate of productivity growth, or an increasing market share. The effects of lead firms' innovativeness and growth then spread to other firms and economic actors through various linkages in economic space. This concept refers to Marshall's 'external economies' and leads us directly to the modern "hub - and - spoke" idea. There were also other academic currents that took part in the debate. In the United States, the notion of new industrial spaces was launched in the late 1980s. It combines insights from the literature on industrial districts, the flexible production systems, social regulation and local community dynamics. The Porterian (1990) cluster of innovation approach can be viewed as a variant of this new industrial spaces literature. Porter's view of the sources and nature of technological development,
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localized processes and the gradual 'networking of the clusters' laid the ground for the spatial operationalization of regional clusters. Saxenian's (1991) work on regional innovation in Silicon Valley is another important reference on this topic. In the 1990s, economic geographers begun to draw upon the technological learning literature and focus on the nature and role of geographically-constrained 'untraded interdependencies' such as technological spillovers, knowledge circulation, technical know-how and learning among the workforce. They were interested in what ways innovation is concentrated within region-based networks, or 'learning regions'. Furthermore, the resource-based view of the region has also been under consideration; the latest argument being 'the capabilities theory of the region' (Lawson & Lorenz 1999; Salmi et. al. 2001). hi this model, regional capabilities are viewed as a combination of the human and physical resources available and the region's specific institutional endowment, which allows knowledge creation and embeds knowledge (Foss 1996). Our knowledge-based view of regional agglomeration can be viewed as its dynamized extension. All the theories of regional innovation systems mentioned above are more or less indebted to the evolutionary theory of technical change, which highlights that innovation is an interactive path dependent learning process. This view can easily be combined with the more formal self organization view introduced in the former chapter 2. At the more pragmatic level Lundvall (1992) has argued that the national innovation system is a social system and that a central activity in this system is learning. Lundvall also perceives firms as knowledge accumulating institutions that need know-how to keep pace with product and process innovation. The institutions also affect the creation, storage, distribution, use and destruction of knowledge. Following the lead of Maskell and Malmberg (1997) we can conclude that the learning process-based view thus has two main implications: (a) History matters. Firms develop various routines and capabilities in order to cope with the uncertain and incremental character of learning processes. Experienced success then makes such routines extraordinary durable and this in turn will tend to establish path dependent place- and industry-specific 'learning trajectories'. (b) Proximity matters. Although development in transportation and communication technology allows more long distance interaction, certain types of knowledge exchange continue to require direct face-to-face contact. The more tacit the knowledge involved, the more important is the spatial proximity. Foss (1996) argues that there are two prerequisites for a capability to be a source of sustaining competitive advantage to a region. The first is due to the collective nature of the capability, which means that the capabilities of an individual employee can be
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transferred to other geographical regions, but a regional capability, embedded in patterns of inter-firm networking cannot. The second prerequisite refers to the largely tacit nature of underlying regional capabilities. If imitation of firm- and regionspecific capabilities is difficult, firms having access to that set may obtain sustainable innovation profits.
AGGLOMERATION AND ENDOGENOUS REGIONAL GROWTH When looking at regional development from the macro perspective one has to conclude that the concept of agglomeration economies is used either explicitly or implicitly in most models of regional development (Okko 2000). Agglomeration economies, of course, refer to the Marshallian externalities arising from skilled labor, specialized suppliers and knowledge spillovers (cf. Krugman 1991, 36-38). The links between firms, institutions and infrastructures in a given region thus give rise to economies of scale and scope. Moreover, knowledge and its transfer among economic agents - the third ground for externalities - is especially important for the firms' strategies in the industrial district. Not so surprisingly, Marshall's notion of increasing returns in the process of spatial agglomeration is also one animating idea of the new endogenous growth theories. According to them, when individuals or firms accumulate new capital (including human capital; Lucas 1988), they also contribute to the productivity of capital held by others. Accumulation of the inputs that generate positive externalities is the source of overall increasing returns. This in turn LEADS to sustained growth in the economy as Romer (1986) argues. Human capital has internal effects just like physical capital or any other input factor. However, the external effects of human capital are more crucial. By emphasizing this Lucas sees direct links between the growth theory and urban studies. Lucas (1988) refers to Jacobs (1984) and agrees with her emphasis that a city, economically, is like the nucleus of an atom: if we postulate only the usual list of economic forces cities should fly apart. For the theory of production a city is simply a collection of factors of production - capital, people and land - and land is always far cheaper outside cities than inside. Why don't capital and people move outside? According to Lucas, the 'force' we need to postulate for the central role of cities in economic life is of exactly the same character as the 'external human capital'. If so, then land rents should provide an indirect measure of this force, in much the same way as schooling-induced earnings differentials provide a measure of the productive effects of internal human capital. However, agglomeration also creates diseconomies, i.e., congestion costs. There are pecuniary diseconomies like high land rents and property prices and traffic
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expenses, but there are also many kinds of social costs. Sometimes only the cost side is taken into consideration on arguing that urbanization is expensive for the society. But as mentioned earlier, the fact that cities do not fly apart, tells that there are also benefits balancing these costs. Agglomeration economies - congestion costs trade off is important in explaining the dynamics of urbanization, but it is dangerous to build an optimal city size theory on that. It is easy to agree with Richardson (1995) that it is better to think about regional structure in general than about optimal size of different units. External effects of human capital are linked with both production and consumption. A distinction between the stock of shareable ideas and human capital as an excludable input for production of goods and for increase of the stock of ideas is fruitful. It means, e.g., that possibilities of benefiting from the idea stock differ in different environments. In a city or in an agglomeration the value of human capital is greater. We may say also that the stock of ideas available to us is a function of the goods we can buy and the tasks we can do. Therefore, in the case of transportation costs, it is better to go where the goods and tasks are. We may realize shareability of ideas by moving to a better environment. A concentration of people not only increases the idea stock (innovations), but it also causes a better realization of existing ideas into active human capital. Empirical studies on agglomeration have mainly concentrated on static externalities (localization and urbanization economies). Dynamic externalities mean that prior information accumulation in the local area has an impact on current productivity. There are "local trade secrets". Dynamic externalities may also be divided into localization economies (Marshall-Arrow-Romer —type) based on ongoing communications among local firms and urbanization economies (Jacobs-type) based on knowledge or ideas associated with historical diversity. Empirical results (Henderson et al 1995) indicate that for mature industries localization externalities are important. These externalities explain that a certain industry is located in a certain city, and these concentrations are quite stable in the history. New high-tech industries are more likely to take root in cities with a history in industrial diversity. Innovative process require diversified urban environment, bur certainly innovations are also breaking historical rules. New growth theory models suggest that what is important for growth is integration not into an economy with a large amount of people but rather into one with a large amount of human capital. According to Romer (1990a) growth seems to be correlated with the degree of integration info worldwide markets but not closely related to population size or density. Integration means interaction of 'idea sector' and 'good sectors'. If there is a difference in the initial endowment of regions in the level of technology, the flow of goods means an extra gain by increasing amount of ideas that can be used in each region in production of goods. An increase in the size of
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market or in the trading area in which a region operates increases the incentive for research and thereby increases the share of investment and the rate of growth of output, with no fall in the rate of return on capital (cf. Romer 1990b). In case of mobility, it is very crucial whether the effects of human capital are entirely internal of whether they have external benefits that spill over from one person to another. In the latter case the wage rate of labor at any given skill level will increase with the wealth of the country in which he is employed (Lucas 1988). Not at all surprising conclusion is that labor will move from poor regions to wealthy ones. But the result is interesting enough in the sense that if offers an explanation within the rigorous theory to the question why labor mobility is not equalizing wage levels. It has been an unsolvable question to the static neoclassical theory.
OPENING UP THE REGIONAL BLACK BOX: TOWARDS A KNOWLEDGE BASED REGIONAL MICRO FRAMEWORK Although the endogenous growth theory reveals the basic formal (macro) mechanisms of regional agglomeration it leaves untouched knowledge-related micro mechanisms and structures. Hence, opening up the regional black box still remains to be done. Our focus is on the knowledge-based externalities and evolutionary mechanisms that lead to knowledge creation and enhanced regional capabilities. Although Marshall asserted that "knowledge is our most powerful engine of production", this idea went unnoticed for decades mainly because neo-classical economics characterized knowledge as a codified public good - not as a source of "monopoly" profits. The rise of endogenous growth theories in 1980's brought the role of knowledge back to the attention of economist. Moreover, the proponents of evolutionary economics (Nelson and Winter 1982; Kylaheiko 1995; 1998) gave a more detailed view about knowledge when they analyzed the mechanisms through which knowledge could be created, replicated, transferred and integrated. As mentioned in Chapter 2 we divide knowledge into three basic categories: tacit, generic and codified. Tacit knowledge is assumed to be hard to transfer "knowhow" which is specific to individuals, organizations or geographic locations. In case of a firm, it gives rise to cumulative learning-based internalities, which enable to exploit the economies of scale and utilize better outsourcing opportunities. Furthermore, replication and partial replication are the basic mechanisms that enable firm-specific trajectories and generate differences between firms. Generic knowledge and codified knowledge, on the other hand, are transferable forms of knowledge, which lead to network and other knowledge-based externalities. The most important mechanisms related to them are knowledge transferring and knowledge creation
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through integrating tacit know-how with generic knowledge (Blomqvist and Kylaheiko 2000). In a technologically dynamic and highly uncertain world, local milieu effects must be seen in conjunction with the parallel importance of wider inter-firm networks which serve as means of access to information on rapidly changing environment. National and global innovation networks have thereby turned out to be very important in many strategic areas of local high technology firm activity: e.g. for external innovation inputs, inter-firm research collaboration, and scientific and professional labor markets. Learning through networking incorporates individual learning into a social pool of knowledge available in the region. When a part of the produced knowledge within the firm (or university, research institute etc.) becomes part of the general pool of knowledge in the region, one may say that knowledge spills over or there are knowledge externalities.
RESOURCES, CAPABILITIES AND REGIONAL COMPETITIVE ADVANTAGE We use the label ''knowledge-based view' as an umbrella concept, which covers several economics and strategy based theories. They include e.g. 'resource based', 'competence based', 'core competence', 'capabilities' and 'dynamic capabilities' views of the firm (Foss 1996; Blomqvist and Kylaheiko 2000). The resource based view of the region can be presented (to a certain extent) in analogy with the resource based view of the firm. The roots of this approach are in the seminal work of Penrose (1959) who conceptualized firms as collections of 'productive resources' (both physical and human) which in turn form the foundation for the firm growth. The term 'resource based' was later introduced by Wernerfelt (1984), who viewed the firms as bundles of firm-specific resources rather than as sets of Porterian product-market positions. Thereafter, the resource-based approach has also led to an improved understanding of the underlying conditions for sustained competitive advantage, as the success of a firm was determined by its distinctive, valuable, rare, idiosyncratic, and non-substitutable (the VRIN-attributes) capabilities. Foss and Eriksen (1995) argue that it is possible to arrive at a resource-based analysis of the external environment as well. Their analysis is centered on the notion of 'industry capabilities' which closely relates to Marshall's notion of 'external economies' analyzed in Chapter 2. Foss and Eriksen (1995) make two important distinctions between resources and capabilities. The first distinction is that resources can be both tangible (physical capital) and intangible (human capital), while capabilities are always intangible and emerge from the interaction between multiple agents (cf. Teece et al 1997 for
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terminology). Furthermore, the economic distinction is that resources are always tradable, while capabilities are non-tradable, albeit built from tradable resources. Industrial district literature emphasizes external capabilities, which emerge from the high degree of vertical (and horizontal) disintegration. However, Foss and Eriksen argue that the way through which firms acquire resources from wellorganized factor markets and reliable suppliers refers more to industry resources, not capabilities. However, vertical disintegration and specialization combined with subcontracting may lead to 'collective capability', which consists of e.g. ability to rapidly turn out new designs or spawn new products. This is something that emerges often spontaneously from the interaction between incumbent firms. Similarly, the geographical proximity promotes the development of trust-relations which reduces transaction costs, thus generating networking opportunities. Trust may therefore also be seen as a capability in industrial districts. Because of these 'collective' and 'emergent' characters capabilities cannot be separated from the firms that created and maintain them. This makes capabilities hard to transfer over regional boundaries. One thing worth stressing is the role of complementary capabilities. The presence of industry capabilities may lead to entry barriers, since these capabilities require investments in co-specialized resources and capabilities on the firm level before entrants can access them. In order to benefit from the industry capabilities, entrants must accumulate resources and capabilities that are complementary to the industry capabilities. Now we are in the position to introduce our knowledge-based model of regional competitive advantage. This dynamized view owes much to evolutionary economics and the basic mechanisms revealed by it. Regardless of some differences in the focal issues, both approaches state that it is a firm's path-dependent knowledge endowment which results in heterogeneity of firms (Winter 1995; Kylaheiko 1995). The evolutionary theory of the firm combines the Schumpeterian innovation approach with the behavioral theory of the firm in a way which can be interpreted from the Hayekian self-organization perspective as well. There are three mechanisms that are at the basis of economic evolution: variation, selection and retention. Variation results from firms' innovative search activities, which aim at enhanced capabilities. The founding of new enterprises and entrepreneurship itself can also be interpreted as sources of variety. Variation generates innovations and "new combinations" on which selection then works by means of competition. The selection environment, consisting of markets and institutions, thus drives less effective organizations out of business. Retention constitutes the mechanisms for preservation, replication, or propagation of positively selected forms and functions. Retention thus means that organizations try continuously to replicate their existing path-dependent routines and capabilities in order to enhance their prospects of realizing success. More
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importantly, replication can also be partial, which means that there is room for proactive adaptational changes. This means that the firms can "learn by learning". We are now ready to outline the knowledge-based framework for regional competitiveness. Figure 14.1 below draws together previous sections of this paper.
Fig. 14.1: Knowledge based view of sustainable regional competitive advantage (cf. Salmi et al 2001) In this framework, knowledge is regarded as one of the most important regional resources. While a distinction between knowledge base and resources is often made at the level of individual firms, the knowledge-based view of the economy is easier to comprehend in terms of a broader definition of resources (i.e. resources are encapsulated assets and capabilities that are contained within firms). As mentioned
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above, e.g. entrepreneurial initiatives take the form of resource recombinations, which means that a bundle of tangible and intangible assets as well as knowledge is combined in order to produce goods, provide services etc. Moreover, the knowledge creation itself is usually considered to be the result of new combinations of elements of existing knowledge and other resources. On the other hand, one has to remember that knowledge, and tacit knowledge in particular, tends to be embedded in the region. This means that knowledge creation and accumulated knowledge are more important factors for regional capabilities and 'economic' competencies than other resources (financial, physical, etc.) which can be acquired more easily from outside. The main reason is, of course, that the most important knowledge-based capabilities are firm-specific, scarce, hard-to transfer, hard-to-substitute, and immobile by their very nature. It is thus essential to recognize that regional competitiveness is crucially dependent on knowledge creation and collective (or economic) learning.
NOKIA-BASED REGIONAL AGGLOMERATION IN FINLAND The Finnish nominal GDP in 1999 was 6.8 times as large as in 1975, but the nominal gross value added of ICT industries was then 21 times as large as it was in 1975. Finland's rapid growth during the 1990's has been export driven and based on expansion of ICT cluster, especially on the very exceptional rise of Nokia Corporation. Nokia with its tremendous productivity enhancing effects has had a dual role as a catalyst of the whole Finnish innovation system. On the one hand, Nokia has effectively utilized resources and grants from the public innovation system (public research and development funding, effective educational system as a whole, university research opportunities, highly skilled labor, etc.). On the other hand, Nokia has managed to produce a huge amount of new manufacturing- and service-related resources and capabilities that have been diffused widely outside the company, thus contributing to the rise of the whole Finnish economy. Hard-to-transfer firm specific know-how has spread from the corporation to Nokia's 500 supply chain partners because of large supplier networks developed by the company. Also universities have profited from having the latest knowledge in the field through an extensive technology transfer system generated during the 1990's. The R & D intensity of the Finnish economy has been increasing rapidly and it is now in relative terms the second highest in the world (3,5 %/GDP in 2002). Interestingly, the private sector has covered about 70 % of the R&D-input, and the share of Nokia has been a half of that. It means that Nokia and the public sector have invested into R&D approximately a same amount. The share of high-tech products in total exports is about 20 %. Ten years ago Finland was one of the least ICT-
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specialized industrial countries; now it is among the most ICT-intensive countries in the world (Koski, Rouvinen&Yla-Anttila 2002, 155). At the same time the regional concentration of the economy has been rapid. The share of the four largest urban subregions in the GDP has increased to the level of 50%. Those agglomerations are not large in respect of population (Helsinki region 1.2 million, the second largest (Tampere) only 0.29 million) but they are strongly linked with the R&D expenditure and with the ICT cluster. The Finnish economy has been a successful case of adjustment to the global competition. But also in Finland some criticism against globalization came up. One main argument has been that market driven development has resulted in regional concentration. Internal migration has increased to a high level. At the end of the 1990's only 12 sub regions out of the total of 85 have had a positive migration balance. It is interesting to look at what kind of connections exists between regional concentration and knowledge-based growth. A simple regression between the migration performance (net migration in 2000-01, NM) and the per capita R&D expenditure (million FEVI per capita, in 19992000) in 17 sub regions of highest R&D-expenditure show the following result (tvalues in brackets): NMoo-oi = -0,003 + 5,O8R&D99_oo (-1,28) (2,98)
R2 = 0,37 n=17
Even if the result above is not good in terms of econometric criteria it makes quite clear that the expanding regions in Finland are strong also as to the knowledgebased growth. This tendency is certainly not enough to explain migration in general. However, we know from other recent migration studies (e.g. Ritsila 2001; Beaudry and Swann 2001) that human capital is effectively concentrating via the migration process. The probability of moving to urban centers is clearly higher among highly educated people. The so-called Nokia phenomenon is especially interesting, since it started in a small country without large urban agglomerations. But it has created knowledgebased industrial districts, which are strong agglomerations in this small country. The pattern has had a quite typical hub-and-spoke -type structure. Via global networks those districts belong to knowledge concentrations capable to create external effects of human capital even if local concentrations are rather small, e.g. Oulu with a 0.17 million population but having a very strong high-tech concentration. Recent Finnish productivity studies (cf. Bockerman 2002) tell us that the industry structure seems to be an important determinant of labour productivity in Finnish regions. Another interesting feature strongly evidenced by Finnish data seems to be that the positive impact of ICT manufacturing is tightly limited to its direct
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contribution. The Oulu region is a good example of that. There have not been strong externalities to the other sectors in a region. In addition, the share of ICT services has no contribution to the labour productivity of different Finnish regions. The roles of ICT manufacturing and ICT services differ sharply in the determination of regional labour productivity. The "New Economy" in Finland has emerged more from an expansion in production of ICT products than from the use of new opportunities offered by the ICT applications and services as such (Jalava - Pohjola 2002). Naturally, the production of ICT goods is regionally more concentrated than the use of ICT services. In this sense Nokia has promoted the formation of knowledge-based industrial districts in a very direct way by expanding its own production in certain locations. To how large extent it has succeeded in creating regional tacit knowledge and long lasting regional knowledge base remains to be seen in the future. That will be tested especially in circumstances in which the rapid expansion is over and new challenges are coming up. Anyway, there are good reasons to think that business capabilities of Nokia dominated areas are much stronger than they have used to be.
CONCLUSIONS In this article we have analyzed the theoretical underpinnings of the Marshallian agglomeration phenomenon in terms of micro and macroeconomic determinants. Our main claim has been that the regional structure of an economy is becoming an increasingly more important development factor and catalyst from the perspective of human capital accumulation and endogenous innovation dynamics. In the theoretical part we emphasized the importance of the so-called capability based view as a basic explanation pattern of underlying micro mechanisms relevant for successful regional development. In the last part of our article some rather casuistic empirical evidence concerning Finnish regional agglomeration tendencies was launched in order to shed more light on the so-called Nokia phenomenon. The first wave of the new economy has meant in Finland rapid regional concentration, even if the ICT might have helped in avoiding obstacles of distance as well. The death of distance may happen in some cases but the benefits of proximity seem to dominate. The positive growth options of agglomeration economies have so far been exercized especially in the production process, but the wide spread use of ICT services may create new opportunities for all regions at the same time. In our view, the future development will mainly depend on how effectively different regions can exploit new services generated through ICT. In sum, our knowledge-based view on regional competitive advantages covers both the production and the use of new technologies. So far it seems to be so that the
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large regional disparities between different regions are most likely to remain, if the still dominating old economy-related parts of the Finnish manufacturing system cannot better utilize the opportunities opened up by the new ICT technology. However, some positive productivity improvement signs especially in the field of paper and pulp industry can already be recognized even if they are not yet strong enough to counteract regional concentration tendencies. More effective and more regionally motivated technology and innovation policy will be needed as well. We are tempted to think that the capability-based view on regional development will be fruitful when designing it.
REFERENCES Antonelli, C. (1992): The Economic Theory of Information Networks. In: The Economics of Information Networks (C. Antonelli, ed.), pp. 5-27. NorthHolland, London. Beaudry, C. and P. Swann (2001), Growth in Industrial Clusters: A Bird's Eye View of the United Kingdom, Stanford Institute for Economic Policy, Discussion Paper No. 00-38. Blomqvist, K and K. Kylaheiko (2000), Main Challenges of Knowledge Management: Telecommunications Sector as an Example, A paper presented at the Ninth International Conference on Management of Technology, Miami, USA. Bockerman, P. (2002), Understanding Regional Productivity in a Nordic Welfare State: Does it Matter, Discussions Paper No. 798, The Research Institute of the Finnish Economy, Helsinki, Finland. Chandler, A.D. (1990): The Enduring Logic of Industrial Success, Harvard Business Review, 130-140. Dixit, A. and Stiglitz, J. (1977), Monopolistic Competition and Optimum Product Diversity, The American Economic Review, 67, 297-308. Foss, N. (1996), Higher-order Industrial Capabilities and Competitive Advantage, Journal of Industry Studies, 3, 1-20. Foss, N. and B. Eriksen (1995), Competitive Advantage and Industry Capabilities. In Resource-based and Evolutionary Theories of the Firm: Towards a Synthesis (C. Montgomery, ed.). pp. 43-69, Kluwer Academic Publishers, Boston. Harrison, B. (1992), Industrial Districts: Old Wine in New Bottles? Regional Studies, 26, 469-483. Henderson, V., A. Kuncoro, and M. Turner (1995), Industrial Development in Cities, Journal of Political Economy, 103, 1067-1085.
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Jalava, J. - Pohjola, M. (2002) Economic Growth in the New Economy: Evidence from Advanced Economies, Information Economics and Policy, 14, 189-210. Jacobs, J. (1984), Cities and the Wealth of Nations, Random House, New York. Katz, M.L. and C. Shapiro (1985), Network Externalities, Competition, and Compatibility, The American Economic Review, 75, 424-440. Koski, H., P. Rouvinen and P. Yla-Anttila (2002), ICT Clusters in Europe, The Great Central Banana and the Small Nordic Potato, Information Economics and Policy 14, 145-165. Krugman, P. (1991), History vs. Expectations, Quarterly Journal of Economics, 106, 651-667. Kylaheiko, K. (1995), Coping with Technology, Research Papers 48, Lappeenranta University of Technology, Lappeenranta. Kylaheiko, K. (1998), Making Sense of Technology, International Journal of Production Economics, 56-57, 319-332. Lawson, C. and E. Lorenz (1999), Collective Learning, Tacit Knowledge and Regional Innovative Capacity, Regional Studies, 33, 305-317. Lucas, R. (1988), On the Mechanics of Economic Development, Journal of Monetary Economics, 22, 3-42. Lundvall, B-A. (1992) [ed.], National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning. Pinter Publishers, London. Malmberg, A. and P. Maskell (1997), Towards an Explanation of Regional Specialisation and Industry Agglomeration. In Regional Specialisation and Local Environment: Learning and Competitiveness (H. Eskelinen, ed.), pp. 1439, Nordiska Institutet for Regionalpolitisk Forskning, Stockholm. Markusen, A. (1996), Sticky Places in Slippery Space: a Typology of Industrial Districts, Economic Geography, 72, 293-313. Marshall, A. (1896/1952), Principles of Economics,. Macmillan, London. Maskell, P. and A. Malmberg (1999), Localised Learning and Industrial Competitiveness, Cambridge Journal of Economics, 23, 167-185. Nelson, R. and S. Winter (1982), An Evolutionary Theory of Economic Change. The Belknap Press, Cambridge. Okko, P. (2000), Growth, Human Capital, and Agglomeration Economies, Management Expertise for The New Millennium (Tapio Reponen ed.), pp. 227235. Publications of Turku School of Economics and Business Administration, Series A-1:2000. Turku. Penrose, E. (1959), The Theory of the Growth of the Firm. Basil Blackwell, Oxford. Perroux, F. (1955), Notes sur la notion de 'pole de croissance', Economie Appliquee, 7, 307-320. Republished and translated in Regional economics: Theory and practice, (D. McKee, R. Dean and W. Leahy, eds.), pp. 93-103, The Free Press, New York.
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Porter, M. (1990), The Competitive Advantages of Nations. Macmillan, London. Richardson, G.B. (1972), The Organisation of Industry, Economic Journal, 883-897. Richardson, H.W. (1995), Economies and Diseconomies of Agglomeration. In Urban Agglomeration and Economic Growth (H. Giersch, ed), Springer Verlag, Berlin. Ritsila, J. (2001), Studies on Spatial Concentration of Human Capital, Jyvaskyla Studies in Business and Economics, 7, University of Jyvaskyla, Finland. Romer, P. (1986), Increasing Returns and Long-run Growth, Journal of Political Economy, 94, 1002-1037. Romer, P. M. (1990a) Endogenous Technological Change, Journal of Political Economy, 98, S71-S102. Romer, P. M. (1990b) Capital, Labor, and Productivity, Brookings Papers on Economic Activity, Microeconomics 1990, 337-367. Salmi, P., K. Blomqvist, J. Ahola, and K. Kylaheiko (2001), Industrial Districts and Regional Development: Towards a Knowledge-based View, Telecom Business Research Center, Working Papers 7, Lappeenranta University of Technology, Lappeenranta, Finland. Saxenian, A. (1991), The Origins and Dynamics of Production Networks in Silicon Valley, Research Policy, 20, 423-437. Schmitz, H. and B. Musyck (1994), Industrial Districts in Europe: Policy Lessons for Developing Countries, World Development, 22, 889-910. Teece, D., G. Pisano and A. Shuen (1997), Dynamic Capabilities and Strategic Management, Strategic Management Journal, 18, 509-533. Wernerfelt, B. (1984), A Resource-based View of the Firm, Strategic Management Journal,?), 171-180. Winter, S. (1995), Four Rs of Profitability: Rents, Resources, Routines and Replication. In Resource-based
and Evolutionary
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
TOWARDS OPERATIONALIZATION O F DYNAMIC CAPABILITIES
Pirjo Stahle, Lappeenranta University of Technology, Finland* Aino Poyhonen, Lappeenranta University of Technology, Finland Kalevi Kyla'heiko, Lappeenranta University of Technology, Finland***
INTRODUCTION In the global economy the traditional sources of competitive advantage, such as access to natural resources and exploitation of economies of scale or monopoly power, are eroding at the same time as knowledge market imperfections are gaining more importance as sources of sustainable innovation profits. New earning logic boils down to creating and possessing valuable, hard to imitate, difficult to replicate, rare, and non-substitutable intangible resources and capabilities, not to mention dynamic capabilities necessary for orchestrating them effectively. Even though we have witnessed the rapid rise of suitable theoretical approaches that have successfully tackled some of the most severe knowledge management issues, we have also faced the problem of empirical inaccuracy of theoretical concepts used. There seems to be a lack of appropriate dynamic theoretical frameworks suitable for genuine empirical analyses. We shall scrutinize this hard operationalization issue by introducing a new approach that is based on both dynamic capabilities and organization's systemic efficiency. In this approach, organizations are modeled as threedimensional knowledge systems, formed by relationships which function as channels for the flow of information and competencies/capabilities, and controlled by the management function. Dr. Pirjo Stahle is Professor of Knowledge Management at Department of Business Administration in Lappeenranta University of Technology, Finland. Email:
[email protected]. * M.Sc. Aino Poyhonen is Research Assistant and PhD Candidate of Knowledge Management at Department of Business Administration in Lappeenranta University of Technology, Finland. Email:
[email protected] Dr. Kalevi Kylaheiko is Vice Rector of Lappeenranta University of Technology and Professor of Economics, esp. Technology Research at Department of Business Administration, Finland. E-mail: kalevi.
[email protected].
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We'll argue that dynamic capabilities constitute the collective capacity of an organization to replicate, adapt, reform, gather, and innovate its knowledge base (i.e. assets and capabilities) in a manner consistent with its strategy. Then we'll present a novel approach to assessing dynamic capabilities, which enables us to connect our theoretical concepts with their measurable empirical counterparts as to the state and the art of organizations' internal structures and their articulated firm strategies. DYNAMIC CAPABILITY VIEW Some Definitions of Basic Theoretical Concepts and Categories Teece and Pisano (1994, 537) interpret firms as generators of dynamic capabilities, which help "in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources and functional competences toward changing environment." According to this view the competitive advantage of firms fundamentally lies in dynamic capabilities which "are the capacity to sense opportunities, and to reconfigure knowledge assets, competences, and complementary assets so as to achieve sustainable competitive advantage" (Teece 2000, 27). Metcalfe and James (2001) also stress the view that the capability approach treats the firm as a transformation process, not as a market related exchange process ("nexus of treaties"), thus emphasizing the knowledge bases and the accumulation of knowledge both within the firm and among the firms through market and/or network arrangements. Both the views above bear close resemblances with evolutionary theories of the firm (Nelson and Winter 1982; Kylaheiko 1995; 1998), where the firms' behavioral differences create competitive traits through search processes triggered off by selection environments, mainly competitive markets and institutions. The capability perspective assumes that the market performance of the firm depends on the combination of its capabilities with its strategic objectives or intention. Metcalfe and James (2001) claim that productive opportunities are a conjuncture connection between the capabilities and the intentions, and the capabilities can be regarded as organized packages of resources, routines and intentions. Hence, the capabilities in relation to any bundle of resources are contingent on the firms' purposes articulated in their strategies. The fundamental issue in the dynamic capability view is that the differences between firms' behavior create the basis for generating differential and quasisustainable rents, as the resource-based view puts it (Peteraf, 1993). Especially the link between the rent-earning capacity and the lack of tradability of the most crucial collective core capabilities should be emphasized. To be able to create this essential link, the organization structure must possess an organizational memory of practices embedded in its tacit routines and capabilities. Accordingly, since separate resources
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may be traded they are unable to generate sustainable profits. Markets of knowledge are necessarily imperfect, thus reinforcing the bias towards the growth of the capabilities through their internal accumulation. Thus, the transformation of information into firm-specific idiosyncratic knowledge bases depends on the internal organizational structure and articulated strategies of the firm. The consistency of this relationship is where the uniqueness of the capabilities resides and that is what we are trying to look at empirically in terms of our operationalizations. Characterization of Dynamic Capabilities and Basic Mechanisms We view the firms primarily as knowledge repositories, where the wealth creation mechanisms are organized in terms of knowledge creating, updating, transferring and integrating processes (cf. Blomqvist and Kylaheiko 2000). In the evolutionary theory, organizations serve both as (i) sources of new combinations and (ii) providers of stable hierarchies of path-dependent routines and capabilities that are continuously replicated. New knowledge is always conceptualized in the framework of old established organizational routines, which can be dynamic or static. The static routines replicate the existing organizational and technological capabilities and partial replication makes adaptative changes possible. The dynamic routines enable the firm to "learn by learning" and to diffuse generic scientific and engineering knowledge. Accordingly, the dynamic capability perspective focuses on the dynamic routines, which reflect and actualize the firms' latent competencies. The different levels of organizations can be explained by means of the hierarchical view of the routines (Nelson and Winter 1982). First, operative routines promote minor regular innovations by slightly modifying old routines and capabilities. Second, at the tactical level, innovations consist of new combinations of existing technological routines/capabilities added with some "dynamic" routines, which transmit new external generic knowledge and novel types of equipment. At the strategic level, dynamic organizational routines/capabilities are needed when the firm faces the problem of how to contract existing routines and replace them by new ones in the situation where profit flows shrink. To make more sense of our knowledge-related interpretation we'll combine the Nelson and Winter's (1982) idea about a hierarchy of routines with Argyris's and Schon's (1978) famous idea about organizational learning through single- and double-loop learning. Single-loop learning means re-active adjustment to environmental changes using preprogrammed lower-level routines and given mental models, whereas pro-active double-loop learning makes it possible to reprogram single-loops using higher-level meta-routines and capabilities, thus revising and reorganizing existing mental models and the firm's organizational culture. Kylaheiko (1995) has called this kind of double-loop learning innovative rationality, which
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Kyldheiko
emphasizes the constraints of given mental models and allows for qualitative changes of technological routines and strategic changes of organizational routines. Bianchi (1994) has developed the idea of rational innovativeness into a theory embryo in which firms as complex communication systems detect and correct errors in their mental models and change them according to new information. This is an important part of innovative rationality but one problem still remains; innovatively rational firms seem to float without any clear connection to organizational perspectives defined by the firm's strategic management framework. In other words, it remains open how the strategic ends (goals) of the firm and the constraints on creativity have been formulated by means of organizational routines. In order to relax this tricky concept, innovative rationality has to be combined with a strategic framework through which firms can be conceptualized as purposeful strategic systems (cf. Kylaheiko 1995, Ch. 4). Our extended strategy concept can be seen as a characterization of the commitments of the top management and as a rationalization of the firms' main intentions. As already emphasized by Chandler (1962), the strategy always governs the structure but, in our view, even more importantly, these two elements have to be in balance as well. One cannot successfully define (or at least implement) a strategy without taking into account the actual structure of the firm. This crucial balance, in turn, depends upon the hierarchy of lower and higher level routines and capabilities which, in fact, determine the set of activities that the firm is capable of doing in a competitive manner. The set of these critical performing activities based on routines can be called distinctive or core competencies (cf. Prahalad and Hamel 1990, 82) or (dynamic) core capabilities. Consequently, instead of the Chandlerian double connection between "strategy" and "structure", the modern innovating firm has to take into account the triad "strategy", "structure" and "dynamic core capabilities". To put it briefly, if innovative rationality is excluded, one cannot analyze the firm as "a locus of strategic control" but simply as "a legal entity" whose only unconditioned strategy is to minimize the sum of production and (static) transaction costs. In case of innovative rationality, one can no longer speak about the one and only best strategy or optimal organizational structures based on optimally chosen sets of core capabilities. There remains room for diverse firm-specific strategies. MEASURING ORGANIZATIONS' DYNAMIC CAPABILITY Systemic View on Dynamic Capabilities Then, how to capture organizations' dynamic capability? And even more importantly: how to examine it in a way that is quantifiable, measurable and comparable across
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cases? A possible answer, we suggest, can be found by interpreting organizations as knowledge systems. In this approach, dynamic capability equals the collective capacity of an organization to replicate, adapt, and innovate knowledge assets in a manner consistent with its strategy (cf. Poyhonen, 2003). Specifically, we argue that dynamic capability necessitates systemic efficiency, i.e. the ability of the organization 1) to function effectively as a coherent system, and 2) to guide its activities according to the chosen strategy. The systemic view emphasizes connections and between the elements of the system, rather than the elements' attributes per se. For an organization's dynamic capability, this means that it is not the capabilities of individuals that predict a company's success; instead the crucial factor is how these capabilities interrelate to form a coherent action in line with the company's strategy. The crux of our systemic interpretation of dynamic capabilities is summed up in the following arguments: 1.
Systemic efficiency is always needed for organizations' dynamic capability.
2.
Systemic efficiency guarantees an organization's capability a) to function as a system in general, and b) to guide its functions coherently according to a chosen strategy.
3.
Systemic efficiency can be analyzed by a system-based questionnaire and its system-based mathematical analyses.
The systemic view of organizations is widely employed these days. For instance, Benoit and Ramanujam (1999) argue, "Organizations are now routinely viewed as dynamic systems of adaptation and evolution that contain multiple parts which interact with one another and the environment. Such a representation is so common that it has acquired the status of a self-evident fact." To mention a few examples, for instance Sanchez and Heene (1997a; 1997b) have created a competence-based approach of strategic management in which organizations are viewed as goal-seeking open systems of interrelated intangible and tangible asset stocks and flows. Also Hamel's (1998) views about strategy innovation imply that to be strategically innovative on a sustained basis, companies should adopt systems thinking both in relation to the entire field of business and to their intra-organizational issues. Moreover, Eisenhardt and colleagues (Eisenhardt and Tabrizi 1995; Brown and Eisenhardt 1997; Eisenhardt and Brown 1999) deal with organizations as complex adaptive systems. One of their main arguments is that achieving fast adaptation in unpredictable environments requires balancing order and disorder by creating organizational structures that is not too rigid to undermine change, but not too loose to create chaos. Our use of systems thinking departs from the categorization of system theoretical explanations to three classes, which are then applied to organizations.
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THREE PARADIGMS OF SYSTEMS THINKING The systemic movement at large does not by any means adhere to a uniform, integrated grand theory, but rather consists of a wide spectrum of theories and concepts formulated by scientists representing diverse disciplines. Accordingly, even the definitions as to what consists a system tend to vary a great deal depending on the point of departure of the given author. (Stahle 1988; Luhmann 1995; Black 2000.) Based on this lack of coherence in systems-based views, Stahle (1998) has discerned three underlying paradigms in system theoretical writings, which can be labeled mechanistic, organic1 and dynamic. All the paradigms address systems, but their starting points and foci are distinctly different, and consequently each of them depicts systems in a different way. For example, from the viewpoint of mechanistic tradition, systems are orderly and regularly functioning, while within the dynamic paradigm they are portrayed as self-organizing and self-referential. Each systems paradigm implies different criteria for effective functioning of the system. Table 15.1 summarizes the features of the paradigms.
1
This paradigm is often called "organic adaptive" by other authors As systems theory and research is a hybrid construction with myriad strands and applications, it is obvious that the three-fold division into mechanistic, organic and dynamic paradigms is one of the many attempts to categorize the field. It is important to note that the differences between these three approaches are far from clear-cut, and the approaches can be understood to exist along a continuum. We are also well aware that none of the paradigms discerned here is internally uni-dimensional or completely consistent. The decision to employ this particular division was arrived at on the grounds that it (i) allows for a relatively comprehensive categorization of the concepts and explanations that have guided scientific work on systems and that it also (ii) provides a robust basis for the construction of a systemic theory that comprises the significant facets of business organizations. 2
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The three paradigms of systems thinking can be applied to organizations to derive a model of organizations as three-dimensional systems, consisting of mechanistic, organic and dynamic knowledge environments or functions (Stahle & Gronroos, 2000).
Table 15.1: The three paradigms of systematic thinking (Stahle, Stahle & Poyhonen, 2003). It is important to note that each of the knowledge environments exists to a certain extent within every organization and it would be misleading to label an organization as solely mechanistic, organic or dynamic. The three-dimensional organizational theory and its systemic efficiency properties can be combined to respective capabilities as follows:
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Mechanistic:
operative level
replication
slight modification
Organic:
tactical level
partial replication
new combination of
adaptational changes Dynamic:
existing capabilities
strategic level dynamic capabilities actualization of latent replacement of existing capabilities capabilities with new ones
All companies possessing dynamic capability have features of all the three functional modes and capabilities, but the emphasis must be strategically orchestrated on the right mode. Concerning the assessment of the dynamic capability of the organization, it is the relative emphasizing of the different knowledge environments and the related capabilities that is at the core of the analysis. The extent to which each type of capability should be present in the organization is determined by its strategic intent, which in turn can be expressed in a simple manner as an order of importance of the following three types of strategic foci: Mechanistic strategic focus -> strategic emphasis on added value from fixed production lines, the markets are quite assumed to be stable Organic strategic focus -> strategic emphasis on added value from customized services, the markets are assumed to be changing Dynamic strategic focus -> strategic emphasis on added value from growth and innovativeness, the markets are assumed to be turbulent. Developing a system-based analysis of dynamic capabilities In our method for assessing the dynamic capabilities of organizations, the main goal is first to analyze the organization's systemic efficiency in general, and then to scrutinize whether the functional mode of the firm is consistent with its articulated strategy. The development of the assessment tool, called KM-factor™, begun in 1997, and in the following account we will highlight the main principles of the method and the main stages in its construction. The first task was to establish a framework for retrieving data and a suitable method for analyzing it. At this stage, much of the actual development and research was guided by the aim of producing a method enabling (i) reliable comparisons between results from different organizations, and (ii) a standard mathematical and statistical procedure for handling the data.
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We wanted to eliminate the weaknesses of a typical qualitative approach by defining systemic data as both quantified and produced by the system itself. We therefore focused directly on building a framework based on questionnaires. We also abandoned the possibility of letting participants directly estimate the degree of specific organizational features as being e.g. mechanical, organic or dynamic, and took the stand that systemic data was to be gathered through direct, explicit statements in each system class. This led to the development of a matrix in which the system dependent characteristics have a well-defined position. In the matrix we distinguished four main constraints building up and constituting organizations' systemic features. In brief, they are as follows (Stahle et al., 2003): 1.
2.
A system is constituted and demonstrated by the relationships between its elements. The weaker relationships are, the weaker the organization is as a system. Data on the features of relationships reveals the principle of how the system is being continuously re-created and organized. The relationships in different types of systems are formed and maintained in a different manner. In a systemic sense, information is the only source for system's maintenance and renewal: all changes in the system are caused by the exchange of information. Relationships form channels for information flows within the system. The focus is not on the content of the information but on the flow of it. Information, however valuable it potentially could be, is without any value if it is not being exchanged and put in motion.
3.
Organizations are purposeful and goal-oriented systems, in which information needs to be exchanged and enriched by its members. In social systems, the value of the exchanged information is always linked to its meaning (Luhmann 1995), and meaning (and value) of information in business organizations derives from its connection with the organization's primary task and chosen strategy. Even if information was widely exchanged and thus the organization had a lot of potential for change, without proper and strategy-linked know-how, capabilities and competencies, the flexibility would be without any value.
4.
Organizations as systems are always hierarchical and composed of several degrees of sub-systems that cooperate with each other. The steering and regulating forces in a system might come from anywhere on the continuum that ranges from mechanistic regulations to the principles of dynamic selforganization. In real-life organizations, these functions are set up and represented by management.
We call these four main constraints present in all organizations system constituents, since they are what really constitutes the organization and defines its functioning as a system. By combining these constituents with the three system classes introduced
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earlier we are now in the position to present the basic model for data retrieving as a matrix shown in Table 15.2 below. The cross-sections between system classes and constituents are called components.
Table 15.2. Organization as a three dimensional system (Stdhle and Gronroos, 2000). The next task in the development of the measure was to construct a questionnaire based on the matrix. The main emphasis was put on the task of gathering four items into each component. The soundness of the items was checked both statistically as well as by gathering extensive feedback from the organizations participating in the pilot studies. Some examples of the items include: •
"My work encourages me to take risks" (Capabilities / Dynamic)
•
"I get regular updates on the results achieved by our entire team" (Information flow / Organic)
•
"I feel I'm working alone" (Relationships / Mechanical)
•
"My supervisor controls the way in which I work" (Management / Mechanical)
The items are assessed on a 5-point Likert scale, anchored by "I totally disagree" and "I totally agree". The responses produce a set of quantified systemic data. It is important to note that every response has a unique position defined by the system class and constituent. For instance, every answer either enforces or reduces a specific system class through its constituent. Overall, the KM-factor™ assessment tool comprises 3 questionnaires. Two of the questionnaires - one for the personnel and other one for the management - are based on the matrix #.2 above, and include a total set of 96 statements each. Half of the items concern the present situation (how the situation is now), and half of them are directed at the goal situation (how the situation should be). The third questionnaire is
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used for defining the strategic focus of the organization and it is filled in by the executive manager. In sum, the three questionnaires provide data about the organization's present systemic functioning, the goal situation and the overall strategic focus of the organization. ANALYSIS METHOD Having established the basic model for data retrieval through the matrix combining system classes and constituents, our next undertaking was to ascertain that it is appropriate for determining the parameters that depict the organizational functioning. We therefore proceeded by investigating the behavior of matrix data from a systemic point of view, Acknowledging that organizations can be analyzed in terms of the chosen system class dependent characteristics, our first step was to reliably establish the concept of an organization's systemic profile, i.e. the organization's emphasis on mechanical, organic and dynamic constraints in its every day functioning. Mathematically, an easy way to establish this profile is to take the mean averages over all data within the same system class. In this approach, we also take advantage of the principal difference between system classes (mechanical, organic and dynamic) and constituents (capabilities, information flow, relationships and management): whereas the constituents can be considered discreet, the system classes lay on a continuum. It should be noted that if data in the matrix were random, no profile would emerge from the data. We argue that a profile established in this way (as in Fig. 15.1.) does in fact reliably depict the organization and its emphasis on mechanical, organic and dynamic functions.
Figure 15.1: Systemic profile of an organization that emphasizes organic features (sum =1.0). Having established the means to determine the systemic profile, we focused more directly on the behavior of the data within the matrix. We argue that the behavior of systemic data in itself dynamically reflects systemic parameters more adequately than averages calculated from that data. By this argument we abandon the
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analysis approach based on simply averaging the responses to questionnaire items that are supposed to directly measure system functioning. For example, an overall average of the responses to an item such as "I think we are unanimous" would tell us little about unanimity in the organization. In contrast, by using standard deviation as a primary tool, we can easily measure unanimity as a systemic parameter in a more reliable manner. Following this track of reasoning, the aim of the analysis was to trace and define an adequate and sufficient set of behavioral parameters measuring and quantifying the systems functioning as a whole. The presumption behind this approach is, naturally, that these parameters likewise reflect the very constraints comprising the organization's systemic efficiency. The behavior of systemic data significantly differs from the behavior of random data, i.e. random data is a solid referential base, and this delineation from randomness de facto engenders the parameters and their authenticity as systemic. In sum, our main goal was to create a method for the modeling and measuring the constructs of dynamic capability and systemic efficiency, which could then be presented by both graphical (diagrams) and mathematical (indexes) means. (For a comprehensive explanation of the analysis method, see Stahle et al., 2003.) At the moment about 90 Finnish organizations have been measured with the various versions of KM-factor™, 20 of them with the latest updated version of the tool. However, in order to validate the method, a broader database is required, including also measurements from international organizations.
CONCLUSION Following the argumentation line of this paper, we'll focus here mainly on the findings concerning organizations' systemic efficiency and their implications for understanding the nature of dynamic capabilities. The assessment method is based on the following two phases: 1.
Systemic profile of the organization shows how coherent as a system (any kind of system) the organization is.
2.
Systemic efficiency shows how coherently an organization's systemic profile and the chosen strategy are in line throughout the system. A simplified example of a vector network representing a coherent systemic profile is presented on the left hand side of the Figure 15.2. On the right hand side there is an example of a dysfunctional systemic profile.
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To put it briefly, if the organization is able to function as a coherent system in line with its strategy, and if this strategy has a primary organic or dynamic focus, the company possesses dynamic capability (left hand situation in Fig. 15.2).
Figure 15.2. Examples of coherent and non-coherent systemic profiles. Moving further on from the assessment of dynamic capability of an individual organization, we have also made some preliminary assertions concerning the general tendencies in groups of organizations with distinct strategic foci, based on the analyses of 20 Finnish business organizations. Naturally, the sample is too small to draw any definite conclusions, and these results below are presented only in order to demonstrate the potential of our operationalization of dynamic capabilities to provide for general explanations of knowledge-related phenomena in organizations. In organizations with a primary mechanistic strategic focus the capabilities should be slightly modified along the time. According to our primary results, this rarely happens. Instead there are few perceived developmental challenges, and in many cases there are no attempts for even slight modifications. In addition, these organizations tend to have low level of motivation and a high degree of internal disagreements. In contrast, organizations with either organic or dynamic primary strategic focus possess relatively high unanimity within management and staff about development challenges of organization. Also the level of motivation in both groups of organizations is high. In organizations with a primary organic adaptive strategic focus, the main challenge is to produce new combinations of existing capabilities and to be able to master continuous incremental change. However, our results show that instead of emphasizing existing capabilities and their new combinations, these organizations
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tend too quickly to be willing to replace the existing capabilities with new ones. This, of course, forms a risk factor for their success in business. Organizations with a primary dynamic strategic focus are typically well networked and more coherent than organic ones. The coherency is both hierarchical, interpreted as coherence between management and staff, and systemic, interpreted as both possessing a highly consistent systemic profile and as high systemic efficiency. The main assets of these organizations are good networking capabilities and high level of competence. They have a strong unanimity concerning present situation, i.e. they are more sensitively aware about them selves and their environment than organizations with organic or mechanistic profiles. They also seem to be capable of balancing the challenges between organic and innovative objectives effectively. However, also they have a tendency to neglect mechanistic regulation and control, which would still be needed to a certain extent to secure the successful replication of the new capabilities produced. In conclusion, the assessment method presented in this article allows for a strategy-based quantitative analysis of dynamic capabilities either as replication, continuous development or as radical innovations. The overall dynamic capability level of the firm is contingent on the consistency of the firm's knowledge-based capabilities with its strategic objectives.
REFERENCES Argyris, C. and D. Schon (1978). Organizational Learning. Addison-Wesley, Reading, MA. Bianchi, M. (1990). The Unsatisfactoriness of Satisficing: from Bounded Rationality to Innovative Rationality. Review of Political Economy, 2, 149-167. Benoit, M. and R. Ramanujam (1999). Through the looking glass of complexity: The dynamics of organizations as adaptive and evolving systems. Organization Science, 10, 278-294. Black, J. A. (2000). Fermenting change. Capitalizing on the inherent change found in dynamic non-linear (or complex) systems. Journal of Organizational Change, 13, 520-525. Blomqvist, K. and K. Kylaheiko (2000). Main Challenges of Knowledge Management: Telecommunications Sector as an Example.A paper in the CD-Rom of the IAMOT Conference, Miami, US, 20.-23. 2. 2000. Blomqvist, K., Kylaheiko, K. and V.M. Virolainen (2002). Filling the Gap in Traditional Transaction Cost Economics, International Journal of Production Economics, 71. 1-14.
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Brown, S. L. and K. M. Eisenhardt (1997). The art of continuous change: Linking complexity theory and time-paced evolution in relentlessly shifting organizations. Administrative Science Quarterly, 42, 1-35. Chandler, A. (1962). Strategy and Structure: Chapters in the History of the American Industrial Enterprise. The M.I.T. Press, Cambridge, MA. Eisenhardt, K. M. and B. N. Tabrizi (1995). Accelerating adaptive processes: Product innovation in the global computer industry. Administrative Science Quarterly, 40,84-110. Hamel, G. (1998). Strategy innovation and the quest for value. Sloan Management Review, 39, 78-86. Kylaheiko, K. (1995). Coping with Technology: A Study on Economic Methodology and Strategic Management of Technology. Lappeenranta University of Technology, Research Papers 48, Lappeenranta. Kylaheiko, K. (1998). Making Sense of Technology. International Journal of Production Economics, 56-57, 319-332. Luhmann, N. (1995). Social systems. Stanford University Press, Stanford. Metcalfe, J.S. and A. James (2001). Knowledge and Capabilities. In N. Foss (Ed.): Resource, Technology and Strategy. Routledge Advances in Management and Business Studies, Routledge, London, UK. Nelson, R.R. (1991). Why do Firms Differ, and How Does it Matter? Strategic Management Journal, 12, 61-74. Nelson, R.R. and S. Winter (1982). An Evolutionary Theory of Economic Change. Harvard U.P., Cambridge, US. Penrose, E. (1959). The Theory of the Growth of the Firm. Blackwell, London. Peteraf, M.A. (1993). The Cornerstones of Competitive Advantage: A ResourceBased View. Strategic Management Journal, 14, 179-191. Prahalad, C.K. - Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review, 79-91. Poyhonen, A. (2003). Renewal Ability of Organizations: Literature Review and Recommendations for Measurement. Working Paper, Lappeenranta University of Technology. Sanchez, R. and A. Heene (1997a). Reinventing strategic management: New theory and practice for competence-based competition. European Management Journal, 15,303-317. Sanchez, R. and A. Heene (1997b). Managing for an uncertain future: A systems view of strategic organizational change. International Studies of Management & Organization, 27, 21-43. Simon, H. A. (1976): From Substantive to Procedural Rationality. In Latsis, S. (ed.): Method and Appraisal in Economics. Cambridge University Press, Cambridge, US.
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Stahle, P. 1998. Supporting a system's capacity for self-renewal. Department of Teacher Education, University of Helsinki. Research Report 190. Stahle, P., Stahle, S. and A. Poyhonen (2003). Analyzing Dynamic Intellectual Capital: System-based Theory and Application. Acta Universitatis Lappeenrantaensis, 152. Teece, D. J. (2000). Managing Intellectual Capital. Oxford University Press, Oxford, UK. Teece, D. J., Pisano G. and A. Shuen (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18, 509-533.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
THE ROLE OF ACADEMIC JOURNALS IN THE EMERGENCE AND EVOLUTION OF MOT Derrick F Ball, De Montfort University and RADMA Ltd* John Rigby, IOIR, The University of Manchester
INTRODUCTION This chapter describes part of an ongoing study into the emergence and evolution of the management of R&D, innovation and technology as a subject in its own right. It deals with communicating research in this area via the relevant journals. For these it gives details of the motivation for starting them, the current objectives, the target audience and the distinguishing features. It then sets out to identify those who make up the "community" on the basis of publication in the relevant journals over the period 1954-1998. These number about six thousand authors with about ten thousand author entries. Analysis of these entries gives details of individual propensity to publish. Of the six thousand authors only 51 have published eleven papers or more in the eleven journals selected. Those publishing only once constitute 78 per cent of the author list and 50 per cent of the papers.
THE JOURNALS A major feature of the literature on R&D and innovation management has been the massive growth in refereed journals dealing with this subject. This section details the origins, purpose and development of a selection of these journals. First in the field, Derrick Ball is Chairman of RADMA Ltd and Emeritus Professor of R&D Management at De Montfort University. John Rigby is Research Associate at the Institute for Innovation Research, The University of Manchester, in the United Kingdom.
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IEEE Transactions on Engineering Management commenced publication in 1954 with Albert H Rubenstein as one of the first editors. The current editor-in-chief is Dundar F Kocaoglu, who is based at Portland State University and supported by eight department editors nearly all of whom are academics. Transactions is a research based journal in engineering management published quarterly by the Institute of Electrical and Electronics Engineers and with a worldwide subscription base of approximately 10,000. The Transactions has a number of purposes. These are: to assist in the establishment and recognition of the engineering management discipline; to provide a publication medium for authors at the leading edge of engineering management; to establish the guidelines and identify the future directions of critical issues in engineering management; and finally to become a forum for the researchers and practitioners of engineering management of their technical specialities. The Transactions attracts articles from both managers of technology and academics. Four types of article are considered for publication. These are research articles, technical management notes, papers focusing on practice, and those raising strategy and policy issues. Of special interest are studies carried out within an industrial company or government agency. From time to time there are special issues with guest editors aimed at making a significant impact on the selected field by bringing forth the best research in it. The special issues have given rise to an increase of research activity and the growth of the research community around the topics covered. They are part of the Transactions proactive strategy to facilitate the growth of research in engineering and technology management. Research Technology Management was launched in 1958 as Research Management to serve as a vehicle for carrying out one of the principal purposes of the US based Industrial Research Institute i.e. the dissemination of information on techniques of organization, administration and operation of industrial research. Louis Marshall was the original editor and Research Technology Management was published as a joint venture with Interscience Publishing Co. The present editor is Michael F Wolff. In 1970 the Industrial Research Institute took over complete publishing responsibility and engaged professional editorial and publishing management services. The circulation is now almost five thousand with currently 64 pages per annum. Representatives of about 300 member companies of the Industrial Research Institute receive Research Technology Management as part of their membership with the remainder being sold worldwide in more than 70 countries. The target audience throughout has been senior technical executives such as R&D managers. The distinctive feature of the Journal is the emphasis on practitioneroriented articles with the aim of helping readers lead their technology based organizations more effectively, efficiently and profitably. This accords with the Industrial Research Institute's mission of enhancing the effectiveness of technological innovation in industry. Insight into the needs of the industrial subscribers is obtained
Role of Academic Journals in the Emergence and Evolution of MOT 215 on a regular basis from the Editorial Board which is drawn exclusively from industry, business and research institutes. R&D Management is a refereed journal which commenced publication by Blackwells in 1970. It has its origins amongst UK based R&D managers in larger companies and government laboratories who were associated with the R&D Study Group of the Operations Research Society. They recognized a need and benefit in promoting the subject and in launching a journal that was not North American. There was a gap between manager experience/journalistic approaches and academic/professional OR journals that were too specialized and not focused specifically on R&D. The needs of these managers coincided with the foundation of two business schools to promote MBA education in the UK and the initiative in one of these to establish an (the) R&D Research Unit. Alan Pearson, a lecturer in decision analysis within the Manchester Business School, started both the Unit and the journal R&D Management. Alan Pearson has remained one of the editors throughout but there have been several co-editors including managers and academics. The current co-editor is Jeff Butler, who is based at PREST. The journal R&D Management aims to advance and communicate the 'stateof-the-art'; to publish papers which will be of significant and longstanding value; to address the needs and interests of managers and academic researchers in R&D, innovation and technology management. A broad spectrum of topics is acceptable to the Journal. These include managing exploratory science; improving the commercial exploitation of ideas and opportunities; social, economic and environmental implications of technology; R&D, innovation and business processes; cultures to promote innovation; new product development; technology strategy; and organisational change. Appropriate papers and relevance factors are recognised and influenced by conferences for managers. The EIRMA and JUPITER Conferences, which are strongly influenced by industrialists, often have the same topic as the annual R&D Management Conference. The UK-based R&D Society meetings also influence what is relevant, various courses and "incidental" meetings with research sponsors, managers, etc. Subjects for workshops at R&D Management Conferences are determined by perceptions of what is currently interesting industry. A selection of the papers from the annual R&D Management conference normally forms the basis for a future issue of R&D Management. There is a substantial world-wide circulation. This is consistent with the composition of the Editorial Advisory Board which consists of eighteen members drawn from the UK, Germany, USA, Canada, Belgium, the Netherlands, Switzerland, France, Australia, and Brazil. The members are drawn principally from academia. There is an annual prize awarded to the best paper in each volume, which is judged by a committee consisting of practitioners. Research Policy commenced publication in 1971. Throughout, it has been based at the Science Policy Research Unit at the University of Sussex. The first editor
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was Christopher Freeman, with Keith Pavitt as the current editor. The motivation for starting the Journal was to meet the need for a multidisciplinary and international journal to improve understanding of policy and management issues related to R&D activities. It was targeted primarily at academics, government, and business. Just over half of the current readership are academics with corporate and government almost a quarter. The Journal has wide circulation with an increasing readership in the USA and Asia so that half are now outside Western Europe. The distinguishing features of the Journal are that it is multidisciplinary, theoretically eclectic, and with a high academic impact. The Editorial Board has been established on the basis of personal contacts, quality and openness, and national balance. Publication of Technovation commenced in 1981. It has grown from four to currently twelve issues per year. The first editor was Wayne Brown who died following a plane crash in 1988. The current editor is George Hayward, who has been involved since the first issue. The motivation for starting the Journal reflected the belief that innovation was a fragile and poorly understood phenomenon which flourished in some settings but stubbornly resisted efforts to infuse it into seemingly similar environments. The stimulus to this was an approach by Elsevier Scientific Publishing to those responsible for the first issue. The target audience was academia, industry, and government. The basis for this was that universities train innovators and contribute to the growing body of knowledge, that industry must innovate to remain competitive, and that government policies on taxation, regulation and direct assistance have a pronounced effect on the innovation climate. The subscribers for the early issues were mainly from the USA and Western Europe. This has now broadened so that subscriptions are now received from throughout the world. The scope of the Journal is to encompass all facets of technological innovation from conceptualization of a new technology-based product or process through to commercial utilization. Case studies illustrating how innovation occurs from business and technical standpoints are also included together with reviews and analysis of government or industrial policy which inhibit or stimulate technological innovation. The distinguishing feature of the Journal is the international and multidisciplinary nature of the papers ranging from very learned tracts to more practical applications, in some cases based on Third World Technology. There are also unrefereed papers and reports under the heading "Industrial Viewpoint". The original Editorial Board was chosen from people known to Wayne Brown and Elsevier and about one half was from outside academia. Of the current Editorial Board about a quarter are not academics. Also in 1981 saw the launch of The Journal of Engineering and Technology Management with Michael K Badawy as the Founding Editor. Dr Badawy of Virginia Tech has remained as Editor throughout and is also the Editor in Chief for the McGraw-Hill book series on engineering and technology. Published quarterly,
Role of Academic Journals in the Emergence and Evolution of MOT 217 this Journal aims to promote the theory and practice of technology, innovation, and engineering management. It links engineering, science, and management disciplines. At the same time it addresses issues involved in the planning, development, and implementation of technological capabilities to shape and accomplish the strategic and operational objectives of an organization. It covers the entire spectrum of managerial concerns in technology-based organizations which include issues relating to R&D management, new product development, human resource management, innovation process management, project management, technological fusion, marketing, technological forecasting and strategic planning. In addition, this Journal interfaces technology with other corporate functions, such as R&D, marketing, manufacturing and administration. Its primary aim is to make a worthwhile contribution to theory development, research and practice by publication of scholarly research on all aspects of technology, innovation, and engineering management. It sees its audience as engineers, scientists, consultants, managers, and other technical professionals. There is an Editorial Advisory Board of nine of whom four are drawn from industry. An Editorial Review Board of almost sixty in number supports this. 1984 saw the launch of the Journal of Product Innovation Management. The circulation is about 3,500 of which 2,500 copies are distributed to members of the Product Development and Management Association, about 80 per cent of whom are managers. The motivation for starting the Journal was to provide a single publication to integrate research-based information on new product management, and to provide a stronger link between academic researchers and practising managers. The Journal takes a multi-functional, multi-disciplinary, international approach to the issues facing those for whom product innovation is an important concern. It presents the research, experiences, and insights of a wide spectrum including academics, consultants, practicing managers, economists, scientists, lawyers and sociologists. Since approaches to product innovation often differ in different economies and cultures the Journal draws upon the work of authors from all over the world. The editor of the Journal for the first two volumes was Blair Little after which the role of editor was taken over by the Journal's founder, Thomas P Hustad. The current editor is Abbie Griffin. The Editorial Board has grown to reflect increasing manuscript submission and now exceeds 50 in number, which includes industrial subscribers who evaluate manuscripts using criteria sympathetic to their professional interests. Following in 1986 was the International Journal of Technology Management. The Editor throughout has been M A Dorgham of the Open University in the United Kingdom. The Journal was initiated and published with the co-operation and financial assistance of the United Nations Educational, Scientific and Cultural Organization (UNESCO). There are eight issues per volume published by Intersciences Enterprises Ltd. The Journal provides a vehicle to disseminate information in the field of management of technology, engineering management and
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related disciplines. Its objective is to develop, promote and co-ordinate the science and practice of technology management with a view to helping professionals working in the field, engineering and business educators and policy makers. A distinguishing feature is the policy of publishing a substantial number of special issues on themes or topics of special interest. There is an Editorial Board of 27 members with academics in a minority of four. The contributions to this Journal have a higher proportion of papers from industry and government than some of the other journals. Technology Analysis and Strategic Management was founded in 1989 by Harry Rothman of the Centre for Science and Technology Policy at the University of the West of England. The motivation for starting the Journal was to bring together technology policy and strategic management communities. It aimed to do this by linking the analysis of science and technology with the strategic needs of policy makers and management. The Journal presents research on the analysis of and assessment of technologies, their impact and potentialities, and the creation of methodological tools for the identification and analysis of key scientific and technological developments. Subscribers are now drawn from about fifty countries. In the ten years since its inception, the target audience has gradually moved its focus from those involved in technology policy towards business and management schools. The Journal differs from many in the field by seeking to involve business/management researchers. It seeks to transfer intellectual concepts from science and technology studies to problems facing users of technology and to technology policy makers. The original intent of the Journal was to stress practical articles by working professionals. Compared to other technology management journals Technology Management was supposed to focus less on theory. Its purpose was to improve day-to-day technology management through learning about practical examples and case studies. However, the Journal has evolved somewhat in response to the market place. This is because academics, as opposed to industrialists, appear to represent a larger percentage of both readers and contributors and this was the reason for the slight name change. While still being focused on practice the Journal currently encourages the development of theory provided it is applied in the form of case studies or research data relevant to real life problems. The mission is to provide a forum for those practitioners and scholars who seek to bridge the gap between practice and theory by sharing case studies, problem solving techniques, and crossdisciplinary analyses. In addition to original and review articles the Journal includes Insight Trading features which deal with novel applications of emerging technologies; company profiles; book reviews; and Open End editorials focusing on issues of topical interest. One evolving aspect is that the Journal now has a much wider mix of international contributors. Originally the Editorial Board comprised 70 per cent industrialists to 30 per cent academics. Latterly the corresponding ratio of industrialists to academics is 40/60.
Role of Academic Journals in the Emergence and Evolution of MOT 219 The International Journal of Innovation Management commenced publication in 1997 with Joe Tidd as the editor. It is published quarterly by Imperial College Press and dedicated to the advancement of academic research and management practice in the field of innovation management. It adopts an interdisciplinary multifunctional approach, which seeks to integrate the management of technological, market and organizational innovation. Papers are normally based on original empirical research and the observations of experienced managers. In addition, case studies provide new conceptual and theoretical advances with a view to integrating the theory and practice of innovation management. There is both an academic and business advisory board and an editorial review board consisting almost exclusively of academics. The European Journal of Innovation Management published by MCB University Press commenced publication in 1998 with Pervaiz K Ahmed and Mohamed Zairi as editors. The motivation for starting the journal was the belief that there was a heavy bias towards US material in the field and that US coverage was narrowly defined. The objective therefore was to provide a European forum. The target audience is academics and professionals working in the field with the aim of bridging the gap between theory and practice. The value of these specialist innovation journals will be maximized if they meet the needs of their target audience. Despite their differing stated objectives the content of many of the journals is interchangeable one with another. It is unrealistic to expect R&D and innovation managers to read more than one or two specialist innovation journals. The annual cost of all the journals listed here is of the order of 4,000 US dollars. There are few organizations that could easily afford this. On this basis it behoves editors to re-examine their stated objectives and to focus their selection more closely. In this way R&D/innovation managers could select journals to meet their specific requirements. It would be helpful if, in addition to specifying key words, the key audience was also specified. In achieving these objectives the classification of articles on R&D management described by Falkingham and Reeves (1997) may be of particular value. Electronic access and internet or CD ROM literature searches are changing the patterns of reading and library usage of professional journals. The full implications for the future are still not appreciated by publishers and editors but that is not the focus here.
THE AUTHORS The growth in the number of journals has been a response by publishers to the increasing interest and activity in studying the management of innovation. A
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significant feature of this increasing activity has been the establishment of research groups in universities that rely on journals for disseminating the results of their work. The number of authors has grown in line with the increased level of publication. To quantify this the number of author entries in the journals detailed above has been aggregated for each year up to the end of 1998. This has been done by reference to author indices and contents listings of the relevant journals from first publication up to the end of 1998. Thus, where an author is involved in more than one paper more than one entry is made. The recording of the number of authors rather than the number of papers has been chosen because it enables analysis of the level and duration of activity of various authors to be analyzed. The number of entries is 9935 with contributions from 6326 authors. Figure 16.1 shows the number of entries for each of the five year periods up to 1998. The increases shown in Figure 16.1 reflect the growth in the community responsible for the emergence of management of technology and innovation as a discipline. It is difficult to define the boundaries of that community. For the purpose of this study the community is defined as those who have published in the journals listed. There are weaknesses in this definition in that a case could be made for inclusion of a small number of journals not listed, authors of conference papers are not included and publication in general management journals such as Harvard Business Review is excluded. There is an assumption that those who have published extensively on MOT etc will have featured in the journals listed.
Figure 16.1: Number of Author Entries for 5 Year Periods to 1998
Role of Academic Journals in the Emergence and Evolution of MOT 221 Entries
Number
1 2 3 4 5 6 7 8 9 10 11
4948 743 270 111 78 45 25 26 17 13 11
Author Names
Too many names to include
D W Collier, R Coombs, B V Dean, L W Ellis, G R Foxall, H Grupp, A K Gupta, K Holt, M A Rappa, J Roessner, L W Stccle.
12
8
N R Baker, R Balachandra, B L Bozeman, B G Dale, G F Farris, Y P Gupta, M Hobday, A L Porter.
13 14-19
9 10
D F Ball, A S Bean, E J Kieinschmidt, J Lee, J K Liker, D C Mowery, F Narin, R Szakonyi, J M Utterback J Bessant, K Debackere, W A Fischer, M Gibbons, E von Hippel, A N Link, E Mansfield, A de Meyer, K Pavitt, X M Song,
20+
13
T J Allen, K Brockhoff, A K Chakrabarti, R G Cooper, B Gold, M Maccoby, A W Pearson, E B Roberts, R Rothwell, A H Rubenstein, W E Souder, D Wilemon, M F Wolff.
Table 16.1: Frequency of Publication by Individual Authors in Specialist Journals on Management of Technology etc. Writers on innovation tend to fall into two classes. There are practitioners whose writing is largely anecdotal and lacking an adequate conceptual framework. Secondly, there are academics, strong on concept but lacking the perspective derived from years of practical experience. The way in which the numbers break will be different for each journal. Nevertheless, for many of the refereed journals there is a shift to an increased proportion of papers authored by academics. For one well known journal the ratio of academic to industrial authors was 1.6:1 in its first five volumes. By the 1990's this had risen to more than 10:1. This does not mean that the propensity of practitioners to publish has declined; it may be that practitioner publications are distributed among an increasing number of journals. Academics have different motivations for publishing compared to practitioners: their career prospects often depend upon it. Once in the field academics are more likely to publish on a regular basis. The data collected for frequency of publication does not permit a differentiation between academic and other authors but Table 16.2 demonstrates the decreasing proportion of single author entries for the five-year periods from 19591998. This supports the supposition that growth in the publication rate derives from increasing activity among academics.
Derrick F Ball and John Rigby
222
4
5
7
8
10+
AA as%
Years
1(A)
2
3
59-63
241
21
2
83
64-68
279
23
3
84
69-73
369
34
10
4
74-78
477
65
18
7
4
1
79-83
548
65
17
3
3
1
1
1
84-88
1014
133
47
10
15
6
1
2
89-93
1449
202
63
34
21
5
4
94-98
1885
291
90
38
18
5
8
6
9
10
75
1 1
5
65
1 1
69
1
1
62
2
5
59
3
59
3
2
Table 16.2: Number Of Papers Per Author Sub-Divided By Five Year Periods.
DISCUSSION "The real problem in directing research is what research shall you do and when shall you stop doing it. The decision is usually in the hands of some very important body. Now in my opinion, the best person to decide what research work shall be done is the man who is doing the research and the next best person is the head of department who knows all about the subject and the work and after that you leave the field of the best people and start on an increasingly worse group, the first of these being the research director, who is probably wrong more than half the time, and then a committee, which is wrong most of the time, and fmally a committee of vice-presidents of the company which is wrong all the time." This quotes from a speech by C E K Mees to the National Research Council at the time when he was Director of the Kodak Research Laboratories in the USA. In 1920 he wrote the early definitive work "The organisation of industrial scientific research". Perhaps one judgement of the success of journals on technology and innovation management as a discipline is whether or not there are still those who believe this quotation to have relevance.
Role of Academic Journals in the Emergence and Evolution of MOT 223 BIBLIOGRAPHY Falkingham, L.T. and Reeves, R. (1997) "The four schools of thought in R&D management and the relationship of the literature to practitioner needs", Annual R&D Management Conference, Manchester. Ball, D.F. Rigby, J and Julian, K. (2003) "Implementing the theories of R&D management: the role of academic journals" Annual R&D Management Conference, Manchester.
ACKNOWLEDGEMENTS The authors are grateful to RADMA Ltd for financial support, to those who supplied information on journals and organizations and to Jeff Butler and Roy Jeffreys for helpful discussions.
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SECTION III
INFORMATION TECHNOLOGY, STRATEGIC, AND PROJECT MANAGEMENT
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
STRATEGIC MANAGEMENT OF INFORMATION IN HIGH TECH FIRMS: ACHIEVING COLLECTIVE INTELLIGENCE USING INFORMATION TECHNOLOGIES Sylvie Blanco, Grenoble Ecole de Management, Grenoble, France*
INTRODUCTION By introducing the expression "Strategic Management", Ansoff (1965) highlighted the necessity to explore organizations' ability to anticipate threats and opportunities, in order to cope with the turbulence of their environment. Empirical studies confirm that successful organizations are those which are able: to detect major events through "alert sensors" (Hedberg et ah, 1976); to gather more information, with more diversity and more frequently (Daft et al., 1988); to acquire and interpret strategic information for action (Thomas et al., 1993). Practically, this task seems to be quite problematic (Aaker, 1983; Vandenbosch et al., 1997). Even organizations using Business Intelligence (BI) systems often do not manage to anticipate strategic surprises (Gilad, 1988; Lesca, 1994). Most firms seem to suffer from both information overload (often paralleled with an exponential advancement in information technology (IT)) and a lack of "strategic information". This is particularly true within technological environments where specific technological devices are implemented to retrieve information from huge databases. This situation leads us to study organizational information gathering strategies for anticipation - and in this context, the potential benefit from implementing information technologies such as Internet.
* Dr. Sylvie Blanco is Professor of Technology Management and responsible of the Centre for TechnoEntrepreneurship at Grenoble Ecole de Management, France. Email:
[email protected]
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THE PROBLEM OF GAINING STRATEGIC AND TECHNOLOGICAL INTELLIGENCE
Business intelligence systems: theoretical overview The need for BI systems. The need for organizations to anticipate threats and opportunities is widely accepted and correlated to environmental turbulence, complexity and rapid technological change (Bright, 1970). This implies to acquire external information in order to reduce uncertainty, to cope with ambiguity and finally, to better anticipate major events (Aguilar 1967; Wilensky 1967). Hence, managers should spend time gathering strategic and anticipatory information (Ansoff 1975; Hambrick, 1982). Actually, they do acquire information for anticipation purposes - information that may be useful for future decisions (O'Reilly 1980; March et al. 1981), but they also perceive major difficulties in gaining anticipatory vision of their environment (Hedberg et al. 1978; Porter 1982; Aaker 1983). Explanations encompass the unpredictability of the environment and the anticipatory nature of information (Ackoff 1967; Daft and Lengel 1986). This opens the window for dedicated device - named business intelligence (BI) systems (Aguilar 1967; Porter 1982; Gilad et al. 1988) which are typically uncertainty and ambiguity reduction devices. The concept of BI systems. The intelligence an organization possesses about its environment depends on its ability to acquire, analyze and retrieve relevant information at the right place and at the right time (March et al., 1981). Lesca (1994) defines BI as: "The information process through which companies prospectively monitor their environment by gathering weak signals in order to create opportunities and to reduce their uncertainty". This process is presented in Figurel7.1.
Figure. 17.1: The Business Intelligence Process
Achieving Collective Intelligence Using Information Technologies 229 A major characteristic of BI compared to other strategic information systems lies in the nature of both the information to be processed and the type of decision. Information consists in what Ansoff (1975) named weak signals. They deal with any actions by a competitor that provide direct or indirect indications about its intentions, its motivation, its objectives or its internal situation (Porter, 1982). They can concern the technological, political, economical or social environments (Bright, 1970). Ansoff (1975) and March et al. (1981) show that dealing with this kind of information is difficult because of its nature: it is anticipatory, qualitative, ambiguous, fragmentary, of various formats and it may come from very diverse sources information needs and sources cannot be defined in advance. The Figure 17.2 illustrates this concept of weak signals.
Figure 17.2: The Concept of Weak Signal The decision process is strategic and concerns novel and complex issues. It is an illstructured process where there is no unique solution to an existing problem but rather the necessity to build one or more representations of the future environment. It is a process of sense-making (Weick 1995). Business Intelligence Systems: some practical difficulties Major problems with BI systems. Relying on empirical studies, several authors (El Sawy et al. 1988; Gilad et al., 1986; Goshal et al. 1991; Lesca 1994) highlight the lack of effectiveness of Business Intelligence Systems. The main problems concern:
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(1) the lack of interrelatedness between BI activities and decision-making; (2) the inability of executives to use BI results for action; (3) the lack of anticipation of BI results which often sound more like "state of the art" studies; (4) the lack of information quality perceived by BI users. They complain about both information overload and incompleteness. Moreover, information is often distorted within the BI process and then difficult to exploit. More specifically, the problem of the selection of strategic information is underlined (Ansoff 1975; Aaker 1983; Wang et al. 1991; Gibbons et al. 1996; Yasaii et al. 1996). However, it is a very important stage in the BI process: "Managers must be able to scan environments selectively so that timely decisions can be made" (Hambrick, 1982); "Managers literally must wade into the ocean of events that surrounds the organization and actively try to make sense of them". (Daft and Weick, 1984); "Somehow, the tidal wave of environmental data must be funneled down to a small pipeline of information" (Smircich and Stubbart, 1985). These problems are perceived as particularly important and generalized within technological environments. Results of a mail inquiry toward 130 managers working in technology-based businesses show that more than 62 % of them perceive BI as inefficient and very expensive regarding the cost of information extraction from scientific databases. Another significant result from this preliminary study is that 65 % of them totally agree with the following assertion: "the selection of information for BI purposes is a problem we are very often confronted to ". The use of automated information filtering techniques is not perceived as satisfactory. Improving the selection of BI information: controversy on the use of IT IT may be of particular interest for different purposes. Early in 1967, Ackoff noted that an essential function of information system is information selection. More precisely, automated filtering and condensation should be proposed. Some authors among whom Elofson et al. (1991) outline the necessity to create technological platforms dedicated to Business and Technological Intelligence. During the last decade, a growing number of researchers from diverse disciplines has been working on the use of information technologies for Business Intelligence. Issues concerning information gathering through Internet and filtering techniques are particularly represented (Belkin et al. 1992). Information Systems and IT inefficiency. Very early, Hedberg et al. (1978) noted that organizations can not rely on "traditional" information systems to cope with environmental uncertainty. They would rather be considered as potential obstacles since they tend to encourage inertia and to leave anticipation issues to managers' discretion, which has been revealed as not satisfactory. Trying to understand the potential benefits of information systems for strategy through the
Achieving Collective Intelligence Using Information Technologies 231 implementation of environmental scanning devices, Marmuse (1992) highlights the lack of usefulness and high cost of such systems. Regarding information gathering, many authors consider that using Internet consists in increasing information processing capabilities by increasing external accessibility to raw data. This amounts to increase information overload and do not enable organizations to reduce their uncertainty. To go further into the use of IT for the selective gathering of BI information, a thorough understanding of information processing needs and capabilities required for the anticipation of unpredictable changes is necessary. Actually, little knowledge about the process by which organizations and individuals are selecting anticipatory information is available and before implementing IT, it seems to be necessary to better understand the corresponding process and to propose a way to manage it (El Szwy etal, 1988).
FRAMEWORK TO ANALYSE THE POTENTIAL ROLE OF IT WITHIN BI SYSTEMS A general framework to analyse the potential contribution of IT to BI systems Overview of the framework. According to Galbraith (1973), "If the organization is faced with greater uncertainty, due to technological change and increased competition, the amount of information processing is increased". As a consequence, it is necessary to reduce that uncertainty by ensuring the "fit" between increased information-processing needs and information-processing capabilities. One approach consists in increasing information-processing capabilities until they fit the amount of information-processing needs. This can be translated as a matter of FIT between strategic information needs and organizational information processing capabilities. This approach is illustrated in Figure 17.3. The questions to be formulated for each phase of the BI process are: who may handle the phase, with what organizational means and using which information technologies. For instance, regarding the selection of weak signals: who, within the organization, is concerned and may contribute? With what organizational means (procedures, information flows, incentives)? Using which technologies? Or wondering whether the Internet may contribute to the selective gathering of weak signals?
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Fig. 17.3: The FIT framework Strategic information
processing needs for the selection of anticipatory
information Strategic information processing needs for environmental intelligence. In the previous part, we mentioned the strategic information processing needs related to the external environment (turbulence, complexity, rapid technological change) and the nature of information to be processed. The main conclusions are that more information (quantity) has to be handled. More diversity in information requires more diversity in information support, channels (across environmental scanners) and knowledge (particularly about technology and market). More ambiguity implies more transversal communications, dialogue and feedback. The nature of the BI activity and more precisely the information selection stage within a technological environment has to be reviewed from the informationprocessing point of view. Three organizational factors linked to the management of technology have to be taken into account: value creation, knowledge sharing; teamwork. In terms of information processing, it requires an intensification of horizontal and transversal networks, dialogue and storage capabilities, creativity tools. It is an activity where reasoning is heuristic rather than algorithmic and subject to individual biases from which may emerge ideas and understandings. Moreover, it refers to sensemaking rather than problem-solving (Weick, 1995). That means that the environment is not a given reality but rather a collective construction created through a process of attention and interpretation (Weick, 1995). It entails that information
Achieving Collective Intelligence Using Information Technologies 233 gathering cannot rely on exhaustive information requirements. It is not directed and conditioned by a given problem but more explorative, guided by mental models and experience. The information selection process can be divided into three main stages: perception of a stimulus which supposes information accessibility and filtering; interpretation in order to create sense and to argue about information anticipatory nature; learning or incorporating of new information into existing representations through formalization and links with prior information (Kiesler et al., 1982; Daft et al., 1984). A critical point in this process is the selection of "relevant" information in situations of time pressure and information overload (O'Reilly, 1980). It must be considered as a collective information process which consists in transforming raw data into anticipatory information. Hence, environmental scanners' role encompasses an interpretive dimension. They should not be viewed as raw information transmitters. Information processing capabilities of organizations Three types of complementary capabilities for information selection can be distinguished: •
human people who are assigned an information gathering task - often called environmental scanners or gatekeepers. They include staff in direct contact with the environment (for instance commercial personnel); experts in technological issues (R&D personnel for instance) or specific environmental actors (Elofson et al. 1991; Yasai et al. 1996; Choudhury et al. 1997); information specialists or individuals mastering specific information sources (librarians, patents or Internet specialists for instance). Except for the last category, BI information gathering and selection is not their main task job and should not be too demanding;
•
organizational structure which can be both an obstacle and a leverage. Main features include: the scanning network (centralized versus decentralized), the culture, the management style, the reward systems, the information flows, the assignment of responsibilities, the openness of the organization;
•
information technologies which should be interpreted in its broader sense: electronic, oral, written supports for information accessibility (Internet, Databases), transmission and retrieval (local and wide networks), sharing, filtering. Today, information technologies are mainly developed for technological aspects of BI. After information accessibility through databases and Internet, information filtering is being a major issue with sophisticated search engine, intelligent agent etc. (Choo 1995; Elofson et al. 1991; Ehrnberg etal. 1997; Zmud 1990).
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Limits of these capabilities. They may not be sufficient when facing ambiguous information (Ansoff 1975; March et al. 1981; Weick 1995). A major problem lies in the filters that are in use at the individual, organizational and technological levels. They tend to put aside essential information for BI (Wang et al., 1991). Numerous authors have paid attention to individuals' information gathering strategies under time pressure and information overload. Conclusions are quite pessimistic about their abilities to anticipate strategic surprises. For instance, Weick (1995) explains that uncertainty and complexity affect what people notice and ignore: they may simplify the cues that are extracted, they may implement queuing, filtering, abstracting, escape and chunking and finally alter the construction of the environment. Finally, some authors are quite skeptic about BI devices, whatever their degree of technological integration. They do not deal with weak signals - but rather require precise and exhaustive definition of information needs which is not feasible in advance. Recommendations to improve the FIT for the selection of BI information It is worth noting March's recommendations (1991) to develop a theory of organizational attention including: task repartition; organizational learning about how to be attentive; management of individuals' attention to the environment (to avoid uniformisation). A few authors formulate some recommendations which can be grouped into two categories: 1. A general heuristic to improve individuals' information-processing capabilities concerning the selection of weak signals (Cats-Baril et al,. 1987); 2. A collective learning process to implement the heuristic (Boland 1994; Brannback, 1994) which implies to develop mechanisms of dialog and coordination through informal communication within the scanners' network (Gibbons et al. 1996). There is quite an important gap between these recommendations and existing BI systems regarding information gathering. Notably, information technologies are not so present in these recommendations, suggesting that a better knowledge of the selection process should be achieved before formulating IT recommendations. That is the purpose of the next part of this article.
Achieving Collective Intelligence Using Information Technologies 235
TOWARD A BETTER UNDERSTANDING OF THE POTENTIAL ROLE OF IT FOR THE SELECTION OF BI INFORMATION Research methodology and experience description Action research and engineering. The first objective of this research is to get a better understanding of a complex process, not easily observable. So we have designed and operationalized a framework for the selection of weak signals (an heuristic method). Then we have implemented it within organizations according to a collective learning process (Huber, 1991) to be in situation of observing the selection by environmental scanners. Finally, we have achieved a one-year follow-up of the effects of this intervention - which enabled us to observe the use and role of IT within the selection process. As it is not the purpose of this article, we do not enter into further details about the research plan of experience. Context of the field experience. This exploratory research has been lead within five organizations among which three high technology firms, trough research partnerships. They lasted between one and one year and a half. The experience we present in this paper takes place in the research and development department of a big telecommunications operator. The partnership was initiated by the managing director of the research center in accordance with the person responsible for the BI activity. Their objective was to improve the BI process. They felt they suffer from both information overload and lack of strategic information. The group of participants is constituted of fifteen persons from various laboratories and different hierarchical levels. Results of the field experience Representation of the selection device. After one year and a half of functioning, the selection stage of the BI process has been stabilised.
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Figure 17.4. Representation of the selection process implemented in a R&D center Practical feedback. The field experience with the use of a dedicated support for the selection of BI information has been largely accepted and perceived as both usable and useful. Participants recognize that they have acquired a better understanding of BI and their motivation and ability to track down weak signals is improved. A new procedural knowledge allow environmental scanners to do this task. The collective dimension of the process is particularly appreciated. Individuals, from diverse backgrounds, become aware of their own biases, due to their own knowledge and experience. It tends to enhance a collective behaviour. People do need to share information and knowledge within a process of mutual enrichment and on a continual basis. The anticipatory criteria for selecting information is perceived as a source of high added value in the process except by scanners whose task job is mainly to retrieve and filter information. Dedicated BI device. Practically, the organization we have worked with has implemented a dedicated device with: a list of each scanners' address, phone and fax numbers; a special internal "journal" to animate the scanners networks; periodic meetings to share experience and information. All these actions enhance the development of a "scanners' community" within an interpersonal network partly
Achieving Collective Intelligence Using Information Technologies 237 based on IT. The main objectives of this network are coordination and mutual enrichment. This device is continuously evolving regarding participants and methods. About 6 months after the initiation of the intervention, an internal shared database with specific applications has been installed on the Intranet. After one year of functioning, basis to design a collective learning tool including examples of weak signals and steps to integrate the role of a scanner were established. Research Contributions Some hypothesis can be formulated concerning the selection of BI information thus leading to proposals on the potential role of IT. These hypothesis have also been identified throughout other field experiences. A better understanding of the selection of BI information. A few authors evoke the information selection process as linear and deductive supposing that it is easy to automate. Field experiences do indicate that selection is rather a heuristic process consisting in refining raw information. It relies on scanners' knowledge and experience and requires both intuitive reasoning and procedural indications. As Vandenbosch et al. (1997) suggested, it appears necessary to train people to the concepts and constructs they will have to implement. The development of preliminary knowledge is a necessary condition for the environmental scanners' network to be motivated and effective. Moreover, the selection is a collective process within which one piece of information can be interpreted and refined by several persons holding different points of view. That is particularly true for scientific teams who are used to this way of functioning. Nevertheless, most of them experienced a true enrichment through dialog with non-scientific persons. In order to work effectively, this network of scanners should include diversity of backgrounds and overlap in preoccupations regarding the targeted environment. Finally, the way this process is structured includes two distinguishable stages: the identification and isolation of a potentially interesting piece of information; its interpretation and refinement for BI purposes. The second stage is necessarily a human one where we could observe that the more scanners practice the selection the more easy they perceive the task. This drives us to suggest that the selection is the learning process. The filtering step can be partly automated for electronic sources of information. Nevertheless, part of this activity should remain the work of scanners who are exposed to special sources. Finally, the critical size of the scanners' network should not exceed twenty to twenty five persons. To conclude, we can formulate the following hypothesis: •
if environmental scanners acquire procedural knowledge, they will be more motivated and able to achieve strategic information selection;
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if environmental scanners confront their interpretations about environmental information, they will achieve a mutual enrichment which may improve their understanding of the future environment.
• •
if the scanners' network keeps a human size, chances to succeed will be better; if the initial implementation of the selection process succeed, extension mechanisms should be easy and rapid to implement - including the integration and training of new scanners.
Nevertheless, numerous factors may entail the failure of the system. The major ones are related to the individual and organizational openness, the intensity of internal (formal and informal) communications between scanners and coordinators, the ability to mobilize horizontal communications channels, the perceived turbulence of the environment. At the individual level, prior knowledge and organizational position may affect the ability and relevance of information selection. Potential role of IT within the BI selection stage. So far, IT that have been implemented mainly pertain to "information search and extraction" devices. Their objective is to find, extract and filter information from huge amounts of raw data (databases, Internet). The main devices include search engines, intelligent agents, datamining. Our understanding of the selection process suggests that IT may have a totally different contribution than information extraction. The objectives that may be assigned to IT for the selection of BI information are presented in Table 17.1.
Achieving Collective Intelligence Using Information Technologies 239 Objectives Coordination between scanners
Mutual enrichment
Information sharing
Collective learning
Information filtering
Potential role of IT IT such as Intranet, electronic mail and groupware can be perceived as a good leverage for reinforcing lateral communication between scanners. The identification of specific functions such as "scanners directory" or "send a piece of information for interpretation by technological experts" would be very appreciated. From BI coordinators, keeping a traceability of these exchange can be a very useful tool to improve and adapt the selection device. It is linked to lateral communication between scanners but much more related to dialog and confrontation of individual representations and understandings. Nevertheless, physical meeting for such activities - though necessary at the beginning - can not be organized too often as scanners may not be available or in the same local area. IT including electronic forums dedicated to scanners' may be very useful if designed appropriately. During the selection process, we could observe that scanners do react to the presentation of pieces of information — thus adding information from their recent experiences or prior knowledge. This information sharing activity (more than knowledge database) can be part of a specific application on an Intranet or a groupware. The use of the same know-how by environmental scanners is a prerequisite for them to function collectively. It supposes that both an individual and a collective learning tool be implemented and accessible for scanners. Moreover, as both the know-how and the scanners' network evolve, it appears necessary to use very flexible methods for learning. Applications of e-learning may be very useful. Automated information filtering may be useful for complementary information sources not used "traditionally" by environmental scanners - especially for patents. Nevertheless, results of such filtering require that human people add value to information - which may require huge resources. Perhaps the added value of information filtering systems, linked to Internet for instance, lies in the rapid answers it can bring to precise questions that environmental scanners may formulate. Nevertheless, it requires a specific expertise in the use of Internet.
Table 17.1: The potential use of IT and Internet for the selection of BI information Nevertheless, our experience about the use of IT in the selection process indicates that it depends largely on the IT culture of environmental scanners. Moreover, as information selection, during its introduction, is perceived as totally new, we do not recommend to add complexity by introducing IT in parallel. It is rather after a first stabilization of the activity that IT can be implemented to bring more effectiveness.
CONCLUSION
In conclusion, it is worth noting that the selection of BI information can be assimilated to a collective learning process. Its final aim is to support strategic decision-making when facing turbulent environments in order to anticipate and to adapt to novel situations. In this sense, the word "intelligence" seems to be quite appropriated. So far, it has been very well-accepted by managers. In this context,
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information technologies may constitute a good leverage factor for the efficiency of the whole BI process and the selection stage. Paradoxically, research in IT does not totally fit our findings. The role of IT may be much larger than the one identified today through literature review. A valuable research prospective according to our understanding would be to go further into the analysis of coordination and mutual enrichment needs to develop appropriate architecture and use of IT such as Internet.
REFERENCES Aaker, D.A. (1983). Organizing a strategic information system. California Management Review, 25, 2, 73-83. Aguilar F.J. (1967). Scanning the business environment. McGrawHill Ed, New York. Ansoff I. (1975). Managing strategic surprise by response to weak signals. California Management Review, 18, 2, 21-33. Belkin N.J., W.B. Croft (1992). Information filtering and information retrieval: two sides of the same coin ? Communication of the ACM, 35, 12, 29-38. Boland R.J., R.V. Tenkasi, D. and Te'eni (1994). Designing information technology to support distributed cognition. Organization Science, 5, 3, 456-475. Brannback M. (1994). Decision support systems for strategic management. Journal of Decision Systems 3, 2, 95-114. Bright, J.R. (1970). Evaluating signals of technological change. Harvard Business Review January, 62-70. Cats-Baril W., G. Huber (1987). Decision support systems for ill-structured problems: an empirical study. Decision Sciences, 18, 350-373. Choo C.W. (1995). Information management for the intelligent organizations: the art of scanning the environment. ASIS Monograph Series. Information Today Inc. Choudhury V., J.L. Sampler (1997). Information specificity and environmental scanning: an economic perspective. Management Information Systems Quarterly 21,1,25-53. Daft R.L., K.E. Weick (1984). Toward a model of organizations as interpretation systems. Academy of Management Review 9, 2, 284-295. Elofson G., B.R. Konsinsky (1991). Delegation technologies: environmental scanning with intelligent agents. Journal of Management Information Systems 8, 1,37-62. Ehrnberg E., S. Jacobsson (1997). Indicators of discontinuous technological change: an exploratory study of two discontinuities in the machine tool industry. R&D Management 27, 2, 107-126. Galbraith J. (1973). Designing complex organizations. Addison-Wesley.
Achieving Collective Intelligence Using Information Technologies 241 Gilad B, T. Gilad (1988). The business intelligence system: a new tool for competitive advantage. Amacom 1988. Hambrick D.C. (1982). Environmental scanning and organizational strategy. Strategic Management Journal 3, 159-174. Hedberg B., S. Jonsson (1978). Designing semi-confusing IS for organizations in changing environments. Accounting, Organizations and Society 3, 1, 47-64. Huber G.P. (1991). Organization learning: a guide for executives in technology critical organization. International Journal of Technology Management, 11. Kiesler S., L. Sproull. (1982). Managerial response to changing environments perception on problem-sensing from social cognition. Administrative Science Quarterly 27, 548-570. Lesca H. (1994). Veille strategique pour le management strategique de l'entreprise. Economies et Societes, Serie Sciences de Gestion, SG20, 5, pp. 31-50. March G.J., M. Feldman (1981). Information in organizations as signal and symbol. Administrative Science Quarterly, 26, 171-186. Marmuse C. (1992). Politique Generate. Economica Ed. O'Reilly C.A. (1980). Individuals and information overload in organizations : is more necessarily better ?. Academy of Management Journal 23, 4, 684-696. Porter M.E. (1982). Competitive Strategy. New York, Free Press. Prescott J.E., T.E. Gibbons (1997). Parallel competitive intelligence process in organizations, International Journal of Technology Management,
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Issue on Informal Information Flow 11, 1/2, 162-178. Smircich L., Stubbart C. (1985). Strategic management in an enacted world. Academy of Management Review, 10, 4, 724-736. Thomas J.B., S.M. Clark and D.A. Gioia (1993). Strategic sensemaking and organizational performance: linkages among scanning, interpretation, action and outcomes. Academy of Management Journal, 36, 2, 239-270. Vandenbosch B., S.L. Huff (1997). Searching and scanning: how executives obtain information from executives information systems. Management Information Systems Quarterly, 21,1, 81-107. Weick K.E. (1995). Sensemaking in organizations. Sage Publications. Wang P. et al. (1991). Filtering strategic environmental information processing using EIS. Proceedings of the 27th IEEE Conference on System Science, 3, pp. 126134. Wilensky H.L. (1967). Organizational Intelligence, Basic Books, New York Yasai'-Ardekani M., P.C. Nystrom (1996). Designs for environmental scanning systems: tests of a contingency theory. Management Science. 42, 2, 187-204. Zmud R.W. (1990). Opportunities for strategic information manipulation through new information technology. In: Organizations and Communication Technology. (J.Fulk and C. Steinfeld, ed.), Sage Publications, pp. 95-116.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
THE CHALLENGES OF MANAGING GLOBAL VIRTUAL TEAMS VIA INFORMATION COMMUNICATION TECHNOLOGIES* Norhayati Zakaria, School of Information Studies, Syracuse University, NY1 Andrea Amelinckx, Faculty of Management, University of Lethbridge, Canada2 David Wilemon, School of Management, Syracuse University, NY3
INTRODUCTION With the emergence of electronic communication such as information communication technologies (ICTs), the virtual workplace comprises co-workers from various national and cultural backgrounds who are communicating and collaborating from various locations around the globe, through time and space (Amant in Johnson, 2001). Thus, the impact of globalization in the 21 st century reflects the true concept of "Global Village" as anticipated by Marshall McLuhan (1964), and the concept of "Borderless World" as envisioned by Kenichi Ohmae (1990). Interestingly, both scholars seemed to accurately predict the reality facing organizations today in a sense
* This paper extends our earlier paper presented at the Sixth (6th) International Conference on Global Business & Economic Development—States and Markets: Forging Partnerships for Sustainable Development. Bratislava, Slovakia, November 2001. 1
Norhayati Zakaria is a lecturer at the School of Management, University Utara Malaysia and currently pursuing her PhD in Information Transfer at Syracuse University with research and teaching interests in global information technology, international management, and cross-cultural communication. Email: nzakarO 1 @syr. edu 2 Andrea Amelinckx is the Director of the International Management Program, Faculty of Management, University of Lethbridge. Her research and teaching interests include cross-cultural management practices and diversity in employment relations.Email:
[email protected] 3 David Wilemon is the Snyder Professor of Innovation Management at the School of Management, Syracuse University. His field of expertise is product development, high performing teamwork, and innovation management. Email:
[email protected]
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that there is a significant use of ICTs by global virtual teams. They illustrate this point as follows: As we live in a Global Village, a simultaneous happening where constraints of time and space has vanished. The electronic media involves everyone simultaneously. Not only is there a new multi-sensory view of the world, but also now people from around the world can communicate as if they lived in the same village (McLuhan, 1964, p.4). People everywhere are more and more able to get information they want directly from all corners of the world. New technologies are eliminating some inefficiencies of the inflow information in the past (Ohmae, 1990, p. 19). Adding to those statements, it is imperative to understand that global virtual teams are not merely separated by time and space, but often are alienated by cultural differences. On the one hand, it is expected that using ICTs will lessen the impact of cultural differences, and reduce the cultural barriers that exist in global virtual teams due to the absence of face-to-face interaction. On the other hand, organizations need to be more vigilant of the technology used. What is new about this form of teamwork and communication is the mediation of team-support technology. The reality is, "different technologies may be better suited for communications needed to convey information versus converge to decisions" (Massey et al. 2001, p.83). In fact, Townsend et al. (1998) believe that the real challenge might come from the technology itself where global virtual teams need to learn how to use the technology-enabled capabilities to enhance performance beyond that of traditional teams. As such, many scholars consider the rapid advancement of computer and information technology has, and will continue to have, the most intense impact on the way people work and live. Nonetheless, the basic nature of teams as well as the challenges of managing those teams will remain demanding and complex. Findings from Dube and Pare (2001) suggested that GVTs face more challenges than localized virtual teams. Though cultural diversity offers potential richness, it presents enormous challenges. This paper examines the challenges that surface when global virtual teams use ICTs. There are three main objectives: •
To examine how global virtual teams can learn to collaborate and communicate by the use of ICTs.
•
To understand the role of ICTs in facilitating intercultural communication.
•
To provide managerial recommendation to increase the effectiveness of these teams in MNCs.
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GLOBAL VIRTUAL TEAMS Many MNCs are increasingly employing teams that transcend distance, time zones, and organizational boundaries and share cultural diversity known as 'global virtual teams' (GVTs). Lipnack and Stamps (1997) stress that most people will work in global virtual teams and the new form of boundary-crossing teams will be the working conditions of information age organizations. GVTs are sought because they are considered to be a powerful tool to enhance an organization's creativity and problem-solving capabilities. Also, GVTs are increasingly becoming key decision makers in MNCs, addressing challenges that are broad in scope and essential to performance (Maznevski and DiStefano, 2000). In essence, what are global teams? Are global teams similar to or different from virtual teams? It is important to be aware of the differences in these definitions because they often overlap, which can lead to confusion. Global teams are defined as "individuals who are globally dispersed, meet face-to-face rather infrequently, members are from different cultures, and speak different languages" (McDonough and Cedrone, 2000, p.3). They also differ in functionality, which presents more complexity (Wheatley and Wilemon, 1999). Global teams are also sometimes referred to as heterogeneous and electronic groups, while traditional teams are often homogenous and non-electronic groups. In a similar vein, a virtual team is defined as "a temporary, culturally diverse, geographically dispersed, electronically communicating work group" (Kristof et al. 1995). The notion of temporary in the definition describes team members that may have never worked together before and who may not expect to work together again as a group (Lipnack and Stamps, 1997; Lau, et al. 1999). A virtual team is considered global when their backgrounds are culturally diverse, and are able to think and work within the diversity of a global environment (DeSanctis, Poole & Dickson, 2000). ICTs effectively link these people together, despite their working at different times or locations. All these conditions necessitate teams to share and communicate resources as needed (Lurey and Raisinghani, 2001). In summary, this paper will use the term GVTs to combine both the meaning of global and virtual teams. It basically includes three main characteristics: team members with diverse cultural backgrounds-comprised of heterogeneous members, working across geographical/national boundaries, and using technology to facilitate communication and collaboration.
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THE EFFECTS OF NATIONAL AND ORGANIZATIONAL CULTURE In global virtual teams, cultures and management come together; they need to be compatible in order to ensure success. Historically, managers have not acknowledged the effects of national culture on management (Shea and Lewis, 1996). For example, when setting up an organization in the United States, American managers tend to structure the management system according to their own cultural norms, developed out of their common practices. But with the rise of MNCs, or setting up a branch in foreign countries, the same cultural assumptions can no longer be applied. As such, Shea and Lewis proposed that "societal factors such as culture must be explicitly considered for effective operation of the organizations, and the cultural environment in which a firm operates has a significant impact on information use" (p.257). Inkeles and Levinson (1954) first defined culture according to three dimensions, which are related to authority; conception of self (looking at the relationship between individuals and society), the individual's concept of masculinity and femininity; and lastly conflict resolution, which include the control of aggression and the expression of feelings. Hofstede (1980) further extended this work by introducing cultural dimensions based on his empirical research of 50 different countries. The dimensions (power distance, individualism-collectivism, career/success-quality of life (previous defined as masculinity-femininity), and uncertainty avoidance) will be discussed in further details in our theoretical framework section. Apart from national culture, organizational culture also has a strong effect on management systems. An organizational culture, like the culture of a society, consists of its own structured systems of policies and procedures based upon its underlying values — values informed by and based upon the national culture of its members. Organizational culture is embedded in the national culture in which an organization operates. As organizations globalize, the organization may be influenced by several national cultures not merely the culture of the "home office" — in fact, the impact of national culture may no longer be a singular influence but a plurality of influences on organizational culture. In examining the interplay between national and organizational cultures, it is important to keep in mind that neither national nor organization culture is static but both evolve and are subject to change over time and with the advent of new technologies - such as ICTs. Although both cultures play different roles, each influences the way things are done in MNCs. Thus, both factors need to be considered especially in the context of global virtual teams using ICTs. To better understand the organizational impact on teamwork, some pertinent questions need to be addressed: Does the organization support teamwork? Does the organizational culture support the use of ICTs? Do team members willingly exchange and share their work using ICTs? How much of a global
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team's use of information technology is directly reflected in and related to their existing work culture? In order to address these questions, we must recognize the complexity, range and distinctiveness of organizational cultures. By definition, organizational or corporate culture includes the values and beliefs expressed in artifacts, symbols and practices as well as organizational language, traditions, myths, rituals, and stories. As Schein (1999) views it "... it is the way we do things around here. Inherently, corporate culture is the learned, shared and tacit assumptions such as values, beliefs, and assumptions" (p.48). Hence, organizational impact varies greatly on ICT usage by global virtual teams - it may act as a barrier or restraint to ICT usage or provide the necessary support in regards to technology, infrastructure and organizational culture, to actively foster it.
USE OF INFORMATION COMMUNICATION TECHNOLOGIES Technology is simply a tool that requires a human interface. No matter how sophisticated the technology, the implementation of technology has the potential to fail if sufficient considerations are not given from the user perspectives. User considerations include training, user interface, and user competencies. To date, there are many types of information technology that enable people to communicate without the constraints of geographic boundaries. The term ICT represents all types of electronic technology that mediate human communication, collaboration, and coordination, which simultaneously incorporate tasks such as data mining, knowledge management, workflow management, etc., across temporal and spatial boundaries. It is a broad reference to electronic systems that integrate both software and hardware (Khoshafian and Buckwitz, 1995). There are synchronous groupware, such as video conferencing, audio conferencing, electronic display, and electronic meeting systems, while asynchronous groupware are e-mail, bulletin boards, web pages, non-real time database sharing, and conferencing. For instance, terms like GroupWare, computer-supported collaborative work (CSCW), teamware, electronic meeting system (EMS), group-support system (GSS), computer-mediated communication (CMC), and group decision support systems (GDSS) are commonly used to highlight the use of any form of computer mediated communication. Our paper uses a generic term, ICT, to illustrate the same basic understanding and meaning of all the available electronic communication technology. The most important concern is the specific features of technologies, which constitute anonymity, language, and interface options that may have an effect on group meetings and their outcome (Scott, 1999).
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Since the discussions in this paper are centered primarily on the issue of crosscultural communication and the use of ICTs, we need to understand these matters—to what extent people are comfortable using information technology compared to the usual face-to-face interaction? Can ICT eliminate the cultural barriers that exist when people communicate? How about the issue of trust? How about power and status? Qureshi and Zigurs (2001) suggest that the greater the degree of virtualization, the more people need to manage the relationships, share knowledge and expertise, coordinate joint activities in completely new ways. In fact the degree of technological sophistication does not influence the success of global virtual teams; instead it depends on how the tools are used.
SIGNIFICANCE OF GLOBAL VIRTUAL TEAMS According to Platt and Page (2001), there are many instances where the growth of GVTs will escalate such as "the prevalence of flat organizational structures, environments that require cooperation and competition among organizations, changes in workers' expectations of organizational participation, the shift toward services/knowledge environments, and increasing globalization of trade activities (Townsend et al. 1998, p. 18). Thus, we realize that organizations in the new millennium have the capacity to reshape and transform traditional teams into global virtual teams. New challenges will be created for GVTs compared to the challenges facing traditional teams since GVTs consist of people from different backgrounds, attitudes, perceptions, and beliefs. Whether they are domestic or global, both types of teams experience degrees of individual difference and conflict. In GVTs, the barriers can be larger due to national differences. For example, team members from Malaysia, the USA, Britain, Germany, Japan, and France are likely to be more complicated to deal with than teams of people from New York, Nebraska, Massachusetts, and California. We now examine how this new form of team can benefit or hinder MNCs by examining the advantages and disadvantages of GVTs. In understanding the significance of GVTs, it is useful to note that while advantages can benefit the MNCs, disadvantages can help MNCs recognize certain problems inherent in a cross-cultural, geographically diverse employee base. There are a number of potential advantages of global virtual teams. GVTs offer, for example, the opportunity for an organization to create needed synergy and creativity among the members of the team. Cohesiveness among GVT members can be increased when the proper environment has been established for the team. Such cohesiveness can help a GVT in times of stress and setbacks. A GVT can help an
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organization gain acceptance for new ideas, when the various members become responsible for "selling" and influencing the adoption of the new idea, process, or policy in their organizations. Finally, GVTs can assist an organization gain a competitive advantage via the creation of new products, new services, or new markets. The clearer the objectives and operating charter are for a GVT, the more likely a GVT will have the capacity to create a competitive advantage. There also are some disadvantages of GVTs. Unless care is taken, decisionmaking processes can be slow and ineffective. This often occurs when an organization begins to use GVTs and decision-making processes are unclear and not effectively established. The greater the authority a GVT possesses, the less likely this will be a long-term problem. Finally, there are many opportunities for miscommunications and misinterpretations. These communication problems can be alleviated, in part, by training GVT participants to deal and appreciate cross-cultural differences. In essence, of GVTs often require new ways of thinking by organizations. In the next section, we will further discuss and relate these issues with the crosscultural dimensions established by Hofstede (1980) and Hall's contextual theory (1976).
THEORETICAL FRAMEWORK In order to understand the challenges and opportunities present in global team dynamics, one must first recognize the impact that cultural difference poses in establishing intra-team communication and relationship patterns. Cross-cultural misunderstanding can be exacerbated in ICT usage when cultural difference is not acknowledged or addressed. Individuals from different cultures vary in terms of their communication and group behaviors (Gudykunst, 2002). This in turn can impact individuals' abilities to work in computer-mediated team environments. Hofstede (1980) examined the impact that national culture has on the creation and maintenance of organizational culture within the workplace. He developed four distinct dimensions in order to understand both national and organizational culture: power distance which denotes how a culture fosters pecking orders and perceives inequality, uncertainty avoidance which indicates how a culture deals with ambiguity and perceives risk taking, individualism versus collectivism which indicates how members in a society perceive themselves in relation to other group members and the extent to which they value group loyalty and attachment, and career success vs. quality of life (originally labeled masculinity vs. femininity) which indicates the value that a culture places upon work as compared to personal life and how a culture perceives such traits as dominance, assertiveness, aggression, competition, rigid gender roles as compared to harmony and equality.
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How does Hofstede's framework inform global team dynamics? Global team members whose cultures value collectivism may appreciate working within a team setting but may feel isolated nonetheless since team members are geographically separated and work without substantial and frequent group input. For those from cultures that place a high value on individual effort, members from collectivist cultures may seem overly needy and demanding. Similarly, those from cultures that rank low on uncertainty avoidance may feel anxious working within a new, unfamiliar, technologically challenging virtual work environment - unless clear procedures and rules are developed and established at the onset. For those members from high power distance cultures where status differentiation provides clear hierarchical lines of command, minimizing those cues may create disorientation and uncertainty when rank delineation is minimized. High power distance members may initially opt to compensate by introducing formal or rigid language patterns and by frequents usage of titles when addressing other team members or referring to themselves in correspondence. For members from low power distance cultures where there is a low awareness of others' social presence, such formality in language may be perceived as distant, unfriendly or cold. Conversely, low power distance members may communicate using language that is perceived as too familiar or impolite. Members who emphasize career/success (masculinity) may expect demanding work schedules that clash with those members from cultures that value their personal lives and time away from work. If such cultural differences are not clearly understood, ICTs can promote an escalation of conflict rather than ameliorating cultural differences. An equally useful framework for better understanding the impact of cultural difference upon global virtual teams is found in Edward Hall's contextual theory (1976). Hall posits that in order to understand the behavioral and communication priorities of a particular culture, one must understand the context in which they occur. His contextual theory introduced the notion of "high versus low context" cultures. Members of a high context culture rely heavily on the external environment, on the situational context in which communication occurs and upon non-verbal, nondirect behavior. Typically, meaning is indirectly conveyed, relationships are long lasting, and those in responsibility are personally accountable for the actions of their subordinates. Conversely, for members in low context cultures, the external environment in which communication occurs is less important as are non-verbal behavior cues; ambiguity is generally avoided while direct verbal communication is the norm - explicit information is given and expected in return. Team members from high context cultures may be at a loss as the prerequisite social environment cues typically needed for relationship building are absent in a virtual work environment. Likewise, ICT does not promote subtle, indirect communication styles. Conversely, team members from low context cultures prefer direct informal
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communication and ICTs foster and promote such dialogue patterns. When global virtual teams include both high context and low context cultural members, establishing and maintaining intra-team relationships and communication patterns can be challenging. GVTs must develop alternative ways to create trust and maintain group unity. One such way is by using multiple channels of communication and multiple communication media. Using multiple channels of communication contributes to group cohesion, in part, because it can provide a richer external (virtual) environment for high context group members and increases the sense of collectivism for members from collectivist cultures.
DISCUSSION Not all people favor the 'cyberspace' notion of working. The absence of face-to-face interaction with ICT use eliminates most verbal and social cues, which can be intimidating for members from certain cultures. Thus, in selecting team members, some attributes or characteristics are worth considering such as: open-mindedness, a willingness to learn, those who favor challenging and new work environments, an ability to acculturate, and those who are competent in using ICTs. Experience working in a virtual or global environment is also important. Besides retainable recruits, attractive reward systems must also be developed to recognize people working across boundaries and working virtually. Rewards must clearly correspond to the performances shown by team members because this can be a key motivational factor to some team members. The diverse nature of global virtual teams accentuates the issue of cultural differences. Thus, communicating between and within teams requires people to be fully aware of and to be sensitive to their cultural differences and/or similarities, hi order to overcome the differences and take advantage of the similarities within global virtual teams, people need to have intercultural communication competence to enhance their communication behaviors (Zakaria, 2000). This competence requires people to have the ability, skills or knowledge about the cultures in question. According to Chen and Starosta (2000), there are basically three competencies required—cognitive, affective, and behavioral. These competencies respectively mean that people need to understand and recognize cultural differences; feel comfortable with various cultures; and thus act accordingly to suit cultural differences. Research on GVTs indicates that virtual teams face very different challenges than do their counterparts in traditional teams - both collectively and as individual members. As well, challenges common to traditional teams, such as team formation, team cohesion, and team conflict resolution, are far more intricate due to distance and
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the nature of team interaction. For this reason, Massey et al. (2003) emphasize that one needs to fully understand the issues involved in the complex coordination of temporal team members across boundaries, and the nature of team interactions. An additional area of fundamental concern for GVTs is with users' satisfaction with the processes and outcomes of the teamwork itself since team satisfaction, to a great extent, determines the ultimate adoption and sustained use of collaborative technologies (Rienig, 2003) Seemingly, this observation challenges the notion that ICT usage actually diminishes reliance upon organizational hierarchy and levels power-distance relations between members. However, it may indicate that the authority of traditional roles and power relations diminish but that power dynamics between members of virtual teams continue to exist and influence group structure. How intra-group power dynamics develop and how they impact team cohesion and work effectiveness may depend on whether the team member or members exerting control are recognized by the team as in a legitimate leadership position within the team. The challenge for high-context people is the difficulty in establishing trust and relationships with the diverse team members because they do not have enough verbal cues. As Rosa and Mazur (1979) concluded; "...when a group is composed of strangers, they very quickly make use of whatever limited status cues are immediately at hand, even such subtle signs as eye contact and speaking order (p.22)." Thus the impact of ICTs can be exacerbated by the lack of both elements, which further intensifies the communication challenge of global virtual teams. For global team members from cultures that value directness and informality, ICT usage can promote dialogue since it already fits within their own cultural framework. The absence of physical cues may actually promote understanding when intra-team trust has developed, as they will not be faced with potentially confusing dissonant cultural cues from culturally diverse team members. Moreover, initial relationship building between members faces more challenges, as does the establishment of intra-team trust. Jarvenpaa, et al. (1998) posits that virtual teams have no time to gradually develop trust and therefore require a high degree of "swift trust" to be demonstrated by enthusiastic and proactive team member behavior. The absence of non-verbal cues may pose certain initial difficulties for some whose cultures rely on body language, gestures, facial expressions, and proximity (Farmer and Hyatt, 1994). For example, in high-context cultures, people in general value subtle and indirect speech when communicating. Visual cues such as a nod, smile, posture, voice, and eye contact provide important indications and meanings to establish certain understanding of what is communicated by another person. Without these cues, it may be initially difficult for these people to carry out tasks as complex as making decisions to as basic as communicating.
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Kiesler and Sproull (1992) found that using ICTs result in a reduction of status inequality, in which member's participation and influence were more equal. Similarly, a study by Pollard (1996) has shown that heterogeneous teams prefer to use ICTs because of its anonymity characteristic. Pollard further observed that electronic meeting systems, which are one form of ICT use, diminished the positional bias and status perceptions among team members. As a result, we propose that low-status team members from the large power distance cultures would be more willing or prefer to participate in computer-mediated discussions since being unaware of the members' status is more salient. Conversely, using ICTs will be a different case for the highstatus members. The fear of loss of power and status might discourage them from using ICTs. Here, we propose that face-to-face interaction would be more credible and desirable because high status members could assert their status and power, thus maintains the expected inequality in the organization structure, which highly supports centralization. In another study, however, the use of ICTs proved that people of high status would be less conscious about maintaining their positions, hence facilitate more equal participation among group members (Propp, 1999). Accordingly, from one perspective, ICT does play a role in reducing status barriers that exist between high versus low-status members from large power distance cultures. Hofstede (1980) stipulated that for members of small power distance cultures, limited distinction is made between the low and high-status team members and members tend to be adverse to rigid, horizontal, hierarchical organizational structures. We can, therefore, presume that small power distance team members would tend to be comfortable using ICTs since it has the potential to reduce social differences. ICTs can promote interdependence between less and more powerful team members. Furthermore, since it was reported that teams that use ICTs observed equality of participation (Strauss, 1997), suppressed the organizational hierarchy (Kock and McQueen, 1997), and generally enhance member's participation in meeting compared to face-to-face meetings (Williams and Wilson, 1997). Global virtual teams that exclusively use ICTs exclude social or physical presence; rely on a depersonalized form of communication between and within team members (Ketrow, 1999). The absence of non-verbal cues pose problems for some cultures that thrive on body languages, gestures, facial expressions, and proximity (Farmer and Hyatt, 1994). For example, high-context people often value subtle and indirect speech when communicating. Visual cues such as nod, smile, postures, voice, eye contact, and many more provide important indications and meanings to establish certain understanding of what is communicated by another person. Without these cues, it is difficult for these people to carry out tasks as complex as making decisions to as basic as communicating.
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THE ROLE OF ICTS AS A FACILITATING TOOL Traditionally, managers travelled great distances to be present at a meeting, or to close a deal. The fact is, without the use of any kind of communication technology, traditional teams need to be in one location to communicate and work collaboratively. Hence, matching meeting time with location is a common problem for MNCs. As McGrath and Hollingshead (1994) point out, "groups using electronically enhanced communication systems could transcend the time and space constraints that burden groups who usually meet face-to-face" (p.4). With the use of communication technology, mobility and flexibility become the essential attributes to global virtual teams' success. People can be thousands of miles apart and still be able to work as efficiently and effectively as traditional teams. It is useful to note that our paper does not focus on which technology is used, whether it is asynchronous or synchronous mode; but it primarily attempts to understand the role and impact of ICTs' use on global virtual teams. Some useful assumptions were made by the study of McGrath and Hollingshead (1994) in regards to the effects of electronic technology on work groups which are: (1) improved task performance, (2) elimination of space and time constraints, and (3) increased access to information. These assumptions fit very well with the concept of global virtual teams in our paper. In consequence, we propose that the use of electronic communication technology has the capacity to help overcome or reduce cultural differences within global virtual teams. Yet, we are not proposing that ICTs will totally eliminate the cultural differences of team members. Merely, ICTs facilitate intra-team interaction by introducing a shared framework and virtual work setting. In that light, the role of ICTs is regarded as a. functional tool that can facilitate cross-cultural collaboration and communication. We also propose that once team members have the appropriate IT competencies that this will enhance their task performance. This in turn is likely to increase their effectiveness and efficiency as a team. Organizationally, strategic planning and management of technology needs to be implemented in order to fully utilize the technology and take full advantage of global virtual teams. O'Hara-Devereaux and Johansen (1994) strongly believed that information technology is not an alternative but it is a requirement for successful global business. Information technology can provide tools to overcome some of the problems of working together in a fragmented, global work environment and meet the challenges of distance and diversity. Still, we need to understand issues such as the limitation of available technologies, and unpredictability of existing global information infrastructures. Findings from group work research have shown that issues of cultural differences are important, be it national cultures or organizational cultures. For example, Shea and Lewis (1996) have identified that in one way or another, culture plays an influential role when introducing or implementing new ICTs.
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ICTs can promote cross-cultural collaboration and communication by providing a common medium for work and shared meaning. ICTs also can foster interdependence between less and more powerful team members and promote equality of participation (Strauss, 1997), reduce organizational hierarchy (Kock and McQueen, 1997), and generally enhance member participation in virtual meetings compared to face-to-face meetings (Williams and Wilson, 1997). "Low social presence generally is unsatisfying and leaves people in some situations, such as those involving conflict, unable to resolve differences effectively or meet their goals" (Ketrow, 1999, p.272). Over time, the exclusion of social and physical presence can foster positive intra-team coalitions and strengthen working relationships that would be less likely to thrive in a more traditional team framework. A summary of the potential advantages and limitations of ICTs are presented in Table 18.1.
Table 18.1: Summary of potential advantages and limitations of ICTs as supporting collaborative communicative technologies
MANAGING GLOBAL VIRTUAL TEAMS Global virtual teams evolve differently than do traditional face-to-face teams. As a result, different solutions and ways to manage them need to be developed. Duarte and Snyder (1999) emphasized that technology is only one of the critical success factors for virtual teams. In fact, virtual teams and their leaders seldom claim technology as the primary reason for success or failures (Nunamaker Jr. et al. 1997). Virtual teams that are also global in member composition raise additional challenges in their management The preparation of global team members, individually and collectively,
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to effectively communicate cross-culturally is a prerequisite to successful collaboration and is as important as the team's technological competency and skills. Managing GVTs entails two key factors—people and technology. People as a factor include culture, language, and IT proficiency; while technology includes accessibility, reliability, compatibility, and appropriate technology use. Significantly, it is useful to note that "organizational leaders who try to improve performance of their virtual teams by simply providing them with more advanced technologies may be misdirecting their resources" (Lurey and Raisinghani, 2001, p. 532). What is more important is the internal group dynamics and external support mechanisms, equipped together with the advanced technologies in order for the GVTs to prevail in the virtual context. Hence, here are some recommendations that we feel important to be considered by organizations that thrive on GVTs. Global Communication Skills It is crucial for GVTs to inculcate global communication skills to enable them to collaborate effectively, thus enhance their performance over the period of time they work together. Although communication is not the only factor that influences collaboration, it is seen as a prerequisite for effective team collaboration. The preparation of team members, individually and collectively, to communicate effectively cross-culturally, is a prerequisite for successful collaboration. Encouraging team members to bridge communication barriers and promoting feelings such as excitement, enthusiasm, and motivation for the endeavor can act as the driving forces that help people to master a rich common language, and use ICT to communicate their intended messages to people around the globe. Cross-Cultural Training The purpose of this training is to help people to adapt and adjust; what really matters is to help people learn about the cultural differences that they face through electronic communication. Moreover, it demands an ability to work within a culturally diverse context. Although using ICTs could reduce cross-cultural barriers, people still need training in order to provide them with the desired cognitive, affective and behavioral competencies (Chen and Starosta, 2000). With adequate knowledge, and training, possible international blunders can be avoided, therefore minimizing the frustration endemic when collaborating online.
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Global Mind-Set Having a global mind-set means GVTs are open-minded, demonstrate appropriate behaviors, and are sensitive to the divergences they encounter during communication and collaboration processes. People need to free themselves from misconceptions, stereotypes, preconceived notions, and ill feelings that would lead to erroneous conclusions in understanding cultural differences. Instead people need to be positive, willing to learn, tolerant, and most importantly patient! Cross-Cultural Leadership Competencies At times, the emergence of leaders is ambiguous in the electronic communication setting, yet this is a crucial issue. According to Kayworth and Leidner (2002), it is essential to understand the role and nature of team leadership in virtual settings given the new growth toward physically dispersed work groups. Therefore, to promote leadership skills, organizations need to establish a strong culture that values teamwork, learning and making the most of making diversity an asset. Leaders need to be open to change, supportive of global teamwork, and most of all help team members communicate effectively. Leaders play the role as facilitators, as well as intermediaries in the event people face difficulties sending and receiving messages across borders. Since ICTs eliminate the verbal and social cues that are prerequisite to certain cultures, leaders must help team members build and maintain trust, ease the transition process, select and use appropriate electronic communication and collaboration technologies, and coach and manage performance without the traditional forms of feedback (Duarte and Snyder, 1999). Organizational Culture MNCs also need to ensure that receptive norms, values, and standards are established, which includes the free flow of information, shared leadership, use of ICTs, and cross-boundary collaboration. Moreover, norms must also be acknowledged and new ways of working and doing business together need to be valued and supported. Appropriate policies must be created on how to do business in different cultures. Strategically, Duarte and Snyder recommend a 'microclimate' as a possible solution to supporting effective norms and values.
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Promoting Trust Among Team Members Issues such as trust and control are important elements to manage as ".. .the success of virtual teams is related to how organization fosters or impedes trust between itself and its external members" (Duarte and Snyder, 1999, p.20). Global virtual teams must develop alternative ways to create trust and maintain group unity, whether it is through virtual socialization and/or through a variety of strategies to foster effective communication and collaboration (Jarvenpaa et al. 1998). Use of ICTs and IT Competencies Organizations must choose the appropriate technology to accomplish a task. (Dube and Pare, 2001). The need to understand how and when to use these technologies are equally important as choosing the right one. Intra-team communication becomes more effective if multiple communication media, such as email, fax, telephone, video conferencing, etc., is used by team members. Moreover, using multiple channels of communication could also contributes to group cohesion and enhances collaboration overall. Collaboration and electronic mail software need to be sturdy enough to handle large volumes of data (Igbaria and Tan, 1998) and software applications must be interface reliably. According to Platt and Page in Johnson (2001), "mastering technological complexities is required to work effectively in virtual teams" (p. 135). Consequently, having appropriate IT competencies are important for GVTs in order to collaborate and communicate effectively.
MANAGERIAL IMPLICATIONS AND CONCLUSION Creating and managing effective global virtual teams are daunting managerial tasks. Group collaboration is a complex matter, with or without electronic technology. Geographic, linguistic and cultural diversity further complicates intra-member interactions and group cohesion. As the reality of the global village sets in, the issue of interactional complexity needs to be addressed by teams due to cross-cultural communication, as well as diversity within cultures. McGrath and Hollingshead (1994) assert that collaboration is more than simply the notion of information exchange. It involves cognitive, affective, as well as the motivational aspects of communication. In our paper, there are significant managerial implications as we anticipate that more complexities and challenges will emerge when we integrate the issue of ICTs
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usage with the culturally diverse nature of global virtual teams, such as: Do ICTs enhance the process of intercultural communication within global virtual teams? Do ICTs promote more effective ways of working and enhancing a team performance? Can ICTs help reduce the cultural barriers that often exist between and among global virtual teams? All in all, can ICTs facilitate learning between team members in order for them to collaborate successfully? Deploying ICTs intensify the challenges of global management, whether it is team-based or not. For example, ICTs can shape the way people perform their tasks in organizations, as much as ICTs can impact the way people communicate and collaborate globally. Without a doubt, we are focusing on new ways of working across borders and across organizations. ICTs are not just simple tools, instead they need to be integrated and aligned with team design, behaviors, and new ways of collaborating and communicating. Whitworth et al. (2000) noted that without anonymity, parallel input, and brainstorming memory input, electronic groups performed more poorly than non-electronic groups. Can we then say people are actually comfortable communicating using ICTs? Basically, many studies have shown that using ICTs enhance communication effectiveness, while other studies have shown that some people prefer face-to-face interaction. Global virtual teams cannot be viewed merely as traditional teams that are geographically dispersed - in creating and in maintaining global virtual teams; managers must recognize that different skill sets are required by individual team members and by the team as a whole. Group cohesion remains much more of a problem for virtual teams in comparison to traditional teams. Despite the ease of communication with ICTs, studies have shown that teams that wholly rely on virtual communication, replacing all face to face communication, report less satisfaction with group interaction (Warekentin et al. 1998). The opportunities for uncovering numerous useful insights in GVTs are available. We hope others will join us in this discovery. In a nutshell, based on our review of the literature on GVTs and ICTs, we summarize our major study findings as follows: 1. Global virtual teams are here to stay. They have become a critical part of the global enterprise. We will see even more use of these teams. The question is not whether we will use GVTs but how well we will learn to use them. 2. Organizations which employ virtual teams will need to address the special requirements these teams demand, e.g., training, management support, leadership development, IT infrastructures, etc. 3. When possible, managers need to facilitate the GVT process by sharing their "hands-on" experiences and by modeling effective team behavior.
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4. Scholars can contribute to more effective GVT practices by conducting research on the key issues & challenges GVTs encounter in their work. Such research will need to be disseminated to those who can use it to increase the efficiency and effectiveness of their GVTs. 5. GVTs are able to transcend both time and space with effective ICT use. ICTs are, in effect, the enabling technologies of GVTs. 6. GVTs often face difficult geographic, linguistic and cultural diversity which complicates intra-team performance objectives. Ignoring these issues can lead to dysfunctional behavior within GVTs and poor performance. 7. Information communication technologies (ICTs) have the potential to greatly enhance a global team's communication and collaboration processes. 8. The creation of a synergistic team culture that promotes intra-team trust is required. The higher the trust among members of a GVT, the more likely a team will communicate and perform effectively. 9. GVT leaders need to be particularly aware of the importance of a shared culture and team identity. Achieving a clear team mission, teamwork processes, clear goals, and a shared agenda can help foster a shared GVT culture. 10. As we note, the challenges are many, yet the rewards derived from highly skilled GVTs can be very important to those organizations that must rely on coordinated teamwork across cultures and national boundaries.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
INFORMATION SYSTEM DEVELOPMENT F O R PROJECT PORTFOLIO MANAGEMENT
Kaj Rintala Jarno Poskela Karlos A. Artto"" Marko Korpi-Filppula
ABSTRACT This paper investigates the use of modern IT enabled systems and methods in project portfolio management. The paper introduces a development process of a special information system for managing several simultaneous, internal development and customer projects as well as information technology projects. The need for project portfolio management tools arises from a rapid growth of organizations using projects as major vehicles for conducting their businesses. Projects are used both as devices for external delivery projects and internally by implementing organizational change, internal development or new information technology. The well-known project management discipline that focuses on managing mere single projects does not provide an adequate platform for successful management in a multi-project environment. The paper suggests that the solution is based on an project portfolio management application. Project portfolio management considers project composition as a whole from a strategic point of view, balances the portfolio against different aspects, and tries to maximize the value of the whole portfolio. At the same time project portfolio management sets new requirements for information systems used in project management.
Ph.D. student Kaj Rintala is a project manager at TAI Research Centre of Helsinki University of Technology, Finland. Email:
[email protected] ** Ph.D. student Jarno Poskela is a project manager at Innovation Management Institute of Helsinki University of Technology. Email:
[email protected] Dr. Karlos A. Artto is professor at the Department of Industrial Engineering and Management at the Helsinki University of Technology, Finland. Email:
[email protected] * Ph.D. student Marko Korpi-filppula is a researcher at TAI Research Centre of Helsinki University of Technology, Finland. Email:
[email protected]
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The objectives of this paper are to analyze the requirements set to a project portfolio management information system, and to introduce a way to build a system that meets the requirements in specific case environments. We discuss the empirical insights gained from a one-year longitudinal study of companies for which project portfolio management systems were constructed. Motivated by lack of common managerial practices, poor information sharing and difficulties in transferring knowledge from earlier development projects, the case study companies sought better ways to manage their projects. Based on case companies' experiences, a project portfolio management system was constructed that can be easily modified to match different needs in different business environments. The system provides a standard model for different types of projects. Furthermore, it enables information sharing via Internet and using the system as an organizational memory that supports learning across projects and organizational units. The project structure, individual tools and document templates represent important parts of the system that need to be tailored to suit the company-specific needs.
INTRODUCTION The amount of project work is continuously increasing in our society. Companies and other organizations that face more competitive, complex and turbulent business environment have adopted project oriented work methods in order to better control their business processes. Some companies have totally abandoned the traditional functional organization structures and moved towards more flexible project organization forms. Project management activities have naturally become one of the main organizational activities performed within organizations, especially in project companies (Shenhar et al., 1997). As projects have generalized as a vehicle for conducting business also the question of their simultaneous management even in a strategic context has emerged. Project portfolio management is a management discipline which takes a strategic view for managing different individual projects or project programs. Even though project portfolio management is a relatively new concept in the field of project management it has its roots in prevailing project management theory. Project portfolio management has got influences from methodologies such as management in multi-project environment, management of product development projects and management of investment portfolios. Empirical investigations have revealed several shortages existing in management of multi-project environment. The main problems can be categorized roughly in the following three categories. Firstly, resource allocation has occurred to be problematic in multi-project environment. Typically key persons suffer from
Information System Development for Project Portfolio Management 267 project overload while some individuals work in undercapacity. Further parallel work activities are conducted in companies because of the lack of overall coordination and transparency between projects. Second problem concerns the strategic context of project composition. Projects are not aligned with the strategy or balanced optimally against different objectives at the portfolio level. Thirdly, work activities are hindered by blizzard of information and in the same time lack of relevant information. (See e.g. Artto, 2001a) Sophistication of management models and tools normally far exceeds the quality of project related input information (Cooper et al., 1999a). Information sharing across projects and project programs is an important activity at the portfolio level. Information sharing and transparency across projects and project programs enable efficient portfolio coordination. Decisions related to project selection and prioritization can be made based on the information of the whole portfolio. Overlapping resource usage can be decreased and synergies can be materialized to full extent at the company level (Poskela et al., 2001). Information sharing and knowledge transfer need to be efficient both in horizontal and vertical direction inside the organization. Horizontal information flows penetrate projects conducted in different business units enabling explicit information reused and tacit knowledge thoroughly mobilized. In addition horizontal information distribution and knowledge transfer are extremely important inside the project when it moves from one phase or function to another. In addition of information systems, middle management is in a central position in vertical information distribution. They greatly influence on the quality of project related information transferred for portfolio decisions at the company level. In multi-project environments, a project information system could serve as a central tool for solving problems related to information sharing and knowledge transfer. Furthermore, effective project portfolio management is based on decisionmaking and communication, which can effectively be supported by a well-designed information system. Systematic project management procedures and methods are a prerequisite for gathering uniform information from the projects, sharing information across projects, and selection and prioritization of projects for effective decision making in the overall project portfolio management scheme. Managing multiple projects also requires appropriate organizational support. These themes of project portfolio management, information management and systematic project management methods are discussed in the following sections. This analysis forms a basis for the empirical study with the emphasis of developing an information system that supports project portfolio management and management of multiple simultaneous projects.
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EXISTING KNOWLEDGE ON PROJECT PORTFOLIO MANAGEMENT AND INFORMATION SYSTEM DEVELOPMENT Project portfolio can be considered as a collection of projects managed in a coordinated way that, in the aggregate, form an organization's investment strategy (Dye and Pennypacker, 1999). The term implies that a project portfolio constitutes of planned composition of different projects that are carefully selected, balanced and prioritized against different strategic objectives. In this article we have adopted the following definition for project portfolio management proposed by Dye and Pennypacker (1999): Project portfolio management is the art and science of applying a set of knowledge, skills, tools, and techniques to a collection of projects in order to meet or exceed the needs and expectation of an organization 's investment strategy. Project portfolio management is a continuous process including decision-making, prioritization, review, realignment, and re-prioritization (Sommer, 1999). The objectives of project portfolio management are (Cooper et al., 1999b): • Maximizing the value of the portfolio • Balancing the portfolio against different objectives • Aligning projects with the strategy It is typical that a company has a surplus of project opportunities compared to its scare resources. Thus company's resources need to be allocated in a way that the value of the whole portfolio is maximized. The value maximization should occur in terms of company's objectives such as long-term profitability, return-on-investment or some other strategic objective. Balance in the portfolio can be built in terms of a number of parameters such as project duration, risk sensitivity versus profitability, market area, project type or resource capacity loading. The main focus in project portfolio management should be to assure that projects are in line with a company's strategy. Project portfolio management can be considered as a strategic tool of project-based companies to manage numerous, simultaneous projects and project programs according to a company's strategic objectives (Poskela et al., 2001). Project portfolio management implies management of strategic context of project and project program composition at the aggregate level. Critical tasks of project portfolio management relate to selection and prioritization of project initiatives in order to find preferred balance between required projects and available resources that would fulfill company's strategic objectives. Risk consideration against different criteria is a serious aspect to go through during the selection process. Existing literature provides several tools and methods for making these final "go", "no-go" or "hold" decisions. Another important task of project portfolio management is a resource allocation that also needs to be thought during the project screening
Information System Development for Project Portfolio Management 269 process. Situations in which there are many simultaneous projects competing for the same specific and scare resources need to be avoided. Conflicts between resource interdependent projects should be solved in favor of a higher prioritized project. Project selection and priori tization in project's infancy are of importance but project composition also needs to be reviewed regularly in order to maintain the optimal project portfolio. The concepts of maturity model and project support office are usually used in a context how to organize project portfolio management operations. Project maturity models are designed for organizations that carry out same kind of projects in a repetitive manner and thus enabling standardization of project activities. (Artto, 2001b) Unifying of management methods at a portfolio level enables objective assessment and comparability between different project proposals and ongoing projects. Anyhow, systematic approaches should be robust to enable the expertise of individual employees to be used at a reasonable level. Project support offices are used to administer and organize business management at a company level. Turner (1999) mentions e.g. the following tasks for duties of project support offices: maintaining the project and program plans, taking care of resource planning, issuing the work lists and progress reports, facilitating the control process, taking care of external interfaces, and operating the document control and configuration management. Project support offices can be used to ease problems caused by the lack of common managerial practices or insufficient information sharing and knowledge transfer between different projects. Block (1999) defines the project office's long-term vision as a dissemination of project management knowledge throughout the organization to integrated part of the company's culture. One central task for project support office can be to take care of data management and communication inside the project as well as between different project stakeholders. Project support offices can work also as a vehicle for putting lessons learned in to active use by advancing best practices and mature managerial working methods inside the company. Information Sharing and Knowledge Transfer In order to achieve efficiency in information distribution organization's information system applications should allow using the same data for project management and portfolio management purposes. This further sets requirements for documentation, tools and methods used in information sharing and knowledge transferring. Integration of used information applications is of importance in order to achieve transparency of project information through out the organization. (Artto, 2001b) Dixon (2000) discusses common false assumptions that people have concerning information sharing and knowledge transfer. He states that just building adequate
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databases for aggregated knowledge is not enough but knowledge should be made useful for users. Further he emphasizes that technology cannot fully replace face-toface contacts in communication. Schiippel et al. (1998) give knowledge management the following definition: organizing the flow of knowledge between two poles of generating and applying organizational knowledge. In the definition knowledge is defined as a sum of individual knowledge used in the value creation process and the knowledge embedded in collective action. Information sharing and organizational learning between different projects and project programs as well as across organizational units and between hierarchical levels take place both in transferring knowledge and in the knowledge interaction situation itself. Nonaka et al. (2000) present a framework of dynamical knowledge creation process in organizations. The framework consists of the SECI process which implies knowledge creation through conversion between tacit and explicit knowledge, ba which means shared context for knowledge creation, and knowledge assets that mean the inputs and outputs as well as moderator of the knowledge creating process. These three elements need to interact with each other to form the knowledge spiral that further continuously creates knowledge. Through knowledge conversion process including socialization, externalization, combination and internalization, tacit and explicit knowledge are spread through the organization. Figure 19.1 presents a framework for supporting knowledge management in business development projects (Korpi-Filppula, 2001). Human interactions refer to sharing experiences i.e. transferring tacit knowledge inside the organization. Human interaction and face-to-face communication have an important role that cannot be fully replaced by technological innovations. Knowledge management procedures relate to tactical and strategic knowledge management processes defined by Bukowitz and Williams (1999). Information system in turn refers to extent of reusability of explicit project information enabled by IT-solutions. Accessibility, intranet and extranet solutions, and document sharing as well as data management solutions are in the focus. Lastly, standard structures imply the management methods, tools and templates enabling information sharing and efficient business transaction. The project portfolio management literature suggests that project databases are used for effective information sharing in the project portfolio context (Archer and Chasemzadeh, 1999). Some authors have also discussed information sharing among multiple projects and organizations with an Internet-based application as a central enabler (See e.g. Artto et al., 2001).
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Fig. 19.1: A framework for supporting knowledge management in business development projects (Korpi-Filppula, 2001). Furthermore, Dietrich and Artto (2001) have introduced an Internet-based project portfolio management information system which provides information to portfolio decision making and monitoring activities at the company level. Systematic Project Management Methods There has been a lot of debate in project management literature in which extent companies should apply unified management methods in different projects or in different types of projects (see e.g. Turner, 1999). Clearly unified project management procedures bring efficiency and standardization provides project managers more time to focus on the critical managerial issues in hand. Further consistently applied state of art project management practices will help to achieve project success. (Block, 1999) The standardization should be focused on the most critical issues in project management which further assures that important steps are carried out in a consistent manner and that relevant project related information is gathered. On the other hand too extensive categorization and standardization decrease flexibility and adaptability, and reduce also innovativeness. Certain project types such as R&D projects require especially high adaptability of changes happening in the project environment and innovation capability to overcome emerged problems. In this kind of environment there needs to be room for innovators and risk takers. People need to be challenged to depart from past patterns to experiment new unproven alternatives (Ridderstrale and Nordstrom, 2000).
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Different project management guides such as PMBOK (1996) provides basic framework to build standardized project management procedures. However, these management process descriptions are not turnkey solutions. Each company needs to select and refine management procedures that fit their own company's culture. Project support office type of solution can work as a vehicle to advance these selected management procedures in the form of training programs and management certification programs. One way to promote consistent management methods is to provide appropriate tools and profound training for using them. Company-wide used tools and methods bring similarity to reporting, planning as well as other project routines. Consistent management methods bring several advantages at the portfolio level. Objectivity of managerial decisions can be increased if there are standardized instructions and tools supporting the decision situation (Poskela et al., 2001). Consistent management approach eases cross-project coordination and comparability. Strategic decisions concerning e.g. resource allocation or project prioritization can be made based on the similar kind of data. Common terminology and working methods enable more fluent co-operation and efficient information distribution between different projects conducted in various business units. Turner (1999) addresses also quality standard aspect in this context by stating that quality accreditation and customer requirements require consistent management practices being in place to some extent.
EMPIRICAL RESEARCH This article describes development efforts conducted in a medium-sized logistics service supplier in Finland. The empirical data for the research was gathered from two case companies but in order to clarify the article we concentrate more on one case and use the findings from the other case to add some notions. The research data was collected by interviewing project personnel and observing management practices during the development projects. There were several simultaneous development projects in the company. Totally eight development projects were examined and two of them were chosen for more detailed examination. These two, that are here called Project 1 and Project 2, were subjected to more thorough participant observation during the whole lifecycle of the projects. Investigations concerning the other projects were mostly conducted after the completion of each project respectively. The observations occurred in a longitudinal manner simultaneously with the development of the framework during a year's time span. Furthermore, all projects were studied by interviewing key individuals and by
Information System Development for Project Portfolio Management 273 examining existing project documentation. Altogether twelve interviews were recorded and analyzed. The case projects were used as examples for building standard structures for organizational development projects and IT-system implementation projects. The intention was to build more structures for other kind of projects later on. Project 1 dealt with the development of a reward system inside the company. The project for planning, developing and testing the reward system started in autumn 2000 and lasted until the early 2001. The goal of the project was to build a reward system supporting the company's strategy and enhancing teamwork. Further, the aim was also to improve work satisfaction and work efficiency among employees. Project 2 consisted of implementation and tailoring of a new IT-system for order handling. The project started in summer 2000 and lasted one year. The objective of the new system was to replace an outdated system and also to improve efficiency. The content of other projects included development of customer relationship, IT-systems and development of groups' working methods as a team. Constructing the IT-system for Project Portfolio Management Requirements for the IT-system were determined based on literature review, our earlier experience, benchmarking of different information systems, and identified case company's special needs. After the literature study three information systems - Lotus Notes', Kehittajan karttakirja and Knowledge Storage - were benchmarked. These systems enable information and knowledge sharing as well as storing important documents with easy accessibility. The focus of benchmarking was to find important functionalities of the systems and assess their usefulness. The most important features e.g. functionalities related to accessing documents via Internet were examined more thoroughly. The case company's special requirements were defined first by interviewing the key persons and analyzing the findings. The following step was to construct the first version of the requirement document based on our experience and literature as well as findings from the interviews and other systems. With the first version of requirement document we started to formalize a more complete version of all requirements. Functionalities, which we suggested to be included in the IT-system, were presented to four key persons of the case company. This was done in order to demonstrate what kinds of things were achievable with the help of the IT-system. ' Lotus Notes includes e.g. following functionalities: group scheduling, Web access and information management client. For further information see www.lotus.com 2 Kehittajan karttakirja is the management tool for organizational development projects, see KorpiFilppula et al, 2000. For further information see Lanning, 2001. 3 Knowledge Storage is on KATTI project made mechanism for managing design rationale, For further information see http://www.vtt.fi/aut/rm/projects/katti/index2.htm
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After demonstration the key persons had some immediate improvement suggestions to help the development process. Although notes were made, these suggestions were not considered to be adequate. Key persons were given some time to think about the functionalities that were needed in daily project management activities as well as management of the whole project composition. A few days later the second meeting was arranged. The purpose was to finish the first version of the list of the functionalities that need to be included in the ITsystem. Some of the key persons' ideas had to be rejected as impossible or too difficult to execute. After the meeting we had the validation for our proposed functionalities and had some new things to be added to the functionality list. The next step was to construct a paper prototype of the system. The functionalities of the system were reviewed with the key persons. The system was analyzed thoroughly by demonstrating the functionalities step by step, for example: "if you want to use this functionality, press this button and you will get this image on your display in which you have the following options". The demonstration was a good start to get users to understand what kind of functionalities the system would have and also to get some valuable ideas and suggestions to improve the system. However, the discussion slipped easily into minor issues for it was easier to discuss locations of buttons that were visualized than functionalities of the system. This discussion was not fertile at this stage because these kinds of issues could easily be modified in later phases. We wanted to concentrate on the functionalities that were needed to make the system more usable. The lesson learned here was that minor issues such as button locations could be left out of the paper prototype and to show them in text form. Functional requirements were categorized to three different categories; must, should be and extra functionalities. Must functionality means a function is needed to make the system work as it is intended to. These kinds of functionalities were all written on "to do list". On the other end of the scale there were extra functionalities, which were identified as nice to have but not compulsory i.e. one could do same things without these features. They were left out from the to do list but agreed to be reviewed again in later phases of the project if there would be resources to do so. Should be functionalities were more difficult to handle because they were somewhere between these two ends of the scale. They were functionalities, which were not obligatory but recognized to be very helpful while using the system and managing projects in general. These requirements were added to the to do list but marked as to be forgotten if could not be implemented on the time limits. Interviews gave a lot of insight on the usability of the system. However, in order to make the system respond to the actual needs of users more insight was needed. Throughout the whole building process four key persons of the company were informed about the process. In later phases of the development process they also
Information System Development for Project Portfolio Management 275 had the newest test version of the system in use. Their help and insights were found to be very useful and directing the building process to the right direction. To make testing possible a prototype of the system was constructed. The prototype did not include all the functions nor had a finished user interface. However, it was found to be useable in most cases and thus could be used in real projects. After having a prototype of the system it was possible to start the testing process, which was an important phase of the building process because of two reasons. First of all this was a way to test it in real project environment and thus find out bugs, which could not be found on dummy testing. The second and even more important issue was to get information on how the system fitted into real use. The testing enabled to find out the features and functions that needed to be changed to improve the usability of the system. Also some fresh ideas about useful functions were gotten from the users during the testing phase. These functions mainly increased usability of the system and even though they were not mentioned on the system requirements originally some of them were found to be so advantageous that they were added to the system. The feedback process between the developers and users improved during the research project. At the beginning the comments of the key persons did not provides much help for the development process. However, on last meetings key persons gave valuable information and well argumented opinions. This improvement made the development process much more effective because there was no need to make guesstimates anymore. Requirements for the System As the result of requirement definition process four major things were identified. These requirements originated from the needs of the company and satisfying of them was considered as a starting point for the system planning and development. The most needed function and also the most important trigger of the whole research project was capability to share information across projects. There was a lot of information in users own hard disks, which never reached those who needed it. Easy accessibility via Internet for everyone with relevant permission was enabled by transferring information to a common database. This function made possible to project participants to work in different physical locations as well. To ensure management's accessibility to relevant project data, a management option was added to user information. A person categorized to management group was allowed to search any information from the system. By that functionality the system offered also a way to manage the project portfolio as a whole. The management was able to control all on-going projects by having them under a single system. Furthermore, the system was seen as a tool for building up an organizational memory i.e. cumulated information from earlier projects. In order to make this
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function useful, there was a need to built fast searching routines for saved information. This requirement was added to the specifications together with capability to seek information of ongoing projects. The following three information categories were seen as important for building organizational memory in long term: information concerning the people participating and executing the project, project related information itself, and information concerning the used project documents such as project plans. Information concerning the people conducting the actual project work was considered very important in order to gather data of sources of tacit knowledge. The third essential reason and the main reason in the other case company for starting the whole research project was the need to routinize project activities. There were a lot of same kinds of projects, which were not accomplished in any structured way. Because of these diversified working methods, the information was in several different forms and locations. The system was seen as a solution to this problem. It was meant to contain the basic structure for different kinds of projects. These basic project structures could be modified to respond better to specific needs of a particular project. However, there also had to be some forced basic structures and obligatory rules for documents completion. The basic structure and the document templates (forms and instructions) were seen playing an important role while building up new projects. The last important issue was the security considerations. All information transfer required to be secured and SSL protocol was chosen to be the method to implement such a secured connection. Considering the information content it was seen to be secure enough to prevent misuses in Internet. Security issues were partly related to the user rights as well. It was clear that all projects and documents should not be shown to all users in the system. Controlling persons' access to some project related information and documents was seen an important part of the data security. Also controlling user's accessibility to the system depending on the role or hierarchical level the person has in a project was considered essential. All these requirements made easy user handling and controlling accessibility to cornerstones of the system. The Content of the System The building of the system functionality and system content was a simultaneous process. By system content it is meant documents and files, which formalize project structures and further standardize and facilitate project implementation. Project 1 worked as a model project for later organizational development projects. Based on this project a template for organizational development projects was formed. The structure of the template was generalized in some extent because organizational development projects typically vary in some degree. However, project 2 worked as a
Information System Development for Project Portfolio Management 277 stricter guideline for the future IT-system implementation projects. This was due to typical similar nature of implementation projects. Both the projects were observed and documented carefully during the development process. This documentation was transformed to detail instructions to be followed and to templates to be filled in future projects. These documents were categorized belonging into four project phases named conceptual, planning, implementation and completion phase. The categorization was made based on the literature study (see e.g. Turner, 1999 and Salminen, 2000). Whereas project 2 was almost a complete project model in such, the documentation of project 1 needed to be complemented with additional document templates, which are usually needed on project implementation phases. These templates were excluded from the used organizational development project model for some reason but based on our earlier experience and development tool named Kehittajan karttakirja (Korpi-Filppula et al, 2000) were considered necessary to be included. At the end of this process we had a project structure for both project types. Project structures included templates for each project phases, which guided work activities through projects and forced to fill information considered necessary. On the second case company the content of the system was seen to be much more important because they already had a method for sharing knowledge across the projects. This is why the building process started with defining the content of the system and its functionality was not paid attention until the content was somewhat completed. This made the whole process slower but it was not considered as a problem because they already had a sufficient mean for knowledge sharing and this way they got quicker for the use what they considered as the most vital i.e. the structured way for project management.
CONCLUSION The paper describes the development process of modern IT-system, which is designed for managing projects in a consistent manner and thus helping management of project composition at the portfolio level. The created IT-system provides the solution for general problems existing in companies while conducting many simultaneous projects. More specific the system enabled efficient coordination at the company level by enhancing transparency, systematic working methods as well as information sharing and knowledge transfer across different projects. Transparency and information sharing across projects and project programs are persecutes for efficient portfolio management. Overlapping resource usage or repetitive mistakes can be considerable decreased by providing visibility to the whole portfolio. Transparency between projects is increased by combining different project
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files under the single centralized IT-system. The system provides reliable data for management making decision at the project portfolio level. Information sharing and knowledge transfer are improved by creating standard templates and instructions for gathering project related information. Further the system is seen as a tool for gathering tacit knowledge of project execution and building of the organizational memory. The system allows also working in different physical locations by providing accessibility via Internet. Unified management methods increase managerial efficiency and give managers time to focus the most relevant issues in project execution. Standardization of management methods should be focused on the most critical steps in project execution while giving employees room for trial and experimentation. Consistent working methods are seen as means for enhancing coordination and comparability as well as knowledge transfer between different projects. The system contained the basic structures for different kinds of project types that further guided project teams to carry out their work in a unified way. The new IT-system has just been taken into use in a real project environment. The system is a solution to several troublesome problems that are faced on everyday project business in the company. There are a lot of similar projects implemented in different ways that can now be done based on the same unified framework. The value of effort to build the organizational memory will materialize in coming years, when some new projects are implemented in assistance of the new IT-system. Even though there are some differences in specific functionality needs and also some user interface requirements, the system can be modified quite easily to suite to different business environments. However, there is need to re-construct the content side of the IT-system case by case. It is a hard part of the implementation process because companies usually do not have structured or well-documented procedures to carry out different project types.
REFERENCES Archer, N. P. and F. Chasemzadeh (1999). An integrated framework for project portfolio selection. In: Project portfolio management: selecting and prioritizing projects for competitive advantage (Dye, L. D. and J. S. Pennypacker, ed.), pp. 117-133. Center for Business Practices, West Chester, PA. Artto, K. A. (2001a). Project portfolio management - the link between projects and business management. The Finnish National 'Project Day 2001' Conference, Project Management Association Finland, Espoo, November 2001.
Information System Development for Project Portfolio Management 279 Artto, K. A. (2001b). Management of project-oriented organization - conceptual analysis. In: Project portfolio management: strategic management trough projects (Artto, K. A., M. Martinsuo and T. Aalto, ed.), pp. 5-22. Project Management Association Finland, Helsinki. Artto, K. A., A. K. Chakrabarti and M. Vuorikoski (2001). Project-oriented business goes from E to mobile. PMI Europe 2001 Conference, London, UK, June 2001. Block, T. R. (1999). The seven secrets of a successful project office. PMNetwork, 13, 43-50. Bukowitz, W. R. and R. L. Williams (1999). The knowledge management fieldbook. Pearson Education Limited, Great Britain. Cooper, R.G., S. J. Edgett and E. J. Kleinschmidt (1999a). Portfolio management in new product development: lessons from the leaders, phase II. In: project portfolio management: selecting and prioritizing projects for competitive advantage (Dye, L. D. and J. S. Pennypacker, ed.), pp. 23-27. Center for Business Practices, West Chester, PA. Cooper, R.G., S. J. Edgett and E. J. Kleinschmidt (1999b). Portfolio management in new product development: lessons from the leaders, phase I. In: project portfolio management: selecting and prioritizing projects for competitive advantage (Dye, L. D. and J. S. Pennypacker, ed.), pp. 97-116. Center for Business Practices, West Chester, PA. Dietrich, P. and K. A. Artto (2001). Project portfolio application for a public sector organization. PM Research Conference Vienna VIII, Austria, November 2001. Dixon, N. (2000). How companies thrive by sharing what they know. Harvard Business School Press, Boston. Dye, L. D. and J. S. Pennypacker (1999). An introduction to project portfolio management. In: project portfolio management: selecting and prioritizing projects for competitive advantage (Dye, L. D. and J. S. Pennypacker, ed.), pp. xi-xvi. Center for Business Practices, West Chester, PA. Korpi-Filppula, M. (2001). Knowledge management in business process development projects. HUT Industrial Management and Work and Organizational Psychology, Report No. 14, Helsinki University of Technology. Korpi-Filppula, M., P. Kutilainen, H. Lanning, K. Rintala, A. Salminen and S. Toivanen (2000). Kehittajan Karttakirja - apuvaline kehitysprojektien kaytannon toteutukseen. Cd-rom, Kauppakaari. (In Finnish) Lanning, H. (2001). Planning and Implementing change in organisations - A construct for managing change projects. HUT Industrial Management and Work and Organizational Psychology, Report No. 16, Helsinki University of Technology.
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Nonaka, I., R. Toyama and N. Konno (2000). SECI, ba and leadership: A unified model of dynamic knowledge creation. LRP, 33, 5-34. Project Management Institute (1996). A guide to the project management body of knowledge. USA. Poskela, J., M. Korpi-Filppula, V. Mattila and I. Salkari (2001). Project portfolio management practices of a global telecommunications operator. In: Project portfolio management: strategic management trough projects (Artto, K. A., M. Martinsuo and T. Aalto, ed.), pp. 81-102. Project Management Association Finland, Helsinki. Ridderstrale, J. and K. Nordstrom (2000). Funky business - talent makes capital dance. BookHouse Publishing. Salminen, A. (2000). Implementing organizational and operational change - critical success factors of change management. Acta Polytechnica Scandinavia Industrial Management and Business Administration Series No. 7, Espoo. Schuppel, J., G. Muller-Stewens and P. Gomez (1998). The knowledge spiral. In: Knowing in firms - understanding, managing and measuring knowledge (von Krogh, G., J. Roos and D. Kleine, ed.)( pp. 223-239. SAGE Publications Ltd., Great Britain. Shenhar, A. J., O. Levy and D. Dvir (1997). Mapping the dimensions of project success. PM/, 28, 5-13. Sommer, R. J. (1999). Portfolio management for projects: A new paradigm. . In: project portfolio management: selecting and prioritizing projects
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competitive advantage (Dye, L. D. and J. S. Pennypacker, ed.), pp. 55-59. Center for Business Practices, West Chester, PA. Turner, J. R. (1999). The handbook of project based management. 2 nd edition, McGraw-Hill, London, Great Britain.
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
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COMPLEXITY AS A FACTOR IN NPD PROJECTS: IMPLICATIONS FOR ORGANIZATIONAL LEARNING Jongbae Kim, Associate Professor, Silla University, Busan, Korea, Email: jbkim @silla. ac. kr * David Wilemon, Snyder Professor of Innovation Management, Syracuse University, Syracuse, NY, Email:
[email protected] ""Corresponding author ABSTRACT With rapid technological and market change, new product development (NPD) complexity is a significant issue that organizations continually face in their development projects. The inability to recognize and manage complexity can cause the best-intentioned projects to fail. By creating a learning organization, however, companies are more likely to have the knowledge essential to respond competently to the complexity challenges encountered. In this paper, we first define complexity in NPD and then examine the major sources and consequences of complexity. Next, we develop a model of how organizations identify complexities in NPD projects, and how they capture, store, and use their learning from their complexity experiences. Our study is useful in implementing a learning organization designed specifically to capitalize on the experiences of development firms' efforts in dealing with complexity and its consequences. Keywords:
New
product
organizational learning.
development,
complexity,
project
management,
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INTRODUCTION We live in a time of unprecedented technological, market and environmental changes (e.g., Cooper, 2000; Nonaka, 1991). Such changes are closely related to the complexity issues frequently faced in development projects. Both internal and external forces can result in complex development projects. For example: •
Many products, especially in IT-related industries, may require the integration of hardware & software where each is being developed concurrently and each is dependent on the other for the "system" to operate effectively. Also, in order to develop products compatible with the products and services of other firms, companies need to consider the linking and integration of their product architectures. Particularly in high technology, product architectures can be highly complex.
•
As markets evolve, products with multi-functions are developed, e.g., a DVD player having a VTR function or a printer having the functions of a fax, scanner, and copier. Developing multi-function products need complex technologies connecting previously separated functions. Moreover, marketing multi-functional products is likely to be complex since, in order to make decisions on pricing or communicating a multi-function product, one needs to consider the marketing aspects of each previous single-function product as well as the new aspects from integrating these functions.
•
New methods, new materials, new processes, and new applications become available more quickly than ever before; they also become obsolete more rapidly. In order to develop a product with a competitive advantage or to encounter rapid competitive moves, technological and market changes need to be carefully reflected in the NPD process. Concomitantly, companies need to consider how and when to address these and similar changes which may occur in their development projects.
•
Developing a product in a dynamic market requires considering several forces, such as regulations, suppliers, intermediaries, and other marketing agents, which can increase NPD complexity. Iansiti (1998, p. ix) further asserts that research is more complex than ever, characterized by sophisticated competitors, fragmented markets, and billion-dollar production facilities.
Complexity as a Factor in NPD Projects
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•
Companies that develop new technologies and products often need to accelerate their innovation efforts in order to remain competitive. Achieving accelerated development often creates complexity. For example, parallel processing, which can result in the compression of development time, requires more activities to occur in a specific period of time. However, this process is more complex than most sequential development approaches (Cooper, 1990).
•
Teams are an important factor in accomplishing complex development tasks. However, forming and managing a team consisting of various specialists can be a difficult and highly challenging task. Communication among members from different backgrounds and cultures can also be difficult. As Griffin (1997, p. 33) notes, "As products grow more complex, with more functions designed into the product and designed to work together, the task of organizing the interfaces and interactions between different functions may grow geometrically or exponentially rather than linearly."
In order to deal with the complexity challenges encountered, NPD teams need to be fully prepared regarding the characteristics of a proposed project's complexity. Those organizations that can accurately identify, assess, and manage the complexity inherent in projects are likely to gain important competitive advantages. Organizational learning is important in managing development projects. Stata (1989) argues that the rate at which individuals and organizations learn may become the only sustainable competitive advantage, especially in knowledge-intensive industries. Technological innovations are generally complex undertakings, possessing attributes with which developers are unfamiliar; thus they require high degrees of learning (Robertson and Gatignon, 1986). Thus, the degree and rate of learning and adaptation ability is closely related to performance outcomes of new product development projects. In managing complexity, organizational learning is especially important, since: • • •
As noted, there are numerous factors, which cause development projects to become increasingly costly & complex. Continuous improvement initiatives require a commitment to learning. Complexity issues in development projects may differ by the newness of product, thus requiring different organizational learning abilities. Considering that a large portion of the new products undertaken are continuous improvements rather than radical innovations (e.g., Booz, Allen & Hamilton, 1982; Cooper, 1993, p.14), most complexity issues are likely to be solved by known organizational learning
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Jongbae Kim and David Wilemon systems and assets. In managing radical or nascent development efforts, however, organizational learning is usually a difficult and continuous process.
These are some of the reasons why organizational learning is stressed as important in managing complexity in new product development programs. Since organizations continually face complexity, it is important for them to capture, store, and use their learning to increase the effectiveness & efficiency of their development programs. Clearly, organizations with systematic knowledge are better able to capture, store, and use their learning from their complexity experiences and solve the challenges they encounter. Unfortunately, one of the least studied areas in NPD is how to deal with the complexities that occur in virtually all NPD projects. As noted, the inability to manage complexity can have serious consequences for product developers; e.g., high development costs, slower cycle times, strained customer relations, and even project failure. The purpose of our paper is to help product development managers/team members identify and manage the complexities they face through understanding the nature of complexity in NPD and offering guidelines in creating a learning organization to manage complexity.
DEFINING COMPLEXITY & MAJOR SOURCES O F COMPLEXITY IN NPD The concept of complexity has been studied in several areas, such as diffusion (e.g., Rogers and Shoemaker, 1971), purchase and selling tasks (e.g., Fisher, 1970; Gatignon and Robertson, 1989; Johnston and Bonoma, 1981; McQuiston, 1989), and product development projects (Griffin, 1997; Meyer and Utterback, 1995; Novak and Eppinger, 2000; Tatikonda and Rosenthal, 2000). Several definitions of complexity in product development are summarized in Table 20.1. Murmann (1994) defines complexity as the number of parts in a product; Griffin (1997) refers to product complexity as the number of product functions embodied in the product; and, Tatikonda and Rosenthal (2000) relate project complexity as the nature, quantity, and magnitude of organizational subtasks and subtask interactions required by a project. Each definition has its merits and limitations. In studying only industries containing parts, Murmann's (1994) definition would be simple and relevant. However, in studying several types of services and products, independent of industry, Griffin's (1997) definition is especially relevant since the number of functions quantifies the complexity. On the other hand, Tatikonda and Rosenthal's (2000) definition is
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powerful in that it focuses on complexity related to the nature of the work challenge posed by a project.
Table 20.1: Definitions of Complexity in Product Development Author(s) Larson and Gobeli (1989)
Construct Project Complexity
Murmann(1994)
Product Complexity Integration Complexity
Meyer and Utterback(1995) Griffin (1997) Clift and Vandenbosch (1999)
Product Complexity Project Complexity
Sbragia (2000)
Project Complexity
Tatikonda and Rosenthal (2000)
Project Complexity
Novak and Eppinger(2001)
Product Complexity
Definitions The number of different disciplines or departments involved in the project as well as the intricacy of the design itself. The number of parts in the product. The number of different core technologies embodied in a product and their diversity as it affects synthesis. The number of functions designed into the product. Reengineering projects and minor modification to existing projects are classified as simple projects, whereas major modifications and projects leading to new-to-the-world products are classified as complex projects. The number of functional areas involved in a project; intensity of the interaction between the different functional areas in a project; and difficulty of achieving cooperation between the functional areas involved in a project. The nature, quantity, and magnitude of organizational subtasks and subtask interactions posed by the project. The key determinants of complexity are: • Technology interdependence • Novelty • Project difficulty. Three main elements are: • The number of product components to specify and produce • The extent of interactions required to manage components & their integration (parts coupling) • The degree of product novelty.
Since the notion that complexity in product development relates to the difficulties and uncertainties encountered in new product development, complexity can come from several sources—technological challenges, market uncertainties, manufacturing difficulties, organizational complexities, etc. Kim and Wilemon (2001) have examined the underlying factors that can create complexity. The source of complexity may be the difficulty involved in complex technological processes; making tough technological decisions; dealing with uncertain, changing markets; organizational
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confusion; dealing with external partners/alliances; meeting demanding customer requirements; difficult and challenging manufacturing processes; etc. For additional complexity sources refer to Table 20.2 (Kim and Wilemon, 2003). Table 20.2: Definitions of Sources of Project Complexity
Sources of Complexity Technological Complexity Market Complexity Development Complexity
Marketing Complexity
Organizational Complexity
Intra-organizational Complexity
Manufacturing Complexity
Definition The amount of integration of components required, the newness of the technology involved, the variety of skills necessary to develop the technology, etc. Difficulty in identifying market needs, variability of market changes, difficulty in predicting competitors' reactions, vulnerability to market changes, etc. Integrating many different research and development decisions, difficulty of assessing how much effort and money is needed to develop a new product, amount of integration of components required, development process complexity, securing qualified suppliers and managing supply chain relationships, etc. Educating customers, dealing with new market channels, managing the requirements of a new market, promotional complexity, level of user/customer adaptation requirements, incompatible systems/equipment, user capability level, etc. Organizational structures, management approval systems, geographical distances between key organizational units, numbers of groups involved in NPD, cultural norms, communicating with several functional groups about the new product, communicating performance, problems, & progress, & "making certain that all involved groups are on the same page." etc. Difficulty in maintaining relationships with external groups— alliances and partners. May also involve dealing with regulators, getting clear on roles to be performed, managing relationships, etc. The challenge & difficulties of making a new product and integrating the various components, which are part of the final product. The difficulty encountered in developing a process for manufacturing the product. Some products may contain hundreds of component parts, which are integrated and assembled during the manufacturing phase.
CONSEQUENCES O F COMPLEXITY
Simple development projects face fewer design challenges, fewer difficulties in production of the final design, and less market uncertainty than do complex development projects (Clift and Vandenbosch, 1999). In a similar vein, Smith and Reinertsen (1992) note that complexity can be insidious because it multiplies quickly and its effects are indirect and often not apparent. Table 20.3 illustrates some previous findings on the consequences of complexity.
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Table 20.3: Impacts of Complexity on New Product Development Author(s) Larson and Gobeli (1989)
Sample 546 projects representing a wide variety of industries
Murmann(1994)
14 projects from 8 mechanical engineering companies 24 projects in a large, technology-based consumer and industrial products company 343 projects from 21 divisions of 11 companies, including both product and service projects 120 projects from 57 firms
Meyer and Utterback(1995) Griffin (1997)
Tatikonda and Rosenthal (2000)
Impacts of Complexity No association with technical performance, cost, schedule, or overall results of a project Projects with a high number of parts require more time and need more resources Extends development time
Increases NPD cycle time
• •
Poor unit-cost outcomes No association with achievement of schedule objectives
As seen in Table 20.3, while previous research has examined the various consequences of complexity, these studies are often limited in that they focus mainly on the consequences to NPD performance dimensions. "Unresolved complexity," "poorly managed complexity" in development projects can adversely affect project cost, schedules, and performance plus several behavioral issues, such as, conflicts, blaming, teamwork problems, etc. In this section, both the consequences of complexity to performance and behavioral dimensions are examined. Examining behavioral issues is especially relevant since many are reflected to NPD performance. Moreover, these same behavioral issues can impact the larger organization.
NPD PERFORMANCE DIMENSIONS Complexity in development projects also can lead to several undesirable outcomes as noted below: a) Slows the speed of the development process Complexity increases workloads because many more interactions among the factors in development must be considered. It tends to require more people, often specialists,
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which can complicate communication and decision-making. This necessitates a more complicated and thus a slower management process (Smith and Reinertsen, 1992). Previous researchers note that the degree of project complexity determines the effort needed and thus influences the length of the development cycle (e.g., Griffin, 1997; Meyer and Utterback, 1995; Murmann, 1994; Smith and Reinertsen, 1992). Furthermore, McDonough (1993) finds that radical development projects are more likely to be associated with slower development times. b) Leads to other undesirable outcomes Besides affecting development speed, complexity can impact NPD performance since complexity influences not only the speed of understanding and mastering technologies, but also the quality of them. Tatikonda and Rosenthal (2000) empirically found that project complexity is strongly associated with poor unit-cost outcomes.
NPD BEHAVIORAL DIMENSIONS While the consequences of complexity examined above are related to overall NPD performance, the following are mainly related to behavioral issues. a) Requires more complex organizational procedures, making it more difficult to communicate and cooperate Teams are an important factor in accomplishing complex development tasks. Forming and managing a team consisting of various specialists can be complicated and difficult. Communication among different members can be difficult. As Griffin (1997, p. 33) reveals, "As products grow more complex, with more functions designed into the product and designed to work together, the task of organizing the interfaces and interactions between different functions may grow geometrically or exponentially rather than linearly." The increase of the number of technologies, functions, or components leads to involving more individuals and functional groups, which can result in a proliferation in the number of people and processes and lead to lengthy interactions with various groups (e.g., Levinson, 1981). Human cognitive capabilities limit our ability to understand what occurs in complex organizations (Stata, 1989). In studying the diffusion of innovations, Rogers (1995) notes that innovations that are perceived by individuals as being more complex will be adopted less rapidly than other innovations. In industrial purchase situation, complexity of the purchase situation is found to be positively related with the number of participants as well as the frequency of conflict between them (Kirsch and Kutschker, 1982). Similarly, complexity in product development projects can create significant challenges
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regarding the cooperation and communication between functional groups, which can affect the efficiency and effectiveness of NPD performance. Misunderstandings can develop because the degree of project complexity may not be understood. Thus, complexity can place considerable strain on those responsible for developing and marketing new products. Since gaining support for a new product can be influenced by its complexity, it is important to consider internal users' perceptions, needs, and capabilities. Organizational structures, geographical distances, and cultural norms are other factors, which contribute to communication and cooperation difficulties. b) Requires more information/decisions
to be considered in each NPD phase
Complexity increases the information processing required within an organization. In industrial purchasing situations, for example, complexity of the purchase situation is found to be positively related with the amount of information sought to make a decision (Gronhaug, 1975); a shared decision (Grashof, 1979). Grashof (1979) also noted that there is a tendency for shared decision responsibility to be more prevalent in the more technological intensive industries such as chemicals and electrical equipment. He posited that the tendency for shared responsibility might be related to decision complexity. Since complexity creates many challenges in the development process, project teams are likely to: • •
Be "swamped" by paperwork & problem-solving meetings. Experience considerable stress in developing and marketing new products, thus developers and managers may refrain from undertaking complex projects, which, if developed, could bring significant returns to the firm.
•
Be distracted from other important activities in developing and commercializing a new product when there is undue focus on solving complex development issues.
A LEARNING PROCESS MODEL T O MANAGE COMPLEXITY To effectively handle complexity, organizations need to understand both the development process in which complexity issues occur and the learning process, by which learning is captured, stored and retrieved and then develops an effective learning system based upon the understanding. Our objective is to develop a model illustrating how organizations identify complexities; manage them; learn from their complexity experiences; capture & store the learning, and retrieve learning for future projects. Figure 20.1 depicts our framework for creating a learning process in development projects.
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Step 1 to 3 depicts how specific learning about complex issues can occur in NPD processes. On the other hand, Step 4 to 6 shows how the learning, which does occur, is captured, stored and retrieved in the organizational learning process. Figure 20.1: Learning from Development Projects: A Process Model
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Step 1: Encountering & Identifying Complex Development Issues The potential for learning is triggered when a NPD team encounters a complex issue/problem. The following are examples of the complexities NPD teams often face in developing new products: • •
Task & coordination difficulties develop as the number of components required increases. Task uncertainties when a development project contains technologies or functions sensitive to market changes.
•
Low technology synergy: Incompatible technological systems can lead to complexity. In some cases, developers may want to change from one type of technology to another or to a newer technology. This can cause challenging problems for those trying to develop and/or integrate a new technology.
•
Challenges that new technologies present.
The frequency and contents of the complexity issues encountered in development projects are likely to be influenced by these factors: • • • • •
NPD phase Type of a new product Complexity issues People/groups responsible for a specific development task Experience of personnel involved
There are several learning opportunities that can be derived from the above, namely; • What are the sources of complexity? • How frequently do they occur? • •
How important are these complexities? Do patterns emerge from these complexities?
For this step, these actions can be important: • Clearly identify the complexity issues in the fuzzy front-end since it helps the team to more accurately plan projects; estimate costs; schedules; resources requirements; and plan for coordinated action. Murmann (1994) suggests that the feasibility of technological concepts should be investigated before investing significant resources in a project. Early, effective assessment of complexity is also helpful in making screening and resource allocation decisions. However, since management in the early development stages is likely to see more of the positive benefits and fewer of the negative benefits (e.g., Stumpe, 1979), it is
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Jongbae Kim and David Wilemon recommended that a careful assessment of complexity be undertaken as early as possible.
•
Determine if there is prior experience (learning) with the identified issue.
Step 2: Seeking Methods to Solve the Identified Complexity Issue When faced with a complex issue, an NPD team needs to refer first to the existing knowledge assets of the team and the organization's 'learning database' depicted in Figure 1. If there is insufficient support from a previous learning asset, external searches can be sought, such as, academic studies, the experiences of other companies, etc. Finding the most appropriate ways to solve specific complexity problems often requires considerable effort as well as trial and error. In the previous section, we examined the major sources of complexity. Methods to solve complexity problems, of course, differ according to the source. The degree/intensity of searching is likely to be influenced by such factors as: • Available time • People in charge •
Priority assigned
•
Search competencies/experiences
There are several options for learning in Step 2, such as: • Where are the most appropriate complexity resolution methods found? • •
Who or what group has the needed information sources and access to them? What are the most effective ways/procedures to search for solutions?
For this step, the following are important: • •
When the organization is equipped with rich knowledge assets it is more likely to find efficient and effective solutions to complex issues. When an NPD team is composed of experienced people, this step can be accelerated.
Step 3: Solving the Complexity Issue This step involves applying an appropriate method to the identified complexity issue. The outcomes are likely to be influenced by these factors: • • •
Application of the "right" methodology and organizational approach (e.g., Clift and Vandenbosch, 1999; Griffin, 1997) Assignment of priority/resources to the complexity issue Persistent effort until the issue is resolved
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There are two major learning opportunities in Step 3: • Discovering the most effective ways to solve/manage the complexity issue •
Understanding the cost of resolution in terms of funds, time, & performance impacts
Step 4 & 5: Capturing and Storing the Learning and (Step 6) Retrieving Learning for Future Projects Organizational learning includes the development of insights, associations and conclusions about the effectiveness of past actions and their potential influence on future actions (Fiol and Lyles, 1985). By managing the complexities in developing a new product, a development team has the potential to learn during the development process. However, without capturing, storing, and retrieving learning in future projects, any learning produced is likely to have limited value. Thus, learning and storing documents/information for future projects is vital in creating a useful knowledge base. It is important to note that Steps 4 & 5 do not always occur after Steps 1—3. Practically, Steps 4 & 5 are likely to occur when the issues noted in Steps 1~3 occur since the development process and the learning process can be experienced simultaneously. As for the learning system described in Figure 20.1, there are several learning subsystems, such as 'knowledge creating/capturing system,' 'knowledge accumulating/storing system,' and 'knowledge transferring system.' Thus, when all these subsystems perform well, then organizational learning is likely to be maximized. A. Building a knowledge creating/capturing system If a company's knowledge creating/capturing system performs effectively, much valuable knowledge can be produced, extracted, & captured. There are many types of learning from NPD process; relationships of complexity and performance, effective or ineffective ways to deal with specific complexity issues, frequent complexity issues faced in specific development phase, and others, as mentioned earlier. Even though people go through the same project, the more learned or experienced participants may capture the most valuable learning. Thus, staffing is important, especially for an important and complex project. There also are likely to be differences in learning between team leaders and team members, between functional groups, and other project participants.
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Wilemon
Facilitators to a learning orientation: • Communication between functional groups during NPD: For example, Souder and Padmanabhan (1989) noted that when counterpart managers from both R&D and manufacturing assist in the transfer by mutual promotion, —'the bilateral championship of a technology,'—transfers are more likely to succeed. • Achieving a market/customer orientation: Gruner and Homburg (2000) note that customer interaction during the early and late stages (but not the medium stages) of the NPD process and collaborating with customers exhibiting lead user characteristics has a positive impact on new product success. • •
Experimentation: A major source for effective learning. Fostering a climate which allows & tolerates failure: For example, "In Brady Corporation, we want employees to feel free to acknowledge mistakes and to share them with colleagues, who in turn are expected to be supportive and to help turn missteps into learning experiences (Hudson, 2001, p. 47)."
•
Valuing key individuals/groups who can solve complexity.
Barriers to learning in development: • • • •
Inability or unwillingness to "see what's there" Too busy to reflect on events/learning Punitive culture, senior management neglect Lack of awareness
• •
Distractions/crisis management Lack of follow-up
B. Building the knowledge base/storing system During & after product launch, it is important to identify what was learned about managing complexity. This information needs to be documented and stored for future development teams in preparing screening criteria or for identifying which functional capabilities need to be reinforced. The findings and knowledge from both successes and failures also need to be recorded. It needs to be recorded considering the context of the development project. Learning always occurs within a context and documenting the attendant context is important. Facilitators to an effective storing orientation: •
Having a clear methodology to record personal/organizational experiences (e.g., visualization, user-friendly recording). With a manual, for example, development personnel can systematically record what they've learned during an NPD program.
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Creating an effective reward and/or recognition system for recording learning. Without an effective reward system, learning is likely to remain with individuals rather than place in a database for future use.
Inhibitors to a storing orientation: • Lack of incentive and/or time to record experiences. Since vivid recording is more likely to occur when actual learning occurs, quickly recording/documenting experiences are highly recommended. • •
Turnover of development personnel. Perception that historical/experiential information is not valued.
If a company's 'knowledge accumulating or storing system' performs effectively, much valuable knowledge can be stored. This knowledge base can be a platform for developing an innovative, highly competitive, and complex product with greater confidence, efficiency, and effectiveness. Moreover, with a well functioning, systemized learning program, the organization is able to learn more from the similar complexity experiences and retrieve this learning for future development projects. Step 6: Retrieving Learning for Future Projects Creating a knowledge system is primarily related to the communication within a team and between functional groups supporting a project. However, building up a knowledge transfer system is related to the communication between development teams or from one project group to another. While a number of studies conclude that one of the most important determinants of new product success is the level of joint involvement, or integration, between functional groups such as the R&D, manufacturing, and marketing (e.g., Iansiti and West, 1997; Song and Parry, 1992; Souder, 1981; Souder and Padmanabhan, 1989), there is little research on knowledge transfer between project teams. Maidique and Zirger (1985) suggest that team experiences with failed products can capture important information, which can then be used to make a subsequent project effort successful. It is important to note that learning transfer success is closely related to cross-project cooperation and integration. Such transfer requires a different set of educational and communication strategies. Facilitators to an information transfer orientation: • Cross-functional cooperation • Diverse channels of informal networks: For example, Meyers and Wilemon's (1989) research reveals that almost half of the responses relating to learning in
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• • • •
NPD were classified as emphasizing the importance of informal networks in learning transfer, following project leaders as learning transfer agents, and thirdly formal channels. Change agents, liaison personnel Rewards for information transfer Systems for information transfer Valuing experienced team leaders & members
•
Training sessions
Barriers to an information transfer orientation: • "Ownership"/hoarding of information: Nonaka (1991), for example, notes that making personal knowledge available to others is a central activity of the knowledge-creating company. •
Organizational climates that block information transfer (internal competition, reward systems which devalue teamwork and information sharing).
The major benefits of continuous learning to innovative organizations are: • Gaining higher performance outcomes from development projects •
Evaluating proposed development projects which fit the firm's objectives & capabilities
•
Learning from the similar complexity experiences (capturing, storing, & comparing learning systematically) Retrieving learning for future projects
•
SUMMARY Complexity is an important factor in many NPD projects, thus learning about complex issues & their management is important in successfully managing NPD programs. This study examines the nature and importance of complexity in developing new products and then constructs a descriptive model of how organizations identify complexities, how they capture, store, and use their learning from their complexity experiences. Based on our descriptive model, critical systems for a learning organization are examined and then several suggestions to help product developers deal with complexity learning are provided. The methodology suggested in this paper may need to include additional steps and actions depending on the specific context and circumstances of a development project. Complexity is worthy of additional attention from researchers and practitioners alike. Large-scale
empirical
investigation, jointly
conducted
by
researchers
and
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practitioners, will help gain useful insights into how best to manage complexity via learning organizations.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
- ^ LI
STANDARDIZED PROJECT MANAGEMENT CAPABILITY IN PRODUCT DEVELOPMENT Dragan Milosevic", Peerasit Patanakul Portland State University, Portland, Oregon, U.S.A.
ABSTRACT We polled 82 project participants across North America involved in hardware and software development projects and learned how leaders in project management capability (PMC) differ from laggards. Our study found that leaders: • • • • •
Exhibit significantly higher PMC than in organizations that lag Develop project managers with advanced leadership skills Deploy more streamlined and efficient project delivery processes Apply more effective PM methods Use more regular and comprehensive project status metrics.
In a nutshell, the study found significant differences among companies' PMC, and companies with more effective projects seemed to be doing certain things that companies with less effective projects were not.
Dragan Z. Milosevic is an Associate Professor in the Department of Engineering and Technology Management, Portland State University. Email:
[email protected] ** Peerasit Patanakul is a Ph.D. candidate in System Sciences and Engineering Management, Portland State University, Email:
[email protected]
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INTRODUCTION Project Management Capability (PMC) Imperative The ability to develop products and to move them from inception to shipping quickly and efficiently is of paramount importance in the ever-changing business arena. Sticking out among these familiar changes is the speed of project product development and its fundamental significance to the time-to-market competition. Take, for example, the world auto industry. In the 1980's, delivering a car from concept to market used to take close to seven years. Developers of subsequent generations of cars have made giant strides, cutting the delivery process to less than three years (Wheelwright and Clark 1992, Haddad 1996). The case of the automobile industry is not alone. Empirical evidence of project cycle time reduction in other industries and areas is abundant, including software development (Hoch et al 2000), microprocessors, technology development (Tipping et al. 1995), etc. Faced with a competitive environment, many firms managed to reduce their average cycle times by 20% to 50% (Adler et al. 1996). The power of cycle time lies in its consequences those who are fast often enjoy premium pricing, higher profit margins, and increased market share (Calantone and Benedetto 2000). Another competitive reality driving the increasing importance of PMC is that customers have taken charge. In the seller-customer relationship sellers no longer have the upper hand; customers do. They tell suppliers what they want, when they want it, how they want it, and how much they are willing to pay. And suppliers listen. When designing products per their needs and per their quality and schedule requirements, suppliers should realize that satisfied customers represent a real economic asset to a company, which is critical for economic returns. This is apparent from a survey, where the higher-scoring companies created over 100% more shareholder wealth than the lower-scoring companies (American Customer Satisfaction Index 1997). Quality reigns as well. The world's giants in software development, for example, deliver software that contains one third less defects than their competitors, a clear sign of where the success lies (Hoch 2000). Like other organizations, they thrive on the idea of creating superior value by meeting or exceeding buyer expectations on quality, service, features, and performance (Frame 1999). This philosophy of using superb quality as a source of strategic differentiation has rapidly spread across industries (Levine 1996) in both, small and large companies. And product development projects are increasingly expensive and more complex. In order to develop Windows '95, Microsoft spent well above $1 billion (Hoch 2000). Lockheed worked hard to reduce its software development cost by 75%. The premise here is simple — if you want to be competitive, lower the cost. While it is
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well known that in time-to-market businesses cycle time is more important than development cost, companies are clear that to ignore the cost is asking for trouble. Cycle times, customer satisfaction, quality differentiation, and development cost in product development are competitive factors. They make PMC at least as important as traditional sources of competitive advantage including knowledgeable human resources, knowhow, and financial capital. Companies that emphasize PMC often manage to squeeze their competition out. Companies that don't may even see their market standing rapidly dwindle. How then does one go about building and improving PMC in product development? Frankly, while many prescriptions and formulas have been offered (Kerzner 2000, Kerzner 1998), most of them are built on opinions, anecdotal evidence and a few case studies - far from what one would call "strong empirical evidence." Those few that are based on empirical evidence take a handful of approaches ranging from single-project success factors on the product level (Cooper and Kleinschmidt 1994, Griffin 1997, Madique and Zirger 1984) to singleproject success factors on the project level (Adler et al. 1995, Brown and K.M. Eisenhardt 1997); to success factors in a multiple-project environment in product development (Adler et al. 1996, Brown and Eisenhardt 1997). None of them, however, looks into PMC improvement in relation to standardized project management (SPM). The current study intends to add some evidence to the discussion while concentrating on SPM. Why have we chosen a focus on SPM? Prior to the study, we were observing PM in several successful organizations and noticed that they were attempting to build SPM. Intrigued by their attempts, we began a literature search that identified a set of PM strategies frequently deployed in industry. It is the set addressing major areas of a company's PM systems, sometimes bundled and sometimes deployed independently, with the expectation that SPM should be able to enhance PMC in new product development (NPD - for convenience, we will use this term to describe hardware and software development). All prescriptive and descriptive literature that we reviewed did not provide adequate evidence that SPM is an approach that may increase PMC. Hoping to contribute to the evidence, we embarked on an exploratory research study to examine how SPM could be used to improve PMC. hi this paper, therefore, the central question is: what SPM factors are linked to PMC? To answer the question, we surveyed 82 participants involved in NPD projects in organizations in the U.S. and Canada. We will proceed to define SPM, describe hypothesized SPM factors and explain our methodology. Then, more detailed results will be presented, highlighting the differences between leading and lagging organizations.
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LITERATURE REVIEW SPM Factors Likely to improve Project Management Capabilities SPM has been in use by the PM community for some time now. Take, for example, a recent report claiming that 85% of the Fortune 500 Project Management Benchmarking Forum members use standardized approaches and procedures (Toney and Powers 1997). Similarly, the Software Engineering Institute's Capability Maturity Model has helped many organizations standardize PM practices. Additionally, some vendors are marketing models for standardization of PM practices. This significant use of SPM has produced many labels for what we refer to as SPM. Some of them are "standardized PM approaches and procedures," "PM system," "PM standards," "PM templates," "structured process," "standard methodology," or "maturity models" (Kemerer 1997, Kerzner 2000, Lientz and Rea 1999, Toney and Powers 1997). We borrowed the first one - standardized PM approaches and procedures - and shortened it to standardized project management. There were two reasons for this. First, the term came from Fortune 500 PM Benchmarking Forum, a respectable group of PM experts. Second, we repeatedly heard some project managers and companies use SPM as a standard term. Apparently, at this time neither SPM nor any of the above terms with the same connotation have been adopted as an industry standard. SPM is defined as a process of managing projects that is composed of standardized practices. In this context the standardization means the degree of absence of variation in implementing such practices. Hence, as the variation is lowered, the standardization becomes higher. Also, the more practices are varied the less they are standardized. The underlying principle of SPM is the creation of a predictable process with PM practices that are stable and in control. The expectation is that the deployment of such a process will preclude PM practices that vary from project to project, from project manager to project manager, leading to a repeatable PM process regardless of changes in the project environment. Seven SPM factors were identified for the study. PMC likely depends on these factors: •
PM process - projects organized as a streamlined sequence of activities that are intended to create added value for project customers mean improved PMC. Logic ~ Process has been considered an important factor in success studies in NPD projects (Lynn et al. 1997). The cycle is viewed as a collection of project stages, sequential or overlapped, determined by the control needs
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•
•
of the organizations involved in the project. These stages are composed of logically related project activities, usually culminating in the completion of a major deliverable such as a milestone or a significant event in the project. Thus, when there is a standard process it can save project people the trouble of reinventing a new process for each individual project and enhance PMC (Sobek et al. 1998). Project Organization - bringing together all company projects and organizing their management as a coordinated portfolio will increase the ability to deliver projects in tune with their goals, and thus drive PMC. Logic - It has been known from previous studies that companies that organized their projects around a cross-functional, dedicated, accountable project team with a strong management sponsorship outperformed those who did not (Cooper and Kleinschmidt 1994). We are not taking this project-level view in our study. Rather, we set our eyes on interrelating all NPD projects, synchronizing and aligning them with the organization's business strategy. Naturally, then, this integration of NPD projects and facilitation of their PM will improve PMC (Kerzner 1998). Information Technology - the ability to leverage the organization's information technology to create advantage for an NPD project means improved PMC. Logic: PM information systems based on PM software technology have always been considered an important part of project success. Unlike the 80's and early 90's that saw the dominance of desktop software, a current trend is the integration of different computerized systems - from desk top to internet to enterprise systems, often called enterprise PM software (Levine 1996). Its essence is gluing individual projects together, creating a portfolio of projects. By helping gather, integrate, and disseminate the outputs of the portfolio management process, information technology makes the process accessible to management, enabling support of NPD projects and facilitation of their goals and PMC.
•
PM Methods - employing good PM methods that are consciously selected to support project delivery and are mutually compatible will enhance the accomplishment of NPD project goals, and consequently, PMC. Logic - Although almost every PM book emphasizes the contribution that good use of the methods can make to the attainment of project goals, the empirical studies about this theme are scarce. In one of those, Shenhar found that certain methods are drivers of project success. Another study argues that standard project methods are crucial in providing a smooth PM process that will lead to reaching project goals (Sobek et al. 1998). The rationale here is that methods and techniques such as work breakdown
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•
•
•
Metrics - projects using comprehensive metrics to measure and monitor performance will have fewer problems, hence higher PMC. Logic - Historically called project performance measures, metrics are often cited as a key to project success (Tipping et al. 1995). But they are cited in the context of being comprehensive to include all strategic areas of project health, tiered to reflect success indicators for all management levels in an NPD project, and mutually compatible. If such, metrics will help us understand how well the project strategy works, where and why it is flawed, and devise actions to eliminate the flaws, bringing a project closer to its goals. Indeed, designing and deploying such metrics should promote PMC. Project Culture - because team members are more satisfied, engaged, and mutually supportive, NPD projects with a strong culture work harder and are more effective and more successful, increasing PMC. Logic - organizational culture has been cited as a key success factor on the organizational level. Similarly, PM organizations strive to design an effective project culture, expressed as a set of shared behavioral norms and expectations. The intention is that the personnel have a sense of identity with the norms and expectations and accept investing both materially and emotionally in their project. This should make them more engaged, committed, enthusiastic, and willing to support each other to accomplish project goal. Leadership - NPD projects managed by project managers with strong leadership skills are more successful and effective, thus influencing PMC. Logic - The concept of a strong project leader as a key to project success and PMC has been a consistent topic of many studies and experts. As a consequence, there is a strong drive in today's organizations to define leadership style in terms of specific leadership competencies such as interpersonal, business, and process competencies (Frame 1999). Along this line, Sobek et al. argue that each person in a project should be equipped with the same set of standard skills to accomplish their tasks effectively in order to attain project goals (Sobek et al. 1998), hence driving PMC.
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RESEARCH METHOD Questionnaire Development First, through interviews with several project managers we identified a set of concepts and themes that captured the range of issues. Next, we grouped these concepts and themes into the seven areas as extracted from the literature: PM process, organization, information technology, methods, metrics, culture, and leadership. From this set of concepts and the qualitative data from which they were drawn, we then defined a pool of questionnaire items. Multiple interviews were again conducted after statistical testing to add richness to the interpretations of the test results, which yielded insights into practices substantiating our findings. Variables PMC - the dependent variable - was measured as an average of the accomplishment of project schedule goals, cost goals, quality goals, and customer satisfaction goals. This was captured on a 5-point Likert scale (5 being the highest extent and 1 being the lowest extent). The independent variables include the standardization of the project management process, organization, information technology, methods, metrics, culture, and leadership. Once again, a 5-point Likert scale (5 being the highest extent and 1 being the lowest extent) was used to capture the numerical responses. Sample To examine these research hypotheses, a cross-industry sample with sufficiently experienced respondents whose business units and projects vary in sizes was needed. The respondents in this study were primarily attendees of PM workshops. After examining their background against one criterion—at least two years of experience in project works - a final qualifying sample included 82 project participants (project directors, project managers, and team members) from NPD area. Methods The purpose of statistical testing was to verify the relationships between the dependent variable (PMC) and the independent variables (PM process, organization, information technology, methods, metrics, culture, and leadership). Three methods of bivariate data analysis together with one multivariate method were used. The multivariate methods included:
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Pearson product-moment correlation: it measures the simple correlation between each independent and dependent variable; for example, PM process and project effectiveness. ANOVAs with Duncan Multiple Range Tests: first, we divided all our data points for PMC (dependent variable) into three groups based on the degree of effectiveness— the low group (average score 1 to 2.33 on Likert scale), the mid group (average score 2.34 to 3.66 on Likert scale), and the top group (average score 3.67 to 5 on Likert scale). Finally, ANOVA was used to determine whether there are significant differences in mean values among the three groups. The theorized logic here is that groups with higher effectiveness will have higher levels of PM process, organization, information technology, methods, metrics, culture, and leadership. The t-test was used to assess the significant difference between the top group and the low group in terms of SPM factors. Stepwise multiple regression analysis was used as the only multivariate technique in order to validate the previous bivariate analyses: the criterion (dependent variable) was PMC, and predictors (independent variables) included PM process, organization, information technology, methods, metrics, culture, and leadership. Since Pearson product moment correlation indicated correlations between independent variables, several regression runs were performed, eliminating the correlation effects. RESULTS Top Four PMC-Enhancing Factors Four SPM factors appeared to have an impact on PMC, two of them especially. The top four SPM factors that were found to improve PMC were leadership, methods, process and metrics. Technology, organization, and culture were not found to have an impact on PMC. According to our data analysis, leadership is the strongest driver of PMC. As Table 1 indicates, leadership showed a strong relationship with PMC (0.50 at the 0.05 level of significance). The results from ANOVA and t-test supported the fact that there were significant differences in terms of good leadership and poor leadership. While good leadership enhanced the PMC, the lack of leadership perhaps led to the poor PMC (the group with the low project effectiveness featured mediocre leadership at the mean value of 2.13). This is the number one determinant of PMC enhancement. Projects that were led by effective leaders, equipped with a full set of leadership competences from interpersonal skills to intrapersonal skills to process to business competencies, tended to be more capable in delivering on project goals. This result appears to be in tune with the chorus of voices coming from those who argue that we need more leadership
Standardized Project Management Capability in Product Development 309 in project management, simply because other factors, as necessary as they are, won't work without good leaders to deploy them. Project management methods - more precisely, the use of more systemic and compatible methods - is a major driver of PMC. As shown in Table 21.1, all three bivariate analyses yielded virtually identical results—correlation coefficient between methods and PMC was strong (0.47 at the 0.05 level of significance), ANOVA indicated significant differences among the three groups, and the top group of projects in terms of PMC deployed systemic and compatible methods much more so. This finding comes as no surprise. Apparently, methods appear to be an integral part of PMC. They are a PMC enhancing factor when management selects the methods in a systemic rather than random manner, looking at project tasks from all possible angles rather than one angle. It is also important that the methods used are mutually compatible, able to share project information and build on each other, and thus provide necessary consistency and synergy in producing project deliverables.
Mean values of PMC Low Mid Top group group group
SPM factor
Corr el Coeff
Process Organizatio n Technology Methods Metrics Culture
.42*
2.38
2.00
.17
2.50
.04
Leadership
.50*
3.25 2.25 2.13 2.75 2.13
.47* .28* .02
ANOVA F Signif.
t-test Top group vs. low group
3.38
.012*
.013*
2.88
2.75
.801
.371
3.00 2.88 2.25 2.63 4.00
2.88 4.00 3.38 3.50
.842
.654
.003* .089 .402
.000* .002* .134
4.00
.000*
.000*
• = 0.05 level
Table 21.1: Impact of SPM factors on PMC (Bivariate Analysis) With the correlation of a solid 0.42 and the significant differences among three groups of PMC, the message seems to be pretty clear - process matters. To enhance PMC one needs a smooth PM process with well-defined phases, activities, and deliverables that provide a clear roadmap for the delivery of the project product. Cutting corners by sticking with an ad-hoc approach, arguing that the process by its nature is rigid and lacks flexibility, won't improve PMC; rather, it will lower PMC. While flexibility is an integral part of the process, an ad-hoc approach to it rarely is successful. What is really surprising is the low level of quality of execution of the process in our sample. After so much emphasis on improving the process in the last
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decade, one would expect much higher mean values for the process of the three groups. Apparently, the process in NPD organizations still has a long way to go. More regular and comprehensive use of project metrics improves PMC. The correlation value between the metrics and project effectiveness was 0.28 (0.05 level of significance). The results from the t-test showed that there were significant differences between means of SPM factors between the top and low group. Additionally, the low group projects - those with the lowest mean of SPM factors exhibited an apparent irregularity and lack of comprehensiveness in using the metrics. To be able to impact PMC, metrics need to include a balanced set of performance measures, covering all areas of project health that matter to project goals. It is also crucial that they are measured on a regular basis, serving both as leading and lagging indicators, providing an early warning signal and a basis for corrective actions. Again, investing in measuring the project status improves PMC. Factors With No Apparent Impact on PMC The expectation that information technology would drive PMC did not materialize in this study, which is somewhat surprising given that project information has been generally believed to be important to project success (A Guide to the Project Management Body of Knowledge 1996). This lack of impact is perhaps a reflection of two aspects. First, a project portfolio concept has been a novelty to many organizations. Second, the integration of desktop, Internet, and enterprise systems is another relatively new phenomenon in organizations. The implementation of both may be still underway, and not to the point to deliver an impact on PMC. Project organization did not have an impact on PMC in this study. However, this may be a result of how we conceptualized it - integration of all projects and their alignment with the business strategy. This is a different view from the traditional one focused on the team organizational structure, whether functional, matrix, or projectized. Our view demands a very high integration of the project delivery mechanism with an organization's mission and business strategy, an approach that is still not widely spread. Alternatively, it may be that building a strong PM process with methods and metrics and not so much an explicit alignment of projects with the strategy is more important. Project culture did not impact PMC. Perhaps because project culture is not a well-understood concept. In our discussions with project managers, many of them expressed a view that project culture equated with organizational culture, which in their view was the province of executive management, not the project people. Consequently, they may not be able to relate to how the culture impacts their PMC. Or, project managers may believe that even while lacking a strong project culture, they are still able to deliver as expected if the project leadership, tools, process, and metrics are in place.
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Multivariate Results Stepwise multiple regression analysis was used to validate the previous bivariate analyses. Only two SPM factors entered the equation (see Table 21.2). In the analysis, one predicted variable may capture the explained variance of the dependent variable by using its correlated factor. As a result the correlated factor may not enter the equation. Since some SPM factors were strongly correlated with each other - for example, the correlation value between the methods and process is 0.52 (at p<0.05) it is quite possible to get a short list of factors in the equation. Specifically, our list includes only leadership and methods. These two predicted variables were statistically significant at .001 and .003 respectively. The equation itself was also strongly significant at the .000 level. The explained variance (adjusted R2) of PMC by using leadership and methods as predictors was 0.307. This modest explained variance indicates that there are other important factors beyond SPM factors that impact PMC.
SPM Factor Leadership Methods
Beta coefficient .36 .31
Model (n=82) t-value 3.55 3.05
p-value .001 .003
R',aj= 30.8%, significant at 0.0000 level.
Table 21.2: Multiple regression analysis of PMC versus SPM factors (multivariate analysis)
CONCLUSIONS AND MANAGERIAL IMPLICATIONS What strategies could organizations deploy in order to enhance their PMC in NPD projects? Here is what we found in this study. Strong leadership is consistent with strong PMC. Superior PMC requires superior project leadership. While this has been taken for granted by both researchers and practitioners, in reality the focus of project delivery was on the methods. As of recently, we have seen an increased emphasis on leadership, possibly because projects are often delivered in a matrix environment, where project managers have no direct authority over project team members but bear the responsibility for delivery of the project. Perhaps such an emphasis is for the PMC enhancement in top organizations in our study sample, contributed by complete, well-rounded project leaders. These leaders feature the mastery of a multifaceted competency set, filled with in-depth knowledge of process, interpersonal, intrapersonal and business domain.
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Select and deploy systemic PM methods. An emphasis on the methods as a vital piece to the project delivery equation has been around for a long time. Those who believed so were not far off. Indeed, how a project selected and used the methods turned out to be the second most dominant PMC enhancing factor. The top organizations in our study chose a mix of mutually compatible methods that secured a systemic approach to producing project deliverables as planned. When in pursuit of higher PMC, develop a better project delivery process. Pursuit of quality of the project delivery process initially may require investments, but consistency in this approach over time increases PMC (Cooper and Kleinschmidt 1994). The justification is that a capable process brings less rework and less rejected project deliverables, making it cheaper, faster, and more predictable. Consequently, top organizations' investment in building a capable process into project delivery impacted their accomplishment of project goals, the core of PMC. Deploying comprehensive metrics in a regular fashion is essential for enhancing project delivery capability. This means that from inception to completion of the project delivery process, its multiple facets need to be measured in regular periods in order to obtain a holistic picture of its health. Although not one of the top three PMC enhancing factors, metrics had a positive impact on PMC. The project delivery metrics measure customer relations, financial performance, process quality, learning and growth. One size of PMC enhancing factors does not fit all organizations. PMC may vary with the type of business strategy it supports. We repeatedly heard this message from project managers that we interviewed. In short, PMC and factors enhancing it will be customized to fit the strategic purpose of the company, and thus each organization may have its own size of PMC enhancing factors. Don't overemphasize PMC enhancing factors. This study's findings are in tune with previously published case studies and conceptual papers (Kerzner 1998, Sobek et al. 1998, Toney and Powers 1997). Treat these findings as possible benchmarks when taking a road toward PMC enhancement. However, the improvement of PMC enhancing factors may not automatically lead to a higher PMC. Other factors may have their way and PMC may not change or even may deteriorate for any number of reasons.
LIMITATIONS AND FUTURE RESEARCH ISSUES Limitations There are some limitations to how we arrived at our findings, and, accordingly, to their value. The respondents in our study were primarily attendees of PM workshops, people who typically know more about project delivery than an average project
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participant. The outcome is that our sample of respondents may not be entirely representative of the population of project participants. Also limiting is the fact that we did not look beyond a narrow set of SPM factors. Other factors, not addressed in our study, may have a stronger impact on PMC. Future Research Issues In addition to more research necessary to further back up our findings, other issues also deserve more attention in the future. First, the emerging role of new internetbased information technology needs to be researched. Second, an inquiry into how another emerging issue impacts PMC has its merit: integration of all projects and their alignment with the business strategy —. Third, the research light should also be shed on how an organization's competitive strategy influences the architecture of its PMC. Fourth, we need more research to find out how the anatomy of PMC varies across organizations.
BIBLIOGRAPHY American Customer Satisfaction Index (1997). University of Michigan Business School, Ann Arbor. A Guide to the Project Management Body of Knowledge (1996). Project Management Institute, Drexell Hill. Adler, P.S., Mandelbaum, A., Nguyen, V. and Schwerer, E (1996). Getting the most out of your product development process. Harvard Business Review, 134-15. Brown, S.L. and Eisenhardt, K.M. (1997). The art of continuous change: linking complexity theory and time-paced evolution in relentlessly shifting organization. Administrative Science Quarterly, 42, 1-34. Calantone, R.J. and Benedetto, A.D. (2000). Performance and time to market: accelerating cycle time with overlapping stages. IEEE Transactions on Engineering Management, 47, 232-244. Cooper, R. and Kleinschmidt, EJ. (1994). Determinants of timeliness in product development. Journal of Product Innovation Management, 11, 381-396. Frame, J.D. (1999). Building Project Management Competence. Jossey-Bass, San Francisco. Griffin, A. (1997). PDMA research on new product development practices: updating trends and benchmarking best practices. Journal of Product Innovation Management, 14, 429-458.
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Haddad, C.J. (1996). Operationalizing the concept of concurrent engineering: a case study from the U.S. auto industry. IEEE Transactions on Engineering Management, 43,124-132. Hoch, D.J., Roeding, C.R., Purkert, G. and Lindner, S.K. (2000). The Secrets of Software Success. Harvard Business School Press, Boston. Kemerer, C.F. (1997). Software Project Management: Readings and Cases. Irwin McGraw Hill, Chicago. Kerzner, H. (2000). Applied Project Management. Wiley, New York. Kerzner, H. (1998). In Search of Excellence in Project Management. Van Nostrand, New York. Levine,H.A. (1996). Minnesota Smith and the temple of unrealized dreams. PM Network, 11-15. Lientz, B.P. and Rea, K.P. Breakthrough Technology Project Management. Academic Press, San Diego. Lynn, G., Abel, K.D., Valentine, W.S. and Wright, R.C. (1999). key factors in increasing speed to market and improving new product success rate. Industrial Marketing Management, 28, 319-326. Madique, M.A. and Zirger, B. J. (1984). A study of success and failure factors in product innovation: The case of the U.S. electronic industry. IEEE Transactions on Engineering Management, 31, 192-203 Sobek, D, Liker, J. and Ward, A. (1998). Another look at how Toyota integrates product development. Harvard Business Review, 36-49. Tipping, J.P., Zeffren, E. and Fusfeld, A.R. (1995). Assessing the value of your technology. Research Technology Management Journal, 38, 22-39. Toney, F. and Powers, R. (1997). Best Practices of Project Management Groups In Large Functional Organizations. Project Management Institute, Drexel Hill. Wheelwright, S.C. and Clark, K.B. (1992). Revolutionizing Product Development. The Free Press, New York.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
WHEN THE HUMAN BANDWIDTH LIMITS THE ABILITY T O TRANSFER TECHNOLOGY T O INTERNATIONAL LOCATIONS Basil Khalil, University of Miami, College of Engineering, Coral Gables, Florida
ABSTRACT One of the greatest challenges in today's business environment is how to transfer technology from one location to another. This issue seems to be even more prevalent for multinational companies that are trying to transfer their know-how and systems to developing and untapped markets. We utilize an example of a cash control system implemented by a Fortune 500 company in the Caribbean region as a case study to identify some of the major obstacles impeding corporations from transferring technology. We introduce the concept of the IT Expanding Universe Dilemma and how companies that poorly transfer technology are plagued by it. Keywords: International technology transfer, human bandwidth, project management, IT expanding universe dilemma, tacit technology, codified technology
INTRODUCTION (Khalil 2000) defines technology as the knowledge, products, processes, tools, methods, and systems employed in the creation of goods or providing services. Technology can be classified into two categories: tacit technology and codified technology. Tacit technologies are non-articulated knowledge. Codified technologies,
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on the other hand, allow people to know how technology works but not necessarily why it works, or the trail of thought behind its development. Technology transfer is a process that permits the flow of technology from the source to a receiver (Khalil 2000). The source, in this case, is the owner or holder of the knowledge, while the receiver is the beneficiary of such knowledge. International technology transfer is the diffusion of technology from the place of its introduction to other markets around the world (Grosse 1996). International technology transfer is more complex since the cultural and language differences make the transfer of tacit technologies increasingly difficult. Souder and Padmanabhan (1989) suggest that successful technology transfer involves identifying the technological, organizational, and people-related barriers and promoters, and then "manipulating" those promoters so as to overcome the barriers. Bresnen et al. (2003) emphasizes importance of social aspects of knowledge retention and transfer. To capture and transfer tacit knowledge, Malik (2001) states that managers responsible for technology transfer arrangements need to try to identify where tacit knowledge resides and explore ways of articulating it. The ability to achieve this often defines the success of a project, an implementation or the continued financial viability of the company. Daghfous (2003) demonstrated through a case study of technology transfer from a university to private company that knowledge transfer projects have significant intangible benefits as well When dealing with international projects or initiatives, Cultural differences represent a critical barrier to technology transfer. Smith and Haar (1993) warned that projects that are technically, financially, and organizationally strong have failed as a result of cross-cultural factors, that is, the inability of project managers and supervisors to comprehend and respond appropriately to foreign environments. Cummings and Teng's (2003) findings suggest that R&D managers should pay attention to the form and embeddedness of the knowledge, any potential relationship distances between the parties, and the degree of interactions undertaken between the parties. Gupta and Govindarajan (2000) suggest that people must be given incentives to increase the willingness to transfer their knowledge. Malik (2001, 2003) indicates that an important promoter of successful technology transfer is senior management input and trust during a comprehensive review of internal documentation and interviews with management at BICC Cables.
HUMAN BANDWIDTH Bandwidth is the amount of data that can be passed along a communications channel in a given period of time (American Heritage Dictionary 2000). We define human bandwidth as the amount of information that can be transmitted, received, processed,
Human Bandwidth in Technology Transfer to International Locations 317 and internalized by a human being in a given period of time. Human bandwidth is the highest when all the senses are used (i.e. hear, see, smell, touch, and taste) simultaneously. Interpreting the information received is based on the human's previous experiences and existing knowledge. It is dependent on human inherent characteristics and enhanced by environmental and cultural modifiers. The latter includes education, social environment, cultural policy, motivation, and work practices. Therefore, the ability to interpret a certain piece of information is unique to each human. For example, if we were to bring in an expert in a particular field and provide him information that is in a language that is foreign to him, his human bandwidth is reduced to zero, even if the information is in his field. Just as bandwidth can be increased through widening of the communications channel, widening the experiences of an individual can increase human bandwidth. Just as bandwidth can be increased through technological enhancements, an increase of knowledge of the individual increases human bandwidth. This is best illustrated with our expert. If he were to then learn the language in which the information was sent, his bandwidth would increase since he would be able to interpret the information. By recognizing the barriers and promoters and then "manipulating" those promoters so as to overcome the barriers, successful technology transfer is enabled therefore increasing the human bandwidth of the receiver for more technology transfer. In most cases, written documentation, such as user manuals and on-line guides, utilizes only one sense (i.e. sight) for communications. Thus, the available human bandwidth for receiving information is dramatically decreased. The available human bandwidth is further decreased when the written information is rolled out to user groups that may not have a primary common language. This is a challenge that multinational companies have faced for many years. In particular, IT professionals in these multinational companies have faced a difficult task in trying to either develop or rollout a standard application across multiple countries. On one hand, developing software in a single language is more cost-effective from an IT development standpoint; on the other hand, the effort spent on increasing the human bandwidth of the users to effectively use the software may far exceed the effort needed to make the software multi-language enabled. Often, software is developed without taking into account the human bandwidth of its users. Consequently, the benefits expected from rolling out such a technology are not fully realized in multi-national, multi-lingual settings.
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CASE STUDY Cash control application A major issue affecting multi-national corporations in the different markets is how to handle cash transactions. Unlike the United States, where a high percentage of business-to-business transactions occur by check, credit card, or electronic fund transfer (EFT), the social policies, economic conditions or legal restrictions of most countries make cash transactions the preferred method of payment. The multi-national corporation, upon which this case study is based, has over 100,000 customer facing employees, each of which has the ability to collect cash. Ensuring that all the cash collected is deposited in the bank fully is a Herculean task. Given the special rules and regulations of each country, developing one application to help with this cash control would be very difficult. Some countries require specifically formulated invoices and receipts for the collection of cash. International shipments may require invoices to be printed on government provided paper. One particular country requires invoices to be printed only using a dot matrix printer. In 1997 the Latin America division of this corporation undertook the initiative to develop one cash control application for the Caribbean region. The Caribbean region consists of 23 islands, most of which do not have the technological infrastructure to run the complex data-intensive systems internally developed for the whole corporation. A cross-functional team was formed to take into account the existing issues and barriers and to identify a consistent way to handle cash transactions. Outsourcing some or all of the cash collection process to one vendor was not a viable option since a single worldwide vendor did not exist. Most available software is country specific and the process is not consistent across multiple countries. Further, the communications infrastructure and bandwidth did not allow for continuous connectivity between the islands and the divisional headquarters in Miami. The team devised a solution to develop a homegrown application that uses replication technology. Replication technology simply puts a copy of the data onto a local server so the user can access and update information locally and efficiently. In the evenings, when minimal processing occurs, the local copy communicates with the main system and transfers only the changes that occurred between both systems. This process, also known as replication, only transfers the changes. Thus, data transfer is minimized and the issue of a weak technological infrastructure is eliminated. To insure that the user interface was clear and easy to work with, the team met with operational management to develop an easy-to-use front-end for the application. Process flows of existing processes were developed. The team analyzed the current processes and defined how the new processes would work with this application. Design requirements were sent to the technical group for development and the
Human Bandwidth in Technology Transfer to International Locations 319 application was developed in quick fashion. After a two-month pilot study, all identified bugs were resolved and the application was rolled out to the remaining islands. During the rollout, members of the project team traveled to the islands to train the users on how to operate the application. During this training period, the team sat with the users to ensure that all the problems that typically occur during implementations of applications were resolved and that the users could use the application without problems. After implementing the application throughout the islands, the team was rewarded for a successful implementation and the team was disbanded. Cash control application: two years later Two years after the implementation of the cash control application in the Caribbean region, the results were far different from the original implementation. Of the 23 islands originally implemented in, only nine countries continued to process cash control in the original contemplated format. Another 10 islands used the application without replication by sending disks from the island to the main divisional headquarters in Miami. The remaining islands stopped using the application altogether. Much of the data entered into the system was either incomplete or incorrect. A post-mortem of the cash control project was initiated to better understand the root causes of failure. Individual interviews were conducted with key management and personnel from the engineering, accounting, information technology, and operations departments. A team of functional experts was brought together over a two-day period to discuss the preliminary findings from the interviews and to determine a new course of action to improve cash handling and monitoring tools. The team identified the following key reasons for the failure of the cash control application: •
Turnover - When the team implemented the application, a significant amount of time was spent training the user in each island on how to appropriately use the application. Unfortunately, turnover occurs at a very high rate in the industry the company operates in. Thus, within a year, all the trained employees were lost through attrition. For a high-turnover, low-paying position, it does not make business sense to provide a complex application that requires significant upfront training.
•
Poorly sustained knowledge transfer to users - While there was significant effort placed on training for the users during the implementation phase of the project, no effort was placed on training new employees. Since there was no continuity of technology transfer, the knowledge of how to use and maintain the system at the island level was lost through turnover.
•
Uncontrolled environment - Replication technology is fairly effective when the client side and the server side systems are working well. During the
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implementation there was sufficient know-how on both the server side and client side to make the process work effectively. However, once an issue occurred on one of those sides, the replication process ceased to continue. As any owner of a personal computer can tell you, it is very common for one application to break down when another application or program is installed. Furthermore, changes in settings of the PC can substantially alter the performance of certain applications. This was very common in the Caribbean region. Users would download new software, open electronic mail with attached viruses, or change system preferences constantly. Regardless of the policies and procedures implemented for those particular machines, it was not unusual to have three to five islands down at any one point due to system or PC problems. •
Poor match of employee competencies - One of the major assumptions in the development of the application was that a customer-facing employee would complete the data entry portion needed for the cash control application. Therefore, this application was developed to be simple enough to manually enter information. Inevitably, questions were raised about having a customer-facing employee spending time completing data entry rather than spending the time to meet the needs of the customer and the integrity of the data became questionable.
•
Poor "know-how" transfer to the maintainers of the system - When the project team was disbanded, the responsibility of maintenance was placed with a person that was uninvolved with the development or implementation of the application. Since there was no transition period, the tacit knowledge acquired during the development of the cash control application was lost. Consequently, the efforts necessary to problem solve issues increased, as did the time to resolution. This often left the user community frustrated because their systems were down during critical times of the operation.
•
Scalability - Due to the sheer volume growth within the Caribbean region, the amount of processing needed to keep the information current and up-to-date required substantially more resources than what was originally contemplated. Thus, the application did not provide any economies of scale with increasing volume.
The cross-functional team also recommended that strong consideration be given to mitigate these issues if any future application is developed or purchased. While the focus of this paper concentrates on human bandwidth and its effects on technology transfer, an argument can be made that the first three reasons identified are attributable to either misunderstanding or neglect of the human bandwidth of the user community. The significant effort used during the implementation phase to train the initial users helped increase their human bandwidth to a level where the technology transferred to them was easily interpreted. Malik (2001) states that firms must learn that technology transfer is not a single hand-off but more a dynamic series of hand-offs. If
Human Bandwidth in Technology Transfer to International Locations 321 there is high turnover in the user community, a decision must be made to either develop a sustainable program that helps increase or maintain the human bandwidth of the users to receive and interpret the technology, or a less complex technology should be utilized instead. Moreover, in our cash control case study, if the users had the human bandwidth to understand an embrace the technology transferred to them, they would have recognized the implications of having an uncontrolled environment on the technology and could have taken actions to ensure that the technology continued to work properly. Unfortunately, the importance and consideration of human bandwidth in project and product development planning literature is usually understated. Prior to any attempt to transfer technology from one location to another, management must understand the human bandwidth of their employees in each location and identify ways to increase the bandwidth of its employees to institutionalize technologies rather than try to force-fit the technology. In the case of software technology, many companies pump millions of dollars to force-fit canned software to an existing internal process. This usually results in high upfront costs of customization of software and a substantial increase in the perpetual support costs. Many companies come to the conclusion that it is better to develop applications in-house or develop specialized local applications for each country. The total cost necessary for such a decision usually is significant and creates a high perpetual support cost for the company, hi most cases the bulk of the perpetual costs are incurred in the internal IT departments. These departments are asked to either customize software to the needs of each user or to provide the know-how through software support for the user. Thus, companies that do not consider the human bandwidth of its employees and how it may affect their ability to transfer technology often experience what we call the IT Expanding Universe Dilemma.
IT EXPANDING UNIVERSE DILEMMA The IT Expanding Universe dilemma is when an IT department's headcount continues to grow at a rate that is much higher than other departments and faster than revenue growth. Most corporate executives recognize that this phenomena does not make business sense, however, they are continuously reminded by their CIOs that cutting IT will result in a loss of key operational software support, which results in negative consequences to the operations. Figure 22.1 illustrates the phenomena.
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Figure 22.1: IT Expanding Universe Dilemma For every project that is undertaken by the IT group, a certain support function is added for the life of the software. This is due to the lack of complete and final transfer of the technology to the user group or to a human bandwidth shortage of the user group. The latter prevents the user group from taking full ownership and control of the technology. This means that every project taken on by an IT department requires additional resources. As shown by figure 22.1, by the time the fourth project is completed the support resources needed to maintain the four projects is greater than the resources needed to develop the first project. Even at this point, to add another project will require more resources to complete. Thus, the IT group is even less effective with the resources available than they were with the first project. Further, the chart understates the true resources needed for support. Since an IT group in a company is responsible for the maintenance of many different functional groups, projects 1-4 might be for operations, finance, human resources, and engineering groups respectively. If the operations group wants enhancements to their project, a new development cycle necessary and the resources needed for such enhancements would not be available. It is very difficult for a non-IT person to comprehend how IT resources can continue to grow and not get the same or better service from them. The IT Expanding Universe Dilemma demonstrates the results of the lack of human bandwidth of the IT and various user groups to understand, transfer, and internalize the technologies. At some point, the dilemma has to be confronted. Usually this occurs when the CEO comes to the realization that the company cannot support such constant growth of the IT department. This is the exact scenario that Ryder System Inc. faced in the mid-90s. The solution the executive team took was to eliminate the IT department and negotiate a long-term agreement with IBM for hardware support and Andersen Consulting for software development and support.
1
Andersen Consulting was renamed Accenture in early 2001.
Human Bandwidth in Technology Transfer to International Locations 323
Figure 22. 2: Example of IT resource containment through policy change If software companies follow the software development life cycle, why is it that those companies do not suffer from the IT Expanding Universe Dilemma? The answer is quiet simple: The management of a successful software company recognizes that each project should have a defined end of life to projects. Software companies focus their efforts on one or few products that they deliver and clearly define the boundaries of usage of the software. Every product they provide usually requires an enhancement based on customer feedback. Each enhancement is not considered an extension to an existing product but rather a "new" product. While the product may be named the same as its predecessors, the product is usually given a version number or release name. Software companies set and communicate a directive that no software will be supported older than 1 release prior to the latest version. In other words, a company like Peoplesoft, that currently released version 8.0, will no longer support a customer that is on version 6.0 of their software. Figure 22.2 demonstrates how this policy helps ensure that the IT resources are not excessive as new projects are rolled out. Software companies will also set geographical and environmental boundaries to the support they will offer. Often, software companies will not support their software if outside of the origin country. These clearly defined boundaries allow software companies to minimize their risk of dealing with the customer's human bandwidth issues in international settings.
CONCLUSION When diffusing technology from one location to another, management must understand the human bandwidth of their employees in each location and identify ways to increase the bandwidth rather than trying to force fit the technology. To resolve these issues, the human bandwidth of management needs to be increased to understand the people requirements, the level of effort, and the commitment it takes to develop/acquire/implement software. Human bandwidth of the user community must be considered well before the design and/or acquisition of the software. This requires
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certain policies for human resource acquisition, retention, and continuous development to enhance skills. Just like the telecommunications infrastructure and bandwidth must be in place to make a phone call or connect to the Internet, the human bandwidth of the corporation must be available to understand the technology that is being used. The IT Expanding Universe Dilemma will be avoided only when managers truly understand what it takes to transfer technology throughout the corporation. To ensure that this occurs every time a new technology is to be developed or rolled out, CIOs must take the responsibility of educating executive management on the importance of having a sufficient corporate human bandwidth to successfully transfer technology. This idea is particularly critical when dealing in a multinational setting.
REFERENCES American Heritage Dictionary of the English Language. Fourth Edition, Houghton Mifflin Company. Bresnen, M., Edelman, L., Newell, S., Scarbrough, H. & Swan, J. (2003) "Social practices and the management of knowledge in project environments", International Journal of Project Management, vol. 21, no. 3, pp. 157. Cummings, J.L., Teng, B. (2003) "Transferring R&D knowledge: The key factors affecting knowledge transfer success", Journal of Engineering and Technology Management, vol. 20, no. 1,2, pp. 39. Daghfous, A. (2003), "Uncertainty and learning in university-industry knowledge transfer projects", Journal of American Academy of Business, Cambridge, vol. 3, no. 1/2, pp. 145. Derniame, J. (ed.)(1999) InSoftware Processes: Principles, Methodology, and Technology, Springer-Verlag, Berlin Dinsmore, P. (1990) "Ideas, Guidelines and Techniques for Applying Project Management Solutions in the General Business Arena: Lessons for Executives", The International Journal of Project Management, Vol. 8, pp.33-38 Grosse, R. (1996) "International Technology Transfer in Services", Journal of International Business Studies, Vol. 27, Issue 4, pp.781-800 Gupta, A.K., Govindarajan, V. (2000) "Knowledge management's social dimension: Lessons from Nucor steel", MIT Sloan Management Review, vol. 42, no. 1, pp. 71. Khalil, T. (2000) Management of Technology: the Key to Competitiveness and Wealth Creation McGraw Hill, Boston Malik, K. (2003) "Distributed capabilities: Intra-firm technology transfer inside BICC cables", International Journal of Manufacturing Technology and Management, vol. 5, no. 4, pp. 311.
Human Bandwidth in Technology Transfer to International Locations 325 Malik, K. (2001) "How BICC cables transferred a new process technology from R&D to manufacturing", Research Technology Management, vol. 44, no. 4, pp. 55. Souder, W. E. and Padmanabhan, V. (1989) "Transferring New Technologies from R&D to Manufacturing", Research Technology Management 32 (5), pp. 38-43. Whitten, N (1989) Managing Software Development Projects: Formula for Success, John Wiley & Sons, Inc., New York
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
THE EFFECT O F HUMAN DEVELOPMENT AND TECHNOLOGY ACHIEVEMENT O N THE DIFFUSION O F WIRELESS COMMUNICATIONS
Lauri Frank, Lappeenranta University of Technology, Lappeenranta, Finland Sanna Sundqvist, Lappeenranta University of Technology, Lappeenranta, Finland
INTRODUCTION The majority of innovation diffusion studies concentrate on a product's diffusion within a single country, although some international diffusion studies exist (e.g. Gatignon, Eliashberg and Robertson, 1989; Heeler and Hustad, 1980). Dekimpe, Parker and Sarvary (1996) have criticized these so-called international diffusion studies, and their criticism is justified as a quick review reveals that recent international diffusion studies have had a very limited number of countries included: Gatignon et al. (1989) had 14 countries, Heeler and Hustad (1980) used 16 countries, Helsen, Jedidi, and DeSarbo (1993) described international diffusion by using observations from 12 countries, Mahajan and Muller (1994) had 16 countries, and Takada and Jain (1991) included only 4 countries. One of the few exceptions is a study conducted by Dekimpe, Parker, and Sarvary (1994). Dekimpe et al. (1994) studied the effect of the country's adoption timing on the diffusion of cellular telephones in 184 countries. The present study satisfies the demands for the 'globalness' of the study by utilizing the penetration data from 82 countries across the world. What creates the difference in countries' adoption timing? Terpstra and Sarathy (1994) believe that it is rather cultural differences than income, which accounts for M.Soc.Sc. Lauri Frank is a Researcher at the Telecom Business Research Center, Lappeenranta University of Technology, Finland. Email:
[email protected] D.Sc. (Tech.) Sanna Sundqvist is Professor of International Marketing at the Department of Business Administration, Lappeenranta University of Technology, Finland. Email:
[email protected]
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cross-country differences in consumption. Also, Parker and Sarvary (1994) note that a consideration of culture is lacking in diffusion studies. However, cultural differences in a diffusion context has been considered and studied by, among others, Heeler and Hustad (1980) who proposed that communications patterns and economic conditions across countries may cause differences between diffusion patterns across countries, and Gatignon, Eliashberg and Robertson (1989) who studied the cross-national diffusion by grouping countries by their cosmopolitanism, mobility and masculinity. The effect of the country's adoption timing on its diffusion process has been studied by Takada and Jain (1991), and Gruber and Verboven (2001). However, none of the studies focus on the effect of cultural differences on the adoption timing. Additionally, aggregate diffusion models have been criticized for that they treat each country as a homogenous unit, and cannot explain why some countries have a higher probability of adopting in a given year than others (Dekimpe et al., 1994). The objective of present study is to clarify how cultural differences, more specifically the country's way in looking at technology and its human development, affect its adoption and the subsequent diffusion of wireless telecommunications.
THE
ROLE
OF
CULTURAL
CHARACTERISTICS
IN
DIFFUSION
PROCESS
Earlier diffusion studies have used different methods for capturing the countries characteristics, and suggested that also a cultural dimension should be included in order to illustrate cultural differences between adopters. A generally used measure for cultural differences is developed by Hofstede (1991), which is widely accepted and considered as reliable and valid, but does only capture cultural dimensions and not the differences between countries' characteristics like wealth and resources. Although the country would be culturally very similar to the previously adopted country, it will not necessary be the next adopter due to the lack of resources, like wealth and positive attitudes towards new technology. Also cosmopolitanism, mobility and sex roles have been used to illustrate the differences between countries adopting the innovation (Gatignon et al., 1989). Dekimpe et al. (1996) illustrate the country characteristics by annual population growth rate, number of major population centers, gross national product per capita, crude death rate, communism, number of competing systems, and number of ethnic groups. We adopted two new measures, human development and technology achievement indices, from United Nation's Development Report in order to illustrate differences between countries. The human development index (HDI) measures the overall achievements in a country in three basic dimensions of human development longevity, knowledge and a decent standard of living. The HDI is measured by life
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expectancy, educational attainment (adult literacy and combined primary, secondary and tertiary enrolment) and adjusted income per capita in purchasing power parity (PPP). We believe that the HDI illustrates countries' differences in their level of wellbeing and wealth, and thus the HDI describes country's capability to adopt new innovations - especially innovations that require capital investments. Rogers (1983) notes that innovators tend to have higher income. Translating this idea to an international context, several authors have argued that a society's adoption timing and subsequent diffusion rate are related to its standard of living and stage of economic development (Antonelli, 1993; Gatignon and Robertson, 1985; Helsen, Jedidi and DeSarbo, 1993). Also Dekimpe, Parker, and Sarvary (2000) believe that wealth can enable a country to take higher financial risks to adopt a technology. Technology achievement index (TAI) aims to capture how well a country is creating and diffusing technology and building a human skill base - reflecting capacity to participate in the technological innovations of the network age. The TAI is not a measure of which country is leading in global technology development, but focuses on how well the country as whole is participating in creating and using technology. Take the United States - a global technology powerhouse - and Finland. The United States has far more inventions and Internet hosts in total than Finland, but it does not rank as highly in the index because in Finland the Internet is more widely diffused and more is being done to develop a technological skill base throughout the population. The TAI focuses on four dimensions of technological capacity: creation of technology, diffusion of recent innovations, diffusion of old innovations, and human skills. TAI estimates were available for 72 countries. We believe that the TAI also captures a country's tendency and willingness towards adoption of technology in general, and thus we propose that the TAI also represents a country's attitudes towards adoption of new technology. As Rogers (1983) has pointed out the heavy user of some similar innovation is more likely the early adopter of the other one. We propose that in order to be an innovator or an early adopter of wireless communications, a country must have resources towards adoption (HDI) and it must be technologically oriented in general (TAI). Dekimpe et al. (2000) has proposed that also endogenous factors are related to the worldwide diffusion process. They believe that the cumulative international experience with the technology affects a single country's diffusion process, and thus for later adopters, the uncertainty associated with the new technology's relative advantage is significantly reduced. It has been proposed that the countries adopting the innovation later may reach full adoption sooner as and if they can benefit from previous adopters' experiences with the technology (Dekimpe et al., 2000). Thus, the countries adopting the innovation later adopt mainly due to the external information, suggesting a high q coefficient in the Bass model of innovation diffusion. Dekimpe et al. (2000) expected that the cumulative international experience implicates that
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countries adopting the innovation later will experience faster within-country diffusion. In their study on the diffusion of consumer durable goods, Takada and Jain (1991) also found that lagged adoption leaded to an accelerated subsequent diffusion. Based on the discussion we propose the following hypotheses: HI: H2: H3: H4:
Wealthier and more/higher developed countries adopt wireless communications earlier. Innovator countries are those who have both resources and willingness to adopt wireless communications. The more technology oriented the country is, the earlier it will adopt also wireless communications. The diffusion will be slower within those countries that were the first adopters of wireless communications.
EMPIRICAL RESEARCH Data and the Bass Diffusion Model Annual data of wireless communications penetrations of 83 countries were used for this study. The EMC database provided the time series, ranging from year 1981 to 2000. However, the range varied from country to country, as Sweden, Norway and Japan have had wireless communications for 20 years, and Nepal only for 2 years. Nepal did not provide enough observations for estimation purposes, and thus it had to be dropped. The countries' diffusion curves were estimated employing the Bass model of innovation diffusion. The estimation was conducted using the NLS method. The model was developed originally by Bass (1969), and thereafter its use has been extensive. The Bass model combines external (p) and internal (q) influence by the following equation:
*(')=—S—-
(i)
In equation (1), y(t) denotes the penetration rate at time t. Parameter m gives the final penetration, which was restricted not to exceed a penetration of 100 % of the total population in this study. This was done because of if parameter m was not restricted several countries' estimations would not succeed. In the following analysis, the countries where the Bass model did not succeed in estimating the diffusion path were
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dropped (see Appendix 1 for a list of these countries). The functionality of the Bass model was judged by the significance of parameter m. Thus, countries without a significant m (p<0.05) were left out. Finally, altogether 53 countries out of the initial 83 were included in the following analysis. Values of parameter p ranged in between [0; 0.0082], and had a mean of 0.000787. The close to zero values of p show that external influence has had low meaning in the diffusion of wireless communications. In this case the Bass model is reduced to the logistic model (also known as the Mansfield model by Mansfield 1961), which is also popular for modeling innovation diffusion. Thus the logistic model might show as good results with one less parameter (for a model comparison in forecasting wireless communications, see Sundqvist et al., 2001). Values of parameter q had a range of [0.3375; 2.6856] with a mean of 0.904119. Analysis and Results In order to test the hypotheses, we grouped the countries on the basis of their human development and technology achievement. The limit dividing the countries into low and high scorers in these measures was taken from the UN report, which rated countries with a value greater as 0.8 as high HDI countries, and countries with a value greater than 0.5 as high TAI countries. The averages of the countries in this study were 0.75 and 0.36, respectively.
Figure 23.1: Categorization of adopter countries The results of clustering are depicted in figure 2. Cluster 4 contains the 'Innovators' (n=17), representing countries with high human development and technology
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achievement indices. Cluster 3 is formed of 15 'Potential adopter' countries, which can be illustrated with a high HDI but a low TAI. Finally, the remaining 35 countries identified as 'Resource restricted' countries, as cluster 2 has low values of both indices. As expected, no countries belonged to the 'Absurd' category, and thus would have had a high TAI and a low HDI.
Figure 23.2: Grouping results. Hypothesis 1, i.e. "Wealthier and more/higher developed countries adopt wireless communications earlier", was tested by an ANOVA test, which showed that the adoption year differed significantly between the formed four adopter groups. It supported the hypothesis as the 'Innovator' group had the smallest adoption years on average; the 'Potential adopter' group the intermediate value; and the 'Resource restricted' group the greatest value (the values are summarized in Table 23.1). Thus, countries with higher technological achievement and human development, have adopted wireless communications earlier. A negative correlation between the adoption year and the country's GDP per capita of year 1999 shows that the early adopters are also the wealthy ones (see Table 23.2). The number of previously adopted countries was used as another measure of the country's innovativeness. The formed groups also differ by this measure, as the innovator group has on average the least countries adopted previously, and the second
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and third groups have greater values (see Table 23.1). As the innovator group was formed by those countries, which have high values in both indices, the fact that this group has adopted the earliest gives support to hypothesis 2: The early adopters, and thus the innovators, are those countries which have both, the resources (HDI) and the willingness (TAI) to adopt. Group
Innovators
Adoption year P
n«, nnn
CaPlta
Previously adopted countries
1984.47
Potential adopters 1988.30
Resource restricted 1991.67
Total
22740.00
13860.00
6354.17
15025.68
10.40
29.50
50.44
31.60
1988.37
Table 23.1: Group and total means of variables. All variables differ between all groups on a 0.05 confidence level. Furthermore, a negative correlation between the countries' adoption years and their TAI scores supported our hypothesis 3: more technology-oriented countries, measured by the index, have adopted the wireless communications earlier (see Table 23.2). Hypothesis number 4 was tested by whether the Bass model parameter q is higher for those countries, which have adopted later. The parameter q measures the slope of the diffusion curve and thus gives an indication of the rapidness of diffusion. A positive correlation between these two variables (see Table 23.2) indicates support for hypothesis 4: Later adopted countries face a more rapid diffusion, and thus might catch up the forerunners. Table 23.2: Correlations between variables No of adopted GDP per capita countries Adoption year 1** -0.750** No of adopted countries -0.750** GDP per capita * = significant at 0.05 level, ** = significant at 0.01 level.
Parameter q 0.483** 0.483** -.339*
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CONCLUSIONS AND FURTHER RESEARCH
The results of this study show that a country's human development is a prerequisite for its technological achievement. This is verified by the fact that countries with high values of both are innovators in the adoption of wireless communications, whereas other countries either have the resources but have lagged their adoption, or lack human development and thus have no resources to adopt. The two latter are called potential adopter and resource-restricted countries, respectively. The resourcerestricted share a similar look at technology with the potential adopters, but have adopted later since they do not have the necessary resources (human development). Also, as previous studies have suggested (e.g. Gruber & Verboven, 2001), later adopters face a greater growth rate of the diffusion, and thus may eventually catch up the innovators. Further work could examine the countries of the formed groups more deeply. Also, other technological innovations adoption and diffusion could be tested against the groups.
REFERENCES Antonelli, C. (1993). Investment and Adoption in Advanced Telecommunications. Journal of Economic Behavior and Organization, 20, 227-245. Bass, F. M. (1969). A New Product Growth For Model Consumer Durables. Management Science, 15, 215-225. Dekimpe, M. G., P. M. Parker, and M. Sarvary (1994). Modelling Global Diffusion. INSEAD Working Paper, 94/72/MKT, 31, INSEAD, Fontainebleau, France. Dekimpe, M. G., P. M. Parker, and M. Sarvary (1996). Comparing Adoption Patterns: A Global Approach. INSEAD Working Paper, 96/37/MKT, 24, INSEAD, Fontainebleau, France. Dekimpe, M. G., P. M. Parker, and M. Sarvary (2000). Global Diffusion of Technological Innovations: A Coupled-Hazard Approach. Journal of Marketing Research, 37, 47-59. Gatignon, H. and T. S. Robertson (1985). A Prepositional Inventory for New Diffusion Research. Journal of Consumer Research, 11, 849-867. Gatignon, H., J. Eliashberg, and T. S. Robertson (1989). Modelling Multinational Diffusion Patterns: An Efficient Methodology. Marketing Science, 8, 231-247. Gruber, H. and F. Verboven (2001). The Diffusion of Mobile Telecommunications Services in the European Union. European Economic Review, 45, 577-588. Heeler, R. M. and T. P. Hustad (1980). Problems in Predicting New Product Growth for Consumer Durables. Management Science, 26, 1007-1020.
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Helsen, K., K. Jedidi, and W. S. DeSarbo (1993). A New Approach to Country Segmentation Utilizing Multinational Diffusion Patterns. Journal of Marketing, 57, 60-71. Hofstede, G. (1991). Cultures and Organizations: Software of the Mind: Intercultural Cooperation and its Importance for Survival. Cambridge, England. Mahajan, V. and E. Muller (1994). Innovation Diffusion in a Borderless Global Market: Will the 1992 Unification of the European Community Accelerate Diffusion of New Ideas, Products, and Technologies? Technological Forecasting and Social Change, 45, 221-235. Mansfield, E. (1961). Technical Change and the Rate of Imitation. Econometrica, 29, 741-766. Parker, P. M. and M. Sarvary (1994). An Integrated Cross-Cultural Study of Diffusion Theory. INSEAD Working Paper, 94/70/MKT, 30, INSEAD, Fontainebleau, France. Rogers, E. M. (1983). Diffusion of Innovations. Free Press, New York. Sundqvist, S., K. Puumalainen, L. Frank, and S. Pitkanen (2001). Forecasting Capability of Diffusion Models on Wireless Telecommunications. International Symposium on Forecasting, June 17-20, 2001. Callaway Gardens, Pine Mountain, Georgia, USA. Takada, H. and D. Jain (1991). 'Cross-National Analysis of Diffusion of Consumer Durable Goods in Pacific Rim Countries' Journal of Marketing, 55, 48-54. Tersptra, Vern and R. Sarathy (1994). International Marketing. The Dryden Press, Texas.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
A MODEL FOR INTEGRATING AND MANAGING RESOURCES FOR TECHNICAL TRAINING PROGRAMS R. Sawhney, Ph.D., A. B. Badiru, Ph.D. P.E, and A. Niranjan University of Tennessee Department of Industrial Engineering Knoxville, Tennessee 37996-0700
ABSTRACT Industry is continually in a state of flux trying to adapt to the dynamics of the market place and ever-changing technology. This focus on the continuous improvement of an organization is based on a primary foundation: the ability of an organization to promote a cultural change in the organization. This ability of organizations to convince their workforce to change is a key indicator of the organizations success in the market place. Historically, the motivation of the workforce to change has come in a variety of packages ranging from edicts from management to the focus on educating the workforce in a formal training setting. A model has been proposed to allow personnel to evaluate training programs proposed within an organization. The concepts of the proposed two-phased model are based on the integration of two existing models: Systematic Project Management Approach and NIOSH's 4 Stage Training Intervention Effectiveness Research Model. Phase 1 utilizes a worksheet to across the value of the training to the organization. Phase 2 of the model determines the resource requirements for the training program based on the concept of Resource Requirement Planning. Keywords: Industrial Training, Resource Requirement, Failure Mode Effects Analysis, and Precedence Analysis.
INTRODUCTION The Fourth Annual Industry Week Census Manufacturers confirms the correlation between formal training and higher plant performance [1]. Plant executives indicate in this report that a cross-functional workforce to be a most effective initiative to assist plants to reach the desired goals. The development of such a cross-functional workforce requires formal training. The American Society of Training and Development estimated that training costs to be $724,000,000 in the U.S and $654,000,000 in Europe in 1998 [2]. Training has
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become a big business, which has lured industry, government, and academia. For example in one academic institution the MBA program focused on industry generates 500% the revenue as compared to a traditional in-state student. Since training is such a capital-intensive and elusive proposition with no tangible revenue, justification of the training is a reality of life. There are two aspects to the justification: effectiveness and efficiency of the training. Effectiveness refers to the benefits that the organization will receive by training the workforce to meet organizational objectives. According to the NIOSH model for research on training effectiveness the focus here is on variables that influence the learning process [3], Training efficiency is a function of determining the resources required for the training and subsequently providing the resources at the right time. The NIOSH model confirms the correlation between efficient training and optimizing resources available for training interventions.
PROBLEM STATEMENT In practice there is a perceived lack of general awareness and subsequently a structured and consistent process to ensure training efficiency. A literature review revealed a general fourstep process to manage projects [4]. An adaptation of this process by the authors for training is illustrated in Figure 24.1.
Figure 24.1: Project Management Based Training Process The objective of step 1 is to assess the alignment of the training program to the organizational strategic goals. The objective of step 2 is to create a plan that assists training personnel to become more systematic and organized in determining the resource requirement for the development of the training program. This plan focuses in on the analysis, design, and development of the training material. Similarly the objective of step 3 is to determine the resource requirements for monitoring, tracking, managing, evaluation, and documentation associated with training programs. Finally, the objective of step 4 is to highlight the risks associated with the training program. The authors anticipated that a review by industry of the simple four-step process would provide valuable insight into industry's concerns with training. Specifically, the industry review will highlight two dimensions of this issue:
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1. Overall concern with training programs, 2. Specific concern with the proposed structured process. The authors approached medium and large manufacturing organizations that the authors recognized had current and formal training for their employees. The key contacts reviewing the process were human resource managers and directors of training who were personally known to the authors. The reviewers represent manufacturers in the automobile, trucking, medical, and electronics industries. A questionnaire based off of the four-step process was forwarded to each reviewer. Specifically, the reviewers were asked to decompose the process and indicate the strengths and weaknesses of the structured process based on their experiences and responsibilities with training programs. Further, the reviewers were encouraged to provide any additional information that they deemed to be of value. Once the responses were compiled it was determined that an appropriate format to communicate the results is a Failure Mode Effects Analysis (FMEA). FMEA are typically utilized to anticipate and prevent failures in design and processes. Responses were streamlined in developing the FMEA illustrated in figure 24.2. This FMEA highlights industry concerns with the structured process in figure 24.1 as well as overall concerns with training programs. The results of the FMEA are extremely revealing. Industry seems to be concerned with the efficiency of training programs. Specifically, industry indicates the primary cause in failing to motivate the workforce, failure to proceed based on a plan, and the failure to implement properly is the ability to harness the appropriate resources at the right time. This is illustrated by the variety of responses in the potential causes column. Further, it is interesting to note that most responses indicated a lack of any formalized control mechanisms. Control is inconsistent and is dependent on the responsible individual. Industry proposes that the most appropriate action is the ability to plan for resource determination and allocation. This leads to the need to develop a model that allows human resources personnel and other personnel in charge of training to plan an efficient training program.
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Figure 24.2: Industry Response Based FMEA
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Conceptual Approach A framework for the proposed model is presented in Figure 24.3. The framework is based on the planning for the various stages of a training program: needs assessment, developing the training, delivering the training, and subsequent evaluation and implementation in the organization. This framework is further influenced by industry reviewers who suggested that the risk assessment associated with the training be moved to step 1 of the framework.
Figure 24.3: Proposed Framework
Every concept needs a transformation mechanism that proves the value of the concept in practice. The purpose of the transformation mechanism in this case is convert the framework in Figure 24.3 into a model that allows personnel responsible for training to properly determine required resources. The inspiration for this transformation mechanism is based on a combination of two models: Systematic Project Management Approach (SPMA) [3] and NIOSH's 4 stage Training Intervention Effectiveness Research Model (TIER) [5]. The contribution of each model is illustrated in Figure 24.4. The proposed model has two phases. The objective of phase 1 is to ensure that the training is in line with the organizations objectives, expectations, and resources. The objective of phase 2 is to provide personnel in charge of training the ability to forecast resource requirements and subsequently to garner these resources to assure the efficiency of the training. These resources are for developing the training program, conducting the training, and subsequent evaluation and implementation.
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Proposed Model The proposed model consists of two separate but complementary phases as outlined in figure 3. Phase 1: Phase 1 is associated with stage 1 of Figure 24.3; the alignment and risk associated with the training program. This phase consists of an analysis designed explicitly to guide training personnel to evaluate the value of the proposed training to the organization. This analysis is in the form of a worksheet, as presented in Figure 24.5, allowing training personnel to consider the value of the training in terms of four distinct dimensions: 1. 2. 3. 4.
Alignment of training to organization's strategic goals, Areas of impact to targeted workforce, Risk with obtaining desired results from the training program, And timeframe required obtaining the desired results.
The following is a description of the steps required to fill and interpret the worksheet. Step 1. Alignment Rating- List the objectives of the training program. Next compare these objectives to the organization's strategic objectives. The user indicates the alignment of the training objectives with the organization's strategic objectives via an alignment rating. This range of the alignment rating is between 1 and 10. 1 indicates that the training does not support the organization's strategic objectives and a 10 indicates a perfect correlation between the two. Any training with a low rating should be questioned for validity. Step 2. Impact Rating- Training provides content and information for the workforce in any of the following domain subsets: technical, managerial, safety, or cultural knowledge. Each training program needs to be evaluated in terms of the impact it makes in each of these categories. This range of impact rating is between 0 and 9. While 0 indicates no impact, a 9 indicates a significant impact. Not necessarily is each category equally important, therefore the worksheet allows the user to weight each of the four categories in importance. This defined weighting scheme must remain constant for evaluation of all the training programs. The overall impact rating is then the weighted average of the four categories.
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Step 3. Risk Rating- There are four primary reasons that training programs do not provide the anticipated results to the organization. These are the lack of management commitment, lack of resources, lack of an infrastructure, and the lack of workforce acceptance for the training. Every training program is rated for each category. This range of risk rating is between 1 and 10. The 1 indicates extreme risk, while a 10 indicates no risk. The overall risk rating is the minimum rating value in each category because it is the constraint that detracts from the success of the training program. Step 4. Timeframe Rating- The timeframe rating allows one to anticipate the results of the training program to impact the organization. This range of the timeframe rating is between 1 and 10. The 1 indicates extremely long term impact, while a 10 indicates immediate results. Step 5. Overall Training Rating- The overall training rating is determined by multiplying the above four ratings. The ratings range from 0 to 9000. Statistical concepts can be utilized to further decompose the range and interpret the results.
Figure 24.5: Worksheet for Stage 1 of the Proposed Model
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Phase 2: This section will introduce phase 2 of the proposed model. The objective of this phase is to plan the resource requirements for stages 2, 3, and 4 of Figure 24.3. A proper planning will increase the probability of garnering required resources at the right time. The foundation for phase 2 of the proposed model is a component of the SPMA model described by Fuller for instructional intervention (training). Specifically, the model exploits three specific characteristics of the SPMA model. 1. Utilization of Work Breakdown Structure (WBS) to develop a precedence chart of the various levels of tasks within a training program. 2. Defining time requirements for every task within each level of the WBS. 3. Defining the dependency relationships between all tasks within each level of the WBS. The three types of dependency relationships are finish to start, start-tostart, and finish-to-finish. Further for each dependency type there could be a lag. Lag is defined as a passage of time before the subsequent task can be initiated. Figure 24.6 utilizes a modified version of Fuller's WBS to illustrate the mechanics of the model of the model. There are several assumptions defined below that are key to the model. 1. The tasks at any level are arranged chronological from left to right such that the tasks can be analyzed left to right on any level. 2. The tasks at a lower level have to be completed before the tasks at a higher level can be initiated. 3. The dependency relationships between tasks at all levels are defined. 5. The values in parenthesis are necessary times (weeks) for each task. 6. The lag time is assumed to be 1 week.
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Figure 24.6: Stage 2 Precedence Based WBS (Modified Version ofSPMA) Figure 24.6 illustrates that by utilizing the WBS structure; training will be completed in 18 weeks. This is compared to the traditional calculation of 14 weeks. This additional 4 weeks can be the difference between the successful completion of the training and the perceived failure of the training. This 4-week difference is due to the precedence requirements that typically training managers ignore. However, even the correction of this discrepancy does not provide resource details and the timings. The details of resource requirements and the timing of the resource requirements can be determined if a Resource Requirement Planning (RRP) record is to be imposed for each WBS task in Figure 24.6. This is similar to the classic Material Requirement Planning (MRP) record imposed on the Bill of Material (BOM) structure [6]. Such a RRP record is presented in Figure 24.7.
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Figure 24.7: Resource Requirement Planning Record
Each record is associated with a specific task from the WBS and is assigned a responsible department or individual. The record consists of a time bucket corresponding to the length of the training program. The following are brief explanations of each row of the RRP record. 1. Task Time Requirement (row 1)- This is the estimated time required during each period to complete the task by the responsible department or individual. The time will include any delays due to contracting all or part of the work. 2. Precedence Time Adjustment (row 2)- This row shifts the row 1 time requirements to appropriate time buckets to accommodate precedence and time lag constraints. 3. Resource Functionality Adjustment (row 3)- This row increases or decreases the times in row 2 based on the historical evidence of the responsible department's meeting task obligations. 4. Current Resource Commitment (row 4)- This row indicates the time commitment by the responsible department or individual. The time commitment may not be uniform over the training period.
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5. Resource Misalignment (row 5)- This row balances the time requirements against the committed time for every period. The misalignment for each period is calculated as follows: row 4 - row 3. The misalignments for each period are summed to indicate one of two problems: the incorrect allocation of resources (a positive summed value) or lack of resources (a negative summed number). 6. Current Resource Reallocation (row 6)- This row balances the time requirements with the committed time based on the assumption that resources not utilized can be utilized in the subsequent period. The balance is calculated as follows: (row 6 from previous period + row 4) - row 3. 7. Total Resource Load (row 7)- This row adds up all the time requirements for each period for all tasks associated with the responsible resource. Figure 24.7 assumes an additional 12,2,34, and 10 hours of time required from other lower level tasks. Figure 24.8 is an example of the mechanics of phase 2 of the proposed model. This example is based on a subset of the WBS in figure 24.6. The model first analyzes the develop strategy task (task 1). This task influences the pilot study task (task 2). The time requirements task 2 are shifted from periods 1, 2, and 3 to periods 5, 6, and 7 because of the precedence relationship (finish-to-start with a lag) between task 1 and 2. Similarly, the time requirements of design task (task 3) is moved because all the work in tasks 1 and 2 have to be completed before task 3 can be initiated. Further the time requirements for task 2 have increased because historically it has taken about 1.5 times the given time to accomplish the task. The resource requirements and misalignments are presented for each task. Note that as you go from task 1 to 2 to 3 the cumulative resource requirements are identified because all three tasks are performed by the same responsible resource. Badiru [7] presents a related approach for activity-resource assignments in project management.
Figure 24.8: Sample of Phase 2 of the Proposed Model
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CONCLUSION A proposed model has been presented that has the ability to allow the user to rank training programs including comparison of multiple programs as to their value to an organization. For example the model has the ability to differentiate between the training employees in both Lean and Six Sigma as compared to an integrated Lean Sigma training program. The model further attempts to identify the resources required for any training program. For example it has the ability to be able to distinguish between the resources requirements of Lean and Six Sigma as compared to the integrated Lean Sigma. The model is at an infancy stage and is part of on-going research at the University of Tennessee. It requires in the future stabilization of the model, testing of the model, and an attempt to make the model user friendly to encourage its practical use.
REFERENCES American Society for Training and Development: www.ccastd.org Badiru, Adedeji B., "Activity-Resource Assignment Using Critical Resource Diagramming, "Project Management Journal, Vol. 24, No 3, Sept. 1993, pp. 15-21. Bates, William S., "Improving Project Management," HE Solutions, Vol. 30, Issue 10. Fuller, Jim (1997). Managing Performance Improvement Projects. Jossey-Bass Inc, California. Jusko, Jill, associate ed., "Fourth Annual Industry Week Census of Manufacturers: Research Report", Industry Week, 2000. National Institute for Occupational Safety and Health, "A Model for Research on Troining Effectiveness", October 1999. Vollman, Thomas E.; Berry, William L.; Whyback, D. Clay (1992). Manufacturing Planning and Control Systems, Third ed. Irwin. Boston, MA.
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SECTION IV
INTERNATIONAL AND NATIONAL SYSTEMS FOR TECHNOLOGY DEVELOPMENT
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
ORGANIZING GLOBAL
R&D:
CHALLENGES AND DILEMMAS Maximilian von Zedtwitz, Tsinghua University, Beijing, China Oliver Gassmann, University of St. Gallen, Institute of Technology Management, Switzerland Roman Boutellier, University of St. Gallen, and CEO Schweizerische IndustrieGesellschaft (SIG), Switzerland
ABSTRACT After more than a decade of widespread global R&D expansion, top managers in multinational companies take decentralized competencies for granted, expecting their international research and product development functions to deliver results. However, based on more than 150 in-depth interviews and case research carried out with 18 multinational companies from three industry groups between 1996 and 2000, we have identified six fundamental dilemmas that make it difficult even for companies with carefully managed distributed R&D networks to exploit the full potential of global innovation. In addition to a root-problem analysis, we surveyed these companies about the drivers of R&D globalization, and how these drivers would affect their organizations over the next ten years. Although some of the trends that emerged are industry-specific with regard to technology development, we describe five common traits that are expected to shape R&D organization in the mid-term future.
Keywords Globalization, international innovation, R&D organization, project management, knowledge management
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INTRODUCTION Research and development—and as a result technology—have tremendously improved the quality of human life over the last five decades. With the increasing significance of technology today, it becomes apparent that R&D has to take into account not only customers and business economics but the environment and society as well. DuPont's mission statement "Better things for better living through chemistry" tries to capture this spirit. Kao's mission of "Safety for society and users" includes the all-important customer in its vision. It is difficult enough to find an allencompassing vision that appeals to customers, employees and investors with different values and expectations. It is perhaps even more difficult to execute this vision. What are the challenges for R&D that result from considering economical, ecological and societal issues in an increasingly connected world? The Global R&D Management Agenda Most R&D configurations are the result of mergers, acquisitions and manufacturinglocation decisions. Criteria for what constitutes a good location or a good R&D environment have changed over time. Therefore, many multinational companies have set up R&D locations for reasons that no longer apply. For example, cheap shop labor in Singapore evolved into fully-fledged R&D centers (inconceivable in the 1950s or 1960s), strong biotechnical research at Cambridge University has attracted pharmaceutical companies to establish R&D centers nearby; and since the 1990s R&D centers have moved to emerging markets in Southeast Asia, India, and China. But by the end of the 20th century, "more and more of the human work [became the] work of thought and communication" (Simon, 1997: 238). Metal basher criteria, inexpensive labor and the proximity of development units to target markets lost in importance compared to trends that mainly emerged in the last decade: concentration on core capabilities, global R&D outsourcing R&D, the "hunt for talent," information and communication technology (ICT) facilitating improved decision making in networks, or mobile resource allocation to divisions, corporate labs and regions, to name just a few. Table 25.1 enumerates major challenges of R&D globalization that were revealed in our research with 18 multinational companies.
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Table 25.1: What are the major challenges and issues for managing global R&D at your company? Company DuPont
Roche Schering
Ciba
Nestle Kao Xerox Canon
HP
IBM SAP
Unisys
ABB
Daimler
Schindler
Hitachi
Challenges and Issues for Managing Global R&D R&D • Impact of information technology; virtual organizations; • Structure versus processes in R&D; • Going beyond product tailoring and technical service in local markets; • Access to new sciences and technologies from the home base. • Increasing R&D costs; • Cost containment in public health care; • Availability of genomics data. • Globalization of regulatory environment; • Competition for innovation through new enabling technologies; • Uniform worldwide standards for R&D through integrated data management; • Worldwide cost containment in health care. ' Country selection for global project responsibility; • Coordination and exploitation of synergy between distributed R&D centers; • Identification and use of third party research centers; • Aggressive scouting for emerging technologies. ' Realize synergies between decentralized R&D competence centers; • Link research with business development; • Move towards a learning organization (knowledge management). ' Strong connection to the headquarters and laboratories in Japan; • International R&D strategy meetings. ' • • • • • • • • • • ' • • • • • • • • •
Adapting R&D management to a worldwide extended enterprise; Adequately trained human resource in systems and software; Creating an information infrastructure to support worldwide communications. Global project set-up and optimal resource allocation; Making R&D fruits into the assets of the whole group; Innovation management in a distributed environment; Better coordination, collaboration, and communication. Recruiting the right people who strive for knowledge and capabilities; Establishing networks across businesses, partners, customers, and HP; Openness to outside ideas and local management to support parallel R&D; Increase of mobilization speed. Creating the most advanced information technologies; Helping customers to apply technology to improve what and how they do it. Efficient reconciliation and decision processes; Knowledge transfer between different sites; Roll-In (customer to SAP) and Roll-Out (SAP to customer) processes; Process adjustments. Requirements and constraints of European Union to do business; Worldwide technology and business climate and market requirements; Networks and tools to connect virtual offices to R&D centers; Supply of skilled work force.
' • • • ' • • • • • • • • • •
Business impact of innovative ideas and projects; New markets; Proximity to customers; Multinational/multicultural/cross-border teams. Soft and informal coordination means in transnational R&D projects; Building a global mind-set for R&D employees; Overcoming high costs, different languages & cultures, long project duration; Overcoming interfunctional as well as geographical distances. Systematic management of new technologies; Integration of decentralized technology and application knowledge; Concentration on technical core competencies; IT infrastructure and their role in concurrent engineering. Synergy in multi-dimension; Be prepared at competitive front-end of R&D; Social role and responsibility becomes more global;
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Leica
MTU
• ' • • • ' • •
Worldwide standardization of specifications and protocols. New technologies; Global market-driven strategies; State-of-the-art virtual product development tools; Capable engineers. Managing technology alliances on a global scale; Balancing market-/project orientation and innovation; Creating real international partnership.
All these challenges are about making decisions: How to set up structures, processes and support mechanisms to secure timely decisions with respect to new knowledge, new technologies, and new products. The basis for making these decisions—the framework for assessing benefits, risk, and costs—is complex, ambiguous, and non-trivial. Solutions are often the result of socio-political search processes that suffer from the bias of particular power groups, lack of timeliness and lack of system integration. The research leading to this paper was motivated by finding and describing some of the frameworks in order to make decision making for global innovation more transparent and effective. Based on case analysis and extensive research in three major industry groups, we aimed to make the following contributions: •
Ten challenges of managing global innovation;
•
Six fundamental dilemmas in global R&D;
•
Five general trends that will affect R&D management in the mid-term future.
The resulting paper is organized along those contributions. We conclude this paper with some suggestions and implications for improving the practice of global innovation management. RESEARCH METHODOLOGY The starting point for this research was our intention to study and learn from general global innovation practices in a variety of industries. Our research was conducted in three phases. The first phase lasted from 1994 to 1996 and focused on international R&D organization and transnational R&D project management. The second phase extended from 1996 to 1998 and focused on communication, coordination, and interface management in international R&D. Both phases were conduced as explorative research and resulted in a fundamental understanding of global innovation; some of their findings have been published elsewhere (Gassmann, 1997; Boutellier, et al., 1998; Gassmann and von Zedtwitz, 1998 and 1999; von Zedtwitz and Gassmann, 2002a and 2002b).
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The third phase was conducted between 1996 and 2000 and is the main focus of this contribution. This phase was separated into three parallel research efforts. First, we asked R&D directors of 18 technology-intensive multinationals1 to compose in-depth case studies of their global R&D structures and innovation processes. Each contribution was based on specific guidelines to allow comparison; it explained in detail what processes were at work, why they were in place, and what problems the organization faced in implementing innovation. Second, we surveyed these companies on additional data concerning R&D performance and productivity, which we collected from the contributors of the case studies. Thus we had two complete perspectives (one qualitative, one more quantitative) on managing global R&D operations in three industries: the pharmaceutical and health-care related industry, the electronics and software industry, and the electrical and machinery industry. Three of these companies have undergone dramatic changes in the meantime: Ciba merged with Sandoz to form Novartis, Daimler merged with Chrysler, and Hewlett-Packard spun of its measurement business into the independent company called Agilent. Third—in addition to the 18 company cases—we conducted over 150 interviews on global R&D management challenges with R&D directors and chief technology officers from over 60 companies. We used a semi-structured interview guideline that reflected issues identified in phases 1 and 2. In some companies we were able to participate in workshops and R&D project meetings. Combined with internal documentation on R&D organization and technology strategy, presentations by senior R&D personnel and memos from R&D managers, these semi-structured data helped us to assess how these companies managed global R&D. Finally, we reported our findings back to the interviewed companies and sought their feedback to correct erroneous interpretations and classifications (see Yin, 1994, for data triangulation and case study research). Based on a combination of literature review and the input from the first two phases and the 18 case studies, we identified ten challenges and six fundamental dilemmas of managing global innovation.
TEN CHALLENGES FOR MANAGING GLOBAL INNOVATION One of the most important and pervasive insights is that managing innovation at the global scale is multi-dimensional. For instance, what are appropriate R&D structures for transnational innovation? What incentives must be given to increasingly sophisticated and increasingly mobile engineers? How are teams led that span various time zones, different languages and different organizations? In our research we first 1 These companies were: ABB, Canon, Ciba, Daimler-Benz, DuPont, Hewlett-Packard, Hitachi, Hoffmann-La Roche, IBM, Kao, Leica, MTU, Nestle, SAP, Schering, Schindler, Unisys, Xerox.
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sought to identify those questions that posed the greatest challenges before we would go—in a second step—into any solutions or approaches that the company was taking to address these challenges. As expected, there were no straightforward or easy answers for managing global innovation. We gained the impression that even leading companies were still in a state of experimentation with a number of sometimes contradictory approaches. We analyzed ten problem areas—or challenges—in more detail, identified interdependencies among them, and summarized the major currents and concepts that affect the management of R&D in multinational companies. Figure 25.1 depicts some of these issues in context. Because one of the challenges, "from function to integration," was omni-present in all considerations, it is not represented in this figure.
Fig. 25.1: Factors and main interdependencies influencing the management of global R&D From function to integration Originally, R&D was organized as a highly specialized and separated corporate function. Due to productivity and transparency demands, R&D began to be carried out in projects: Some form of matrix was needed to balance between scientific and
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engineering skills and team performance (e.g., Katz and Allen, 1984). In heavyweight project organizations (Wheelwright and Clark, 1992), the project manager becomes an entrepreneur (Burgelman and Sayles, 1986). Having unrestricted access to critical resources and to top management, he is also fully responsible for the success or failure of the project, including the creation of new knowledge (as in research) as well as of new products or production techniques (mostly development). His role becomes that of an integrated innovation facilitator: Research, development, production rampup but also the design of all related business structures and processes. The core competencies of the company not only consist of technology-bundles but also encompass service-related fields such as logistics and distribution (Prahalad and Hamel, 1990). Similar efforts of cross-disciplinary integration are also expected from other R&D ranks and increasingly from most scientists and engineers. We observed three general trends concerning the allocation of resources in high-risk or high-profile innovation projects: 1.
The riskier the project, the tighter corporate control and the more corporate money was allocated. Risky means not only from the technical or market perspective, but also from the point of view of internal acceptance. If the new technology or project was competence-destroying, acceptance within the company was low (see e.g., Tushman and Rosenkopf, 1992).
2.
High R&D expenses could only be recovered in global markets. But many products required additional localization, which had to be carried out by insiders: Either employees from the regions or, even better, in R&D units in the region itself. The higher the localization, the more money was allocated to regional R&D. This was one of the main reasons for the expansion of overseas R&D locations in the early 1990s.
3.
The more risk-averse the company, the longer small but risky projects were pursued over the years. Risk was spread out over a large number of small projects and managed with an insurer's attitude: The "law of great numbers" prevented disaster in case an individual project would fail.
Close to centers of technology creation and application knowledge In most industries, local presence in a cluster of innovation or center of technical excellence is almost mandatory. But R&D organizations are often organically grown structures (e.g., Hakanson and Zander, 1988; De Meyer and Mizushima, 1989; Krubasik and Schrader, 1990; von Boehmer, et al., 1992; Beckmann and Fischer, 1994). Indeed, the 1990s have been characterized as the decade of jungle growth in R&D internationalization, when companies vigorously pursued opportunistic development (Gassmann and von Zedtwitz, 1999). At the macroscopic level, the following geographic regions are dominant as the main locus of R&D activity:
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Boutellier
1. Western Europe (particularly Germany and the UK) 2. USA (with a focus on the North-East and the West coast) 3. Japan (agglomeration around Tokyo and Osaka) 4.
Southeast Asia (in particular the "tiger" countries, as well as India and China).
In a study of 1021 R&D sites, Zedtwitz and Gassmann (2002a) found that 73.2% of all research and 53.4% of all development sites were located in these regions. Strong attractors were—and continue to be—market reasons and access to local scientific networks, but as illustrated by the responses from our 18 benchmark companies (Table 25.2), R&D efficiency and factors not directly related to R&D (e.g., M&A) also drove R&D internationalization. In some cases, global R&D managers have to cope with the consequences of location decisions made disrespective of anticipated R&D performance.
Table 25.2: What are the most important drivers of globalization? Company Pharmaceuticals, Chemicals, and Food
Drivers for globalization Talent: Limitations in quality and supply of technical talent in home country (DuPont); Different expertise available abroad (Ciba); Localize management resources (Kao); Sourcing worldwide leading scientists (Nestle) Customers: Different customer requirements (DuPont, Nestle); Meet local market requirements (Kao); Supply new technology to manufacturing facilities abroad (DuPont); Clinical trials are carried out in various countries (Roche) Technology Sourcing: Better access to local science and technology (DuPont); Availability of scientific and market information through information technology (Schering); Complexity of emerging technologies (Ciba); Breakthrough technology (Kao) Costs: Pay-back of R&D costs by simultaneous launching (Roche); Global project launches (Schering); Less redundancy due to global coordination (Roche); Costs of doing R&D, especially contract R&D (Ciba); Geographic proximity to manufacturing plants reduces the ,,scaling-up problem" (Nestle) Regulations: Harmonization of global regulatory environment (Schering); Compliance with local regulatory system (Ciba) Strategy: Competition for innovation (Schering); Business strategy (Kao) Electronics Customers: Globalization of markets (Xerox, Unisys) and customers (IBM, SAP); and Software Living in the market (HP); Global legal and business processes (SAP); Growth of third world economies (Xerox, Unisys) Costs & Communication: Growth of information economies (Xerox); Internet-based global 24-hour communication (Unisys); Low costs of communication (Xerox) Strategy & Vision: Corporate philosophy (Canon); Corporate vision (HP) Talent: Tapping the best R&D people and mixing their talents (Canon, SAP); Obtain the best intellectual capital (HP); Regional centers of excellence (IBM); Emerging supplier and work forces in developing countries (Unisys) Universities: Proximity to universities (HP); Contact to leading universities and research institutes (IBM). Electrical and Customers: Customer orientation (Schindler); Re-use of technologies to satisfy local Machinery needs (ABB); Supporting local development (Daimler); Market-driven needs (Leica); International partners help to open international markets (MTU); Customer proximity (Leica) Technology Sourcing: Monitoring technology trends (Daimler); Sourcing know-how in centers of technological excellence (Daimler); Complementary skills of
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strategic partner (MTU, Hitachi); Taking the best ideas and skills (MTU) Risk & Costs: Risk-sharing in large-scale projects (MTU); Economies of scale and scope (MTU) Regulations: Country-specific regulations and standards (Schindler) Strategy: Developing the global company (Daimler); Corporate support and drive (Leica); Globalization of business (ABB, Hitachi, MTU); Acquisition of local companies (Schindler) Enabling Technologies: Information technologies (ABB, Schindler)
Integration of R&D units into global networks While corporate organizational evolution increasingly incorporates global stimuli and local responsiveness, companies also build internal complexity and flexibility in order to cope with the specific challenges imposed by technological evolution, industry structure and economic trends. The R&D structures of many multinational companies have evolved historically through mergers and acquisitions (e.g., Ronstadt, 1978; Pausenberger and Volkmann, 1981; Hakanson and Nobel, 1993), while others started R&D in the home base and expanded from that ethnocentric and more or less homogeneous R&D center (Perlmutter, 1969). As a consequence R&D organizations differ in the degree of cooperation between individual R&D sites and the dispersion of their internal competencies and knowledge bases (e.g., Ronstadt, 1977; Chiesa, 1996;Kuemmerle, 1997). Starting up local labs and connecting dispersed R&D efficiently in aligned distributed innovation processes is far from trivial. Only few companies like IBM, ABB or Novartis have become truly international through building up an integrated R&D network that is being managed as a whole. Political battles must be won, both in the host countries and internally in local country organizations and business units. The not-invented-here syndrome (Katz and Allen, 1982) describes reasons for inefficient exchange of information and knowledge between R&D units. Better means of communication (through, e.g., modern ICT and travel) only improve international innovation if these socio-political and organizational impediments can be overcome. Establishing overlaying structures Effective innovation is based on effective knowledge and technology transfer. In international R&D, communication is constrained by geographical distance and organizational dispersion (e.g., Allen, 1977), as well as functional and hierarchical structures (e.g., Burns and Stalker, 1961). Overlaying structures (Gassmann and von Zedtwitz, 1998; von Zedtwitz, 2003a) may overcome some of these impediments: •
A transnational process and project structure that provides basic functional and object integration (e.g., Henderson, 1994; Gassmann, 1997).
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•
A network structure that provides a framework for informal communication as well as the relationship networks so useful for vertical integration (e.g., Takeuchi and Nonaka, 1986; Brown and Duguid, 1991).
Since the bottom two layers (regional/legal and functional/hierarchical) also impose a sense of order and functionality on R&D work, they are ultimately detrimental to creativity in R&D. While many companies still struggle with implementing a situation-driven approach to project management, managing informal networks across corporate boundaries and geographic borders is a remote goal. Most companies pursue at least a mixed centralized/decentralized approach, including, for instance, technology gatekeepers, job-rotation through R&D, business units and external research institutes, project manager pools and professional clubs. However, managing the two upper overlying structures (process and network) requires skills most R&D managers do not yet possess. Decentralized R&D processes and virtual innovation teams Companies are becoming increasingly dependent on external sources of innovation. R&D managers try to incorporate outside experts and lead customers into the often rigid framework of internal R&D processes (O'Hara-Devereaux and Johansen, 1994; Handy, 1995; Chesbrough an Teece, 1996; Harris, et al., 1996; Upton and McAfee, 1996). Supported by modern information and communication technology (ICT) ,,virtual project teams" are formed that are spread out over several locations and organizational boundaries. Four fundamental factors determine the degree of decentralization of R&D projects: •
Type of innovation: incremental vs. radical (Utterback, 1994; Christensen, 1997)
•
Systemic nature of the project: systemic vs. autonomous (Chesbrough and Teece,
•
Mode of knowledge: explicit vs. tacit (Nonaka and Takeuchi, 1995)
•
Degree of resource bundling: complementary vs. redundant (McCulloch, 1965;
1996)
Galbraith, 1973). Most companies rely on ICT and travel of key project members to facilitate communication and coordination, but besides being expensive, this approach also neglects tacit knowledge and complex forms of interaction—typical forms of communication at the core of innovation.
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Market and customer-orientation in R&D Organization by product or project focuses the energies of an organization on the customer (Henderson, 1994: 105). A major obstacle to customer orientation is the often dominant technology-push thinking. Internationalized R&D activities impede efficient communication between R&D and customers (von Zedtwitz and Gassmann, 2002b). Local variations of taste, infrastructure, economic wealth, etc. make it necessary for the innovator to align new products with the often unknown expectations of new customers. Regional operations often compete for scarce centrally allocated R&D budgets or, in the case of business unit financing, fight over who has to pay the bill for the project. Too often managers lose sight of the actual problem to be solved, i.e. the customer value proposition to be offered. Despite much public acclaim and many corporate reorganization programs, fulfilling the customers' requests may not solve those problems long-term. Managing interfaces in R&D Research is typically concerned with interesting scientific phenomena and fundamental technology breakthroughs, whereas development must satisfy the demands of business units and impatient customers. How harmful is the mismatch between these two worlds? On the one hand, research collocated with development often corrupts and diminishes long-term R&D. On the other hand, business units sponsoring research may not be able to fund and support the necessary breakthroughs (see e.g., Hirano and Nishigata, 1990; Medcof, 1997). We identified the following separators between international research and development: • •
Geographical distance: Central research labs and decentralized business unit development. Differences in reporting structure: Central research versus operating business units;
•
Controlling: Strategic research planning with loose control versus milestone planning with sophisticated controlling and performance measurement;
•
Time horizons: Long-term knowledge creation versus short-term knowledge transformation in products;
•
Knowledge background: Scientists (knowledge experts) versus engineers (knowledge integrators);
•
Cultural gap: Blue-sky researchers versus tightly lead-product development with cost and time pressures.
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Given the increasing mobility of the knowledge worker of the 21 s t century, the struggle between free-wheeling scientists and tightly controlled product development engineers should be a thing of the past, but plenty of examples illustrated that the barriers continue to exist between research and development (e.g., Leifer and Triscari, 1987). Processes in transnational R&D R&D processes already pose unique problems for project managers (see e.g. Van de Ven et al., 1989; Cooper, 1990; O'Connor, 1994). Most companies engage not only in product development but also in some form of technology research (at least in minimal technology intelligence). Global R&D processes are even more difficult to manage, when invention, testing, development, production and markets are dispersed worldwide. There has always been a temptation to introduce regularities and standards (which have contributed so much to the progress of manufacturing) into R&D. But R&D is less predictable and less easy to generalize: Research is fundamentally different from development, and pharmaceutical R&D (for instance) is governed by principles very different from those found in software development. Individual phases of R&D phases differ greatly in terms of problem-solution approaches, freedom of thought and action, management and control, individual versus group responsibilities, etc. Transnational managers are expected to combine different management styles in one role, while coping with the hassles of international travel and reduced communication quality at the same time. All these considerations fundamentally affect the nature of a global R&D organization, but exceed the responsibility of an individual R&D manager. Top management is expected to define the framework for global innovation processes and commit to it. All to often, however, strategic objectives change at the top level (if they ever existed), or are in mismatch with local competencies and expectations. Information and communication technology (ICT) as an enabler of dispersed R&D Without modern information and communication technologies, there would be no transnational R&D projects. In the 1990s, the efficiency of transnational R&D processes has been greatly increased by the use of e-mail, shared databases and remote login (Howells, 1995). But ICT cannot substitute for traditional project management. The lack of personal contact cannot be compensated for by even the most skillful project-leadership-based ICT. Bridging cultural differences becomes much more difficult without face-to-face communication, particularly during the early
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stages of a project when building team spirit and trust in the project leader and defining a system architecture is so important. The use of ICT becomes much more difficult when the project requires pooling of complementary resources, which necessitates a high degree of interdisciplinary collaboration and sharing of tacit knowledge. Although experienced R&D project teams can replace some face-to-face communication with ICT-based communication, De Meyer (1991) showed that regular meetings are important to rebuild trust and confidence. Global knowledge creation cannot function without ICT. The technology itself cannot cope sufficiently with the challenges of bridging geographic distances or time differences, and cannot cope at all with cultural differences. Managing knowledge and human resources Ideas—created by individuals—are at the core of every innovation. In multinational companies, R&D managers supervise highly creative people from diverse cultural and ethnic backgrounds. The internationalization of companies is accompanied by a formalization of processes and structures, which are in juxtaposition to the requirements of creativity and experimentation. There is often no room for creative freedom in efficiency-focused international companies. Additionally, the continuous globalization of technological information requires more attention to knowledge flows. "Knowledge travels (best) with heads," as the adage goes, but travel is expensive and time-consuming. Scientists and engineers are often unwilling to leave family and lifestyle behind to assume assignments abroad. Researchers typically have greater loyalty to their science than their current employer. While capital and goods may be relatively easy to transfer to new locations, people are not. Senior R&D managers must include this constraint when making strategic R&D decisions such as the establishment or relocation of R&D laboratories.
Six DILEMMAS IN GLOBAL
R&D
Summarizing our analysis of the key challenges of global innovation we noted that: •
Global R&D problems are not well structured.
•
There are no unique solutions for the challenges of global innovation.
Management, however, is forced to make a choice. Too many trade-offs between costs, speed and quality, together with our bounded rationality, lead to dilemmas, i.e. situations in which the decision maker has the choice between two contradictory but
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equally appropriate alternatives. For instance, given a particular competitive environment, is it better to concentrate R&D in one location to improve efficiency, or is it better to decentralize to be closer to customers? If the industry or competitive structures change, can we change our R&D organization as well ... should we change it at all? Many managers choose the Golden Mean, thereby losing the creative tension so vital for R&D (Pascale, 1990). The 18 case studies we have gathered show many creative trade-offs. In our interviews we met with R&D managers still looking for the single best solution, similar to one that Taylor (1913) put forward in manufacturing. Western engineers tend to favor one-to-one relations and unique solutions; they do not like "Yin-and-Yang" situations, i.e. the coexistence of seemingly contradictory patterns. Although we collected many suggestions for overcoming these dilemmas, we feel it is important to manage rather than to eliminate them. First of all, it would not be possible to eliminate these dilemmas because they are inherent to global innovation. Second, it would be detrimental for the strategic flexibility of a company as a whole if creative tension—considered by many as the engine of technological and corporate renewal—was crudely eradicated. Based on our research, we found six principal dilemmas of global innovation: 1.
Local versus global
2. 3. 4.
Processes versus hierarchy Creativity versus discipline Control versus open source
5.
Face-to-face versus ICT
6.
Long-term versus short-term
Local versus global Strategic decisions have to be made under local-versus-global considerations (e.g., Bartlett and Ghoshal, 1989; Asakawa, 1996 for R&D): How much autonomy should be granted to a local R&D unit? Too much freedom leads to reinventing the wheel. Not many companies can afford this sort of luxury in times of scarce R&D budgets and escalating development costs. Overly tight control could hinder creativity and optimal exploitation of local competencies. Global sourcing is not limited only to purchasing departments. Due to the widespread use of the Internet, information no longer has geographic limitations. Even very small companies can afford to source knowledge on a global scale. However, information obtained via ICT is mainly restricted to relatively structured data, i.e. explicit knowledge. Research experience and know-how cannot be accumulated by
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downloading publications from the Internet. The global village has its limits when it comes to the diffusion of tacit knowledge and trust. On the market side the same principle applies: "Our market is different" is the most often heard argument to support local autonomy. How much does a product need to be adapted for regional market requirements? Customization and tailored products for every specific market segment or even customer may increase revenues but also increase costs: Developing new, slightly different product for each request can easily incur hidden variant costs. Therefore, many companies have standardized hidden key components and only adapt visible parts to regional markets. But there is no single solution to the goal conflict between local effectiveness and global efficiency.
Fig. 25.2: Local effectiveness versus global efficiency ABB GT 24/26 and IBM-VSE: Comparison of Two International Innovation Projects In the early 1990s, ABB decided to re-enter the high-power gas turbine market. Timeto-market was considered more important than cost-effectiveness, as late market-entry was associated with high opportunity costs. ABB established a project team near its corporate R&D center in Baden, Switzerland, composed of several hundred engineers and scientists from twenty nations. This heavyweight R&D center was responsible for the lion's share of the R&D work. However, several ABB R&D units cooperated in this project, such as ABB Moscow in engineering and ABB Mannheim with specific development tasks. MTU Munich contributed key mechanical elements. Jersey Central Power & Light in the US acted as a lead user and built and tested the first prototype. Project coordination resided in Baden, Switzerland. IBM pursued a different approach with its VSE (Virtual Storage Extended) development. Eleven R&D units participated in this project, including core component developers in R&D units in Stuttgart (Germany), Hursley (UK), Santa Theresa and New York (USA). More than 150 engineers were involved worldwide.
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The project office was established in Stuttgart, coordinating technical and managerial responsibilities. However, Stuttgart did not exert directive authority over these units: most of the project was self-coordinated and required active cooperation of several R&D units. Subsequent releases and repeated projects established sophisticated conflict resolution and decentralized project management schemes. Processes versus hierarchy First-generation international R&D organizations are characterized by R&D duplication. More advanced R&D organizations assign technical and product competencies to individual R&D units. This permits the concentration of resources to reach critical size and economies of scale. At the same time, however, this leads to transnational innovation processes, as R&D units from several locations must pool their resources and align their efforts to develop new products or technology. Interdisciplinary cooperation within projects increases. Process-oriented teams must be able to overcome boundaries of location and specialization, and yet keep their focus on their own special competence. These teams form overlaying organizational structures that ensure a company's long-term innovative capability. At the same time, these teams create conflicts with classical line organization structures. Open communication and common values (vision/mission) can help reduce these conflicts, which are so difficult to manage on a global scale. Process structures and information technologies that reach beyond national boundaries are essential prerequisites. However, tailor-made processes and extensive use of state-of-the-art communication technologies do not lead to the desired project success if the human factor is neglected. Particularly in more complex global environments, innovation cannot be seen as a linear process (e.g., Van de Ven et al., 1989). R&D processes cannot be managed and measured like repetitive routine processes in production. Deterministic models of managing innovation processes have given way to models incorporating chaos theory and randomness. It must be possible to restrict chaos to the early stages of innovation: Chaos and people management must lead to innovative new concepts and well-suited processes, while adhering to discipline yields the efficiency needed in the later stages.
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Fig. 25.3: Hierarchy versus processes
Carilon: Overcoming Organizational and Geographical Boundaries at Shell An example of a company with highly competent but dispersed R&D network is Royal Dutch/Shell. In 1998, Shell spent almost US$ 700 million on R&D carried out by 15 research establishments all over the world. Shell's early experience with coordinating distributed R&D efforts is illustrated in the case of Carilon, a multipleapplication polymer developed between 1984 and 1997. This polymer was first developed in a Belgian R&D laboratory, but then the central laboratory in Amsterdam got involved and—as it was decided that the United States was going to be the ideal target market—the Westhollow Research Center in Houston, Texas. For some time there was duplicate R&D activity and the presence of the Not-Invented-Here syndrome among researchers in various participating sites. With the prospective polymer development not making significant progress, Shell eventually overcame some of the well-established 'laws' cherished in conventional R&D, and as a consequence gave one R&D center complete responsibility for the polymer's development. The additionally enforced focus on market development turned Carilon into a success story. What was initially known as "the most poorly managed project in the company's history" (quote of a Shell manager) became its first successful multinational product development. Creativity versus discipline Many large companies spend more on creating new knowledge than they spend on investments (Kodama, 1995: 20). R&D globalization often aggravates the problem of increasing R&D complexity and product variety. Most R&D departments therefore support planning by an almost unbelievable number of formal control mechanisms. Small dynamic companies control R&D by their annual R&D budget alone. With time, the innovation process progresses from a highly creative phase to a more structured and disciplined one. As innovation is a cross-functional process,
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members of R&D, manufacturing, marketing and sales contribute new ideas and impose new requirements at different stages along the way. However, traditional planning methods based solely on complexity reduction, work breakdown structures and task simplification are no longer appropriate in a dynamic and interdisciplinary project environment. Based on product liability and misinterpreted ISO documentation requirements, managers repeatedly attempt to translate the reliability and controllability imposed on routine processes (as in manufacturing) into innovation processes. The results often do not match their expectations. Because R&D operates under constant time pressure, tight control and regulation lead to deadlocks that result in uncontrollable "gray zones" and further lengthen development cycle times. Not every company needs the same degree of integration and process orientation. R&D always has to balance discipline and creativity, standardization and variety, organizational slack and cost cutting. The more project management focuses on planning and standardization, the greater the efficiency and the shorter the cycle time, but the less freedom there is for creative chaos. Stronger integration of project management according to objects, functions and hierarchies will increase management complexity, but at the same time improve R&D effectiveness and efficiency. The stage-gate concept (e.g., Cooper and Kleinschmidt, 1991) considers these contradictions and attempts to integrate project management according to the three factors of market, specialization and technologies. These factors determine the choice of project management methods to be used. During the second half of the 1990s, new business creation and incubation units posed new challenges to established R&D departments. R&D came under pressure to bridge between creativity and discipline more effectively. Internal ventures and start-ups appear were less restricted than R&D projects, and therefore approached this fundamental tension with more flexibility. We expect that R&D will, in the future, be more incubation than science centered.
Fig. 25.4: Creativity versus discipline
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Xerox and Canon: Evolutions of Research and Development Often disparagingly regarded as an 'Ivory tower,' corporate research laboratories may develop strong development skills. Burgelman and Sayles (1986: 19) quote the case of Xerox's Palo Alto Research laboratory which was not supposed to do new product development but nevertheless came up with a great product eventually: ALTO, a unique personal computer widely used and liked within the company. But since an alternative design named STAR was under development elsewhere in Xerox, ALTO was not further supported. In general, however, allowing for product development capabilities in research reduces the emergence of highly sophisticated yet useless products and hence improves the likelihood of successful technology and knowledge transfer to downstream functions. For instance, Xerox Research in Grenoble, France, spun out a development team that established a new Xerox product development unit near the research site. Another example is Criterion Software, which is based on a 3-D software technology developed at Canon's UK research lab. The original inventor became head of technical development while one of his former Canon colleagues, a man with strong business orientation, assumed management responsibilities. Criterion quickly grew to more than fifty employees, many of them hired externally, although Canon retained a financial stake in the company and strong joint development linkages. Corporate incubators try to systematically support and exploit these effects. Both cases illustrate the interplay of organizational flexibility and innovation, as well as the changing perspectives of creativity and discipline. Control versus open source R&D labs have limited capacities. R&D depth was reduced in the 1990s, as manufacturing depth was reduced in the 1980s. R&D labs are productive when they are selective, when they do what they have already done many times and when they focus on core capabilities. The organizational emphasis is shifting from self-made to bought-in: suppliers, independent laboratories, IP intermediaries and universities are typical sources. Under the technological core capability paradigm the new operating tenet is to "own only what you must; influence all you can" (Harris et al., 1996). The most successful virtual companies are at the center of networks that are far from egalitarian (Chesbrough and Teece, 1996: 70). They retain control over the network of their partners. This position cannot be maintained unless the company directly controls
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some key technologies. Companies need a process to discriminate between "must have" (technologies that must be owned) and "nice to have" technologies. However, many R&D organizations still fear to lose ownership over what they consider future key technologies. Most companies apply portfolios to manage their outsourcing decisions; they provide standard strategies for well-defined situations. Many use technology life cycles to make R&D investment, control and divestiture recommendations. But the decision to give up existing technologies is one of the most difficult management decisions (e.g., Grove, 1997). Equally difficult is the decision to engage in open source innovation. Without being able to control many of the elements that are necessary to succeed in networked innovation, companies shy away from investing resources and time. A permanent danger is the loss of proprietary intellectual property through leakages and open communication in such networks. Worse, sometimes, are the prospects of sponsoring innovations that the company can eventually not exploit oneself because someone else in the network (perhaps a competitor) has assumed control. While it becomes increasingly clear that a single company cannot develop all the technologies it requires in competition, senior R&D directors realize that the management of international standards, open source networks and dominant designs must be added to their repertoire.
Fig. 25.5: Control versus open source Roche: Outsourcing and Virtual R&D Roche outsourced much of the R&D process to specialized partners and suppliers, or set-up focused external R&D service providers. For instance, Roche established Protodigm, a "virtual drug development company" in London, UK (Hofmann, 1997). In one typical case, Protodigm learned of a certain molecule, i.e. a prospective new medical substance, being discovered in a university laboratory. Protodigm then facilitated further research by guiding the R&D process: It contacted specialized
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companies for testing the substance, coordinated the first clinical trials, and contracted out production, second-stage clinical development, manufacturability tests, drug registration, marketing, and even sales. In 1997, ten Protodigm employees simultaneously oversaw three drugs development projects in various stages of pharmaceutical development. Protodigm selected the most qualified subcontractor for each stage of R&D, thus reducing overall R&D costs and development time. The objective were cutting down R&D costs by 40% without jeopardizing the already tight development schedule. Merck was said to have saved US$ 170 million with this type of outsourcing in 1996. Behind this trend was a fundamental change in the pharmaceutical industry: Basic research was increasingly sourced out to big universities or small specialized companies. Face to face versus ICT The information revolution is transforming the nature of competition (Porter, 1985). According to Davis and Botkin (1994: 170) the worldwide amount of knowledge doubles every seven years. For instance, the number of scientific journals was 100 at the beginning of the 19th century, 1,000 around 1850, over 10,000 around 1900 and about 100,000 journals around 2000. Over 6,000 scientific publications are released daily these days. Every 10 to 15 years the amount of published scientific literature doubles. These numbers have a human equivalent: Over 5 million people work in the area of knowledge production in R&D departments: This is approximately 90% of all scientists who have ever lived (Nefiodow, 1990). R&D is the most important element in industrial technology intensive organizations to source, filter, generate and diffuse knowledge. ,,Science does not advance by piling up information - it organizes information and compresses it" (Simon, 1997: 226). ICT is almost a "must" in R&D organizations. Access to e-mail, video- and teleconferencing, and groupware is possible almost everywhere. The rapid increase of performance compared to costs leads to the paradoxical phenomenon that some R&D sites in developing countries leapfrog technological generations and install more advanced infrastructure than the R&D headquarter. Although ICT is a necessary tool for global knowledge management, it is not yet a sufficient one. ICT can support the exchange of explicit knowledge, but learning between individuals requires a basis of trust not easily facilitated by ICT (De Meyer, 1991). Engineers and scientists must be allowed sufficient freedom to build up a network of informal contacts for sharing such knowledge (Allen, 1977; Katz and Tushman, 1981). Managers realize that the procedural and tacit know-how of the project team members is at least as important as the documented and explicit knowledge. But tacit knowledge is almost exclusively shared face to face.
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Even face-to-face contact does not ensure perfect communication. Language problems and different cultural frameworks make communication less straightforward. Communication must be maintained at a regular frequency, as otherwise the trust level between two partners is too low to allow meaningful communication. Face-to-face communication does not need to be exclusively verbal—it may include drawing and demonstration. Some of the latest ICT tries to convey haptic and sensory information as well. No satisfactory means of effective tacit long-distance communication is in sight. Additionally, the amount of explicitly transferable knowledge has tremendously increased: The challenge will not only be to manage face-to-face communication, but also how to manage and make sense of millions of documents and other pieces of information collected in projects, on the Internet, or from specialized information service providers.
Fig. 25.6: Face-to-face contact versus use of modern ICT IBM and Roche: Knowledge Travels with Heads IBM uses both face-to-face and ICT tools in international R&D projects, but applies different weights in subsequent phases of the project. In the early phases of planning and design IBM relies on face-to-face meetings and conferences. Once a common understanding has been established, video conferences are used. For later stages of coordination (when only detail adaptations are required), IBM promotes e-mail and telephone communication. E-mail is preferred over the telephone as it is cheaper and culturally less sensitive. For instance, IBM made the experience that Germans dislike talking to answering machines and avoid using voice mail systems. Also, e-mail transcripts are more readily quoted and usable in project documentation. For the final meetings, such as roll-out coordination, project hand-overs and post-project reviews, personal face-to-face meetings are again preferred.
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R&D communication essentially fosters learning opportunities. Hoffmann-La Roche uses an international project management team to facilitate learning transfer between projects and deliberately does not integrate associated project managers in its organizational hierarchy in order to optimize knowledge transfer between projects. Every project manager is fully assigned to this geographically decentralized department. The director of this virtual resource pool assigns his people as managers to projects also as part of a global program to ensure standards in quality and project procedures. Upon completion of a project, the project manager returns to the resource pool and awaits his next assignment. Roche thus manages to retain much of the valuable procedural know-how to conduct and lead international projects not only inside the company, but also in a position where it can be reapplied when needed. Long-term versus short-term There has always been a gap between long-term and short-term pressures in R&D. Critical in successful innovation is the timing of the new product or service to be introduced in a market. Early or late introduction is equally detrimental (e.g., Foster, 1986). Products offered too late usually face stiff competition from similar products, and customers may have adopted a competing design or product architecture. Profit margins for late products are thus significantly lower (e.g., me-too drugs in the pharmaceutical industry). Products offered too early may fail because customers do not yet experience the need for them, and these products cannot benefit from complementary offerings (e.g., Beta-Max vs. VHS, Rosenbloom and Cusumano, 1987). Companies therefore often invest in educating the market about the benefits of its product (additional investments in advertising and marketing) to convince the potential customer of the anticipated long-term benefits of the new product (e.g., failure of the Apple Lisa, or the Apple Newton). Introducing the right product at the right time (rather than just as quickly as possible) is critical in innovation. The danger of missing this window of opportunity is great, as numerous examples of new product introduction failures document. There are two principal approaches how innovating companies attempt to cope with this problem: 1)
2)
Researching future customer benefits and assessing emerging technology potentials: Using various forecasting and monitoring techniques, companies predict changes in both the technology pull as well as the technology demand side, and derive strategic implications how long-term innovation efforts in their R&D organizations can meet these expected customer benefits. The goal is to see farther and more clearly what is ahead. Speeding up new product development and decreasing time-tomarket: Customers identify suppliers that can deliver the best solutions to their
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However, these two strategic paradigms of innovation have led to a disintegration of the overall R&D effort. As a consequence, R&D departments have been compartmentalized and functionally isolated. Communications between of research and development units and the alignment of overarching innovation objectives have suffered. At a global level, research is building capacity abroad to source and absorb scientific and long-term technology information. Development, on the other hand, is following market potentials and localizes new products to customer needs. This adds a global dimension to the problem of disintegrated innovation. Moreover, the gap between these two critical R&D capabilities is widening. While new product development has to deliver in shorter and shorter time frames, sustainable innovation is increasingly based on integrated technology planning and the phased introduction of compatible modules and systems that extend the usefulness as well as economic and environmental sustainability of products. This is a fundamental dilemma that some companies have tried to address by reintegrating R&D departments, or by establishing special liaison officers between short and longterm R&D teams, or by imposing technology roadmaps and scenario planning on R&D departments. None of these approaches has produced thoroughly satisfactory results so far; the dilemma of diverging short and long-term innovative capabilities continues to persist.
Fig. 25.7: Long-term technology anticipation versus short-term customer reaction
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ABB and NEC: Managing Long-Term and Short-Term R&D Technology top-management at ABB was convinced that 'project creation' is one of the biggest challenges in R&D. ABB distinguished between R&D for existing products, for next generation products, and for future technologies. Generally, their projects were two-channel funded: At least one business unit had to demonstrate its interest in the R&D outcome by sharing the project costs with corporate headquarters. This was also an effective means to ensure the receiver's interest in transferring the developed technology successfully. NEC, Hitachi, Xerox, and 3M, among others, established a three-tier organization distinguishing R&D work according to time horizon. A three-tier organization is realized in very large companies. R&D is organized, and separated, according to time horizons and specific competencies. At NEC, long-term basic and fundamental research was carried out in the R&D Group. Three development laboratories were concerned with medium-term R&D, whereas system & product engineering units performed short-term application engineering. For instance, while the engineering labs were working on the 64 Mbit DRAM, development labs work on the 128/256 Mbit DRAM, and the R&D Group conducted research that prepared for the 1 Gbit version. With this deliberately introduced separation, technology transfer and communication mechanisms rose in importance. The R&D Group worked on R&D for the 'day after tomorrow.' Development centers carried out R&D for 'tomorrow,' while Engineering Units were concerned with problems of 'today.1 This distinction was also reflected in funding schemes and the location of the R&D work. IMPLICATIONS AND OUTLOOK Managerial Implications What can R&D managers do to apply the insights of global dilemmas? We want to emphasize three important lessons: 1.
International evolution in R&D is inevitable and should be exploited for organizational prototyping. 2. Transnational R&D is best separated into two distinctly managed phases of innovation. 3. There are four principal archetypes of international R&D project organization.
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Boutellier
International evolution of R&D organization The international R&D organization of a firm is neither rigid nor uniformly understood throughout the company and subject to continuous change. There are five trends that characterize the evolution of organization in international R&D: 1. Orientation of R&D processes towards international markets and knowledge centers; 2. 3. 4. 5.
Establishment of tightly coordinated technology listening posts; Increase of autonomy and authority of foreign R&D sites; Tighter integration of decentralized R&D units; Increased coordination and re-centralization of R&D activities in fewer leading research centers in order to improve global efficiency.
These trends are fundamentally linked with the flow of information, assignment of competency and transfer of authority in international R&D organization, and are central for international technology and knowledge transfer between dispersed R&D sites. Local R&D sites also undergo internal evolution: technology listening posts may develop into research centers, and technical service units into full-fledged development sites with a worldwide product mandate (see Gassmann and von Zedtwitz, 1999). Underlying these trends are market and technology pull factors, internal and national politics, efficiency considerations, and many other, sometimes not technology or R&D relevant rationales. Personal determination and commitment by entrepreneurial R&D directors have given individual R&D units new missions and new competencies in R&D networks. Often, duplication of R&D conducted elsewhere was not the successful route to independence and uniqueness. Initial R&D directors tried (either with or without top management approval) new technologies, new projects, new missions, and new organizational forms with their new R&D units (see von Zedtwitz, 2003b, for a recent classification). If successful, these approaches were adopted by other R&D units. Relatively large geographical and power distances were sometimes beneficial to develop new forms of organization. The companies that are doing well in global innovation are those who are able to maintain a healthy rate of evolution and flexibility to adapt more appropriate forms of doing R&D in remote locations. Two phases in transnational innovation processes Innovation processes are characterized by a transformation of the focus of work from creativity to discipline. The first phase of creativity aims for ensuring effectiveness of the results, while the second phase of discipline is concerned about making sure that
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these results are efficiently implemented (see e.g., Gassmann and von Zedtwitz, 2003a).
1) Creative phase: The process in the early R&D phase is highly non-linear. Good ideas require knowledgeable promotion. Although knowledge sourcing for new technologies is not limited geographically, invention is typically local. The definition of a system architecture is crucial and concludes the pre-project phase. 2) Implementation phase: The development phase has to be carried out rigorously and efficiently. Discipline is dominating over diversity. Creativity may be detrimental to overall innovation and must be redirected. In this phase global teamwork is possible and sometimes necessary, but clear definition of work packages and interfaces is required.
These two phases are then followed by the market introduction of the product. Different strategies are possible at the global level: Entering new markets one by one (waterfall strategy) or coordinating the spread of the product at the same time ('big bang introduction', simultaneous launch). Companies in the pharmaceutical industry probably provide the best examples of two-phase innovation. For instance, there are clearly defined milestones and board decisions that determine when and how a drug candidate transitions from research to clinical development. Similar considerations can be found in other industries, but should become more explicit in guiding transnational process management.
Four archetypes of international R&D projects As outline further above, international R&D projects can be distinguished along four principal determinants. First, the type of innovation can be either incremental or radical. Maintenance-of-line projects are typical incremental; breakthrough projects are radical. Second, the nature of a project can by systemic or autonomous. Systemic projects are characterized by a high degree of interdependence of work tasks and technical components; autonomous projects can afford to work on a highly modular part of a system, such as a better keyboard in a PC environment. Third, projects also differ in terms of the preferred knowledge exchange mode, either explicit or tacit. Forth, project resources may be distributed complementary rather than redundant. In redundant-resource project organizations, similar knowledge and resources are shared in different project locations, improving communication and the speed of integrating modules. Depending on these factors, global R&D projects are carried out in: 1) highly decentralized autonomous teams; 2) teams coordinated by a system architect; 3) teams
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directed by core teams; or 4) centralized venture teams. The centralization of R&D projects is necessary for radical innovation, systemic project work, prevalence of tacit knowledge and the presence of complementary resources (see Gassmann and von Zedtwitz, 2003b, for an in-depth review). The decentralization of R&D projects is possible for incremental innovation, autonomous project work, prevalence of explicit knowledge and the presence of redundant resources. For each of those project types, the role of the project manager changes significantly. Outlook and Trends The companies in our study sample demonstrated how they deployed a sophisticated array of technology, innovation, and R&D strategies. However, not every multinational company has a long-term technology strategy: A benchmark study conducted by one of the author's institute found that just slightly more than half of 39 multinational companies had formally written technology strategies at the corporate level and defined technical core competencies. Small and medium-sized companies, in particular, are very often missing explicit technology strategies. Technologies are handled reactively: The three most important drivers for innovation are customers, suppliers and employees. As small companies are increasingly targeting global markets, these companies will need simple, efficient concepts that are not yet available. The rather complex, historically grown R&D patterns of the large multinationals will need simplification that cannot be achieved without better theories on global R&D. An area generally ignored by conventional R&D researchers is services. "Services are simply too heterogeneous to be an interesting category," remarked Thurow (1996: 27). Inroads are being made for instance in electronic commerce and health care. Hospitals are bundles of high-tech yet poorly managed in many regulated economies. The share of manufacturing in a service-oriented society will decrease, but the significance of R&D will nevertheless grow because of more demanding customers and greater technological potentials. Global R&D will thus likely incorporate the following trends: more system orientation, more reductionism, more mobility, more open networking and more harmonization.
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Fig. 25.8: There is no single best solution - R&D management has to fit with the targeted R&D type 1.
More system orientation: With the conventional borders of modern products vanishing, engineers will have to be able to look beyond their established fields of technological expertise and integrate unexpected functionalities, other uses, different cultures, and sometimes uncomfortable philosophies.
2.
More reductionism: Holism is important for systems but hasn't changed engineering. Physical and mathematical models have increased predictive power. Simulation is replacing experimentation, and approximations are replacing exact solutions. For example, pharmaceutical research is being changed by computational chemistry and genomics. Illness is no longer considered to be a sign of too many bacteria, as in Pasteur's time, or a faulty chemical process but rather an information defect in the human genetic code (Drews, 1998: 103).
3.
More mobility: Advances in telecommunication have already made decentralized work possible; advances in transportation will further improve communication were ICT still fails. New forms of organizing work will provide more adequate frameworks to deliver innovation. R&D employees of the future will be more mobile and flexible chose their own most conducive places and time of work.
4.
More open networking: Economies of scale in R&D will not be measured in employees per organization but rather in spheres of influence. Small players who know better how to leverage their core capabilities in a network of suppliers and customers of technology will fare better than the old flagships of corporate R&D.
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More harmonization: International technical and cultural norms facilitate the spread of global products. Regionalism is a reaction to international integration supported by television, travel, and the Internet. In science, English is the common language that facilitates communication: the critical success factor in R&D. Scientists and engineers are trained the same way everywhere in the world: Scientific laws and fundamental engineering principles know no national boundaries.
Conclusion This paper summarized some of the most frequent challenges in global innovation. We also described six fundamental dilemmas: •
Local versus global
•
Process versus hierarchy
•
Creativity versus discipline
•
Control versus open source
•
Face to face versus ICT
•
Short-term versus long-term
As R&D organizations have developed from centralized and geographically confined towards distributed and open structures, these dilemmas have risen in urgency. Dilemmas are not negative per se. To the contrary, in a dilemma both alternative courses of action are equally valuable. The various approaches to managing these dilemmas—including those that attempt to eliminate them altogether—have given rise to an impressive body of know-how among R&D managers and R&D scientists. One thing was confirmed by nearly all our interview partners: Looking ten years ahead, regardless of the rapid evolution of modern technologies, new organizational concepts and even more efficient tools, the individual and teams will remain at the core of international management of innovation.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
TECHNOLOGICAL KNOWLEDGE AND INTERNATIONAL PERFORMANCE - EVIDENCE FROM INFORMATION AND COMMUNICATION TECHNOLOGY SMALL AND MEDIUM-SIZED ENTERPRISES Sami Saarenketo, Lappeenranta University of Technology, Finland Olli Kuivalainen, Lappeenranta University of Technology, Finland Kaisu Puumalainen, Lappeenranta University of Technology, Finland Kalevi Kylaheiko, Lappeenranta University of Technology, Finland
INTRODUCTION Many small high technology firms are based on certain product or service innovations. Such innovations are based on the knowledge the firm possesses. Although, the importance of the technical capabilities is noticed in many studies, even today, the relationship between technology strategy and new venture performance and growth is not well documented (see e.g. Zahra and Bogner 1999; Zahra 1996; Lefebvre et al. 1992). This paper explores the role and the effects of technological Dr. Sami Saarenketo is Senior Lecturer of International Marketing at Department of Business Administration in Lappeenranta University of Technology, Finland, Email:
[email protected]. Dr. Olli Kuivalainen is Researcher of International Marketing at Department of Business Administration in Lappeenranta University of Technology, Finland, Email:
[email protected]. Dr. Kaisu Puumalainen is Professor of International Marketing at Department of Business Administration in Lappeenranta University of Technology, Finland, Email:
[email protected]. Dr. Kalevi Kylaheiko is Vice Rector of Lappeenranta University of Technology and Professor of Economics, esp. Technology Research at Department of Business Administration, Finland, Email: kalevi.
[email protected].
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knowledge on international performance of high-tech firms. Our framework builds on the knowledge-based view of the firm. The rest of the paper is organized into three main sections. The second section provides a theoretical framework and hypotheses for empirical analysis. This theory part discusses the concept of technological capabilities, nature of knowledge and international performance, and concludes with the formulation of the hypotheses. The third section presents our empirical results from the Finnish Infocom industry. The last section provides conclusions and draws implications for management.
THEORY AND HYPOTHESES Technological Capabilities and High-Tech Small and Medium-sized Firms According to so-called resource-based view (RBV) of the firm (e.g. Wernerfelt 1984; Barney 1986; Foss 2000) a firm's competitiveness is based on unique resources. Such resources or capabilities should be valuable, rare, inimitable and nonsubstitutable. Many researchers have emphasized the importance of intangible resources (often referred to as knowledge and capabilities) to competitive advantage (see e.g. Kogut and Zander 1992; Grant 1996; Deeds et al. 1999). In dynamic, i.e. changing and unpredictable environments, the knowledge-based resources are seen to contribute most to the performance (Miller and Shamsie 1996). However, after a long period of conceptual work, the empirical research on resources and capabilities is still lacking, and the field has not reached maturity (Miller and Shamsie 1996; Spanos and Lioukas 2001). Miller and Shamsie (1996) have categorized resources into two classes, i.e. to property-based and knowledge-based resources. Spanos and Lioukas (1996) with their focus on RBV and emphasis on knowledge, have divided capabilities into organizational, technical and marketing capabilities. The role of technology has been one of the main issues studied in the field of high technology small and medium sized enterprises (SMEs). Technology strategy has been seen as one of the most important aspects of any firm's strategy or strategic posture especially in dynamic environments and it is among the most recognized determinants of the success of new ventures (Zahra and Bogner 1999; Zahra 1996; McGrath 1995). Deeds et al. (1999) notice that "...to compete and survive, these [entrepreneurial high technology] firms must rely on steady stream of innovative products". Our view is that the competitive advantage of high-tech firms is primarily based on their organizational and technological resources and capabilities (see Kuivalainen et al. 2001). However, this relationship between these resources and capabilities and competitive advantage is often studied in a sequential or "static" manner, without concentrating on dynamic and complex links between firms' competitive and technology strategies (see this argument e.g. in Zahra et al. 1999).
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This view neglects the opportunities different technologies can offer for the firm in the long run. Zahra et al. (1999:190) include the following components into technology strategy: a company's technological posture (i.e. is the firm a follower or a pioneer in a certain technology); technology sourcing (make or buy or co-operation); technology portfolio (technologies used over time); and distinctive technological skills and resources (skillful staff). In their research related to causal logic of rent generation Spanos and Lioukas (2001) measured firms' technical capabilities (i.e. competencies that are required to converting inputs to outputs) by looking at the efficiency of production departments, technological capabilities and infrastructure, and economies of scale and technical experience. They found out that firms' internal assets have an effect on market performance and through it, on high profitability. In both above-mentioned studies it is mentioned that resource-based view has worked well in a managerial context. There are shortcomings, though, as traditional RBV is seen as static approach. In a dynamic environment, in which industries undergo enormous changes, the classification of oldfashioned resources becomes irrelevant. Thus, managing technological capabilities and technologies in a dynamic environment is a challenge for a small firm. It has been argued that emerging knowledge-based view (KBV) of the firm offers a more promising way to forecast the future success (see e.g. Grant 1996; Spanos and Lioukas 2001). In KBV, learning is seen as key component for the longterm competitive advantage. Nature of Knowledge We propose that not only the level of but also the very nature of knowledge has an effect on international performance of the firms. Teece and Pisano (1994: 537) interpret firms as generators of dynamic capabilities, which help "in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources and functional competences toward changing environment." The opportunity window of the firm is always constrained by its existing routines and capabilities, thus implying the path dependency constraint. The more there exist the economies of scale, the more the firms have to specialize in their path-dependent capabilities and the more vulnerable they become in turbulent markets. On the other hand, the greater the existence of complementarities between dynamic capabilities, the more the firm's potential to sustain competitive advantage can be enhanced. We think cooperative modes of internationalization (partnerships etc.) can be utilized as useful complementary sources of capabilities to promote flexibility and risk sharing between partners.
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To understand the nature of knowledge we cover briefly the basic knowledge categories and main knowledge related mechanisms. Two basic knowledge categories are distinguished (cf. Blomqvist and Kylaheiko 2000): a) Tacit knowledge ("know-how") is embedded in the firm organization, which makes it easy to protect against the imitation attempts of rivals. Tacit knowledge induces cumulative learning-based internalities thus enabling a firm to exploit economies of scale and scope and utilize the profit opportunities in terms of outsourcing or networking strategies. The basic learning mechanisms that make the internalities possible are replication and partial replication. However, tacitness also makes it hard to transfer knowledge between the firms. This may promote the use of FDIs as strategic devices to overcome the hard-to-transfer problems. b) Codified and generic information ("'know-that") make it possible to exploit the externalities generated through external knowledge bases of other firms and research institutions. They are sources of network externalities and the most important mechanisms related to them are knowledge transferring and knowledge creation through integrating. Next we will compose our knowledge-based view of the firm by introducing the following knowledge determinants: 1) Appropriability regime refers to the question of how easily a firm can protect its ideas from imitation. The appropriability does not only depend on legal protection (patents, trademarks, etc.), but the nature of knowledge is perhaps even more important. The more tacit the knowledge is or the higher the economies of scale are, the more appropriate is knowledge. 2) Complementary capabilities consist of the external capabilities that are needed to complete a firm's own internal capabilities. 3) Economies of scale and scope. When the firm utilizes mainly its own resources/routines and capabilities it can build on cumulative learning and exploit the economies of scale and scope. 4) Path Dependency is based on cumulative internal learning mechanism. 5) Uncertainty refers to the difficulties in predicting changes in the global markets and technologies. International Performance The export performance of a firm is one of the central streams of research in international business. Gencturk and Kotabe (2001, p. 55) point out that the difficulties of assessing performance, especially in an international context have made
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the evaluation of export performance of individual firms mostly an elusive goal. Until recently, the topic has drawn more conceptual but less empirical attention (Chetty and Hamilton 1993). Instead of export, we use the concept of international performance to stress the fact that firms engage also in other, more advanced foreign market entry modes, such as licensing, strategic alliances and partnerships, or direct investments. Within the SMEs exporting frequently remains the dominant mode, however. Typically, export performance has been measured by using a single indicator approach, and export sales, export sales growth, export profits, and export intensity. However, there is growing evidence that the construct is multidimensional and is not to be captured by single indicator (Cavusgil and Zou 1994). Use of multiple measures of performance is becoming popular as different measures are proposed to capture different facets of the construct (Katsikeas et al. 2000). Furthermore, many researchers believe that the various performance indicators are more complementary than mutually exclusive (Shoham 1998). There are two primary ways of measuring export performance: Economic (financial measures such as sales, profits and market share) and noneconomic (nonfinancial measures related to product, markets, experience etc.) (Cavusgil and Zou 1994). In addition, some researchers have chosen more collective approaches to measurement. One general measure is based on manager's degree of satisfaction with overall export performance of the firm. Other generic measures are perceived export success and the degree to which export objectives have been accomplished. (Katsikeas et al. 2000) Though it has been accepted that when studying success determinants in internationalization, a valid and reliable measurement of performance is crucial (Matthyssens and Pauwels 1996, p. 85), the multitude of performance dimensions considered in the literature demonstrates that there is no universally accepted criterion for successful internationalization and that organizations can pursue, measure, and judge export performance on various dimensions (Genctiirk and Kotabe 2001; Aaby and Slater 1989). Furthermore, as Bantel (1998, p. 214) points out the measurement of performance is exceptionally complex for young firms. It is demanding to capture the range of potentially relevant performance outcomes to adolescent firms since particularly economic data is often unavailable. Small, young, privately-held firms are many times reluctant to provide objective economic data. However, it has been suggested that the use of subjective performance data is appropriate when objective data are unavailable (see e.g. Dess and Robinson, 1984). Main Hypotheses for Empirical Analysis The basic proposition of this paper is that the level of firms' technological knowledge and the nature of the knowledge have a significant role in international performance of the firms. The firms having higher level of technological knowledge are expected
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to outperform firms with moderate technological knowledge in international markets. The relationship is, however, moderated by the knowledge determinants presented previously. This moderating effect is proposed to be stronger within the firms that do not possess superior technological capabilities. On this theoretical foundation we have formulated the following hypotheses: HI:
Firms with superior technological capabilities have better international performance
H2:
The international performance of the firms with less technological capabilities depends more on the nature of knowledge
The hypothesized linkages are presented in the following Figure 26.1 that illustrates our model. There is a direct link between the technological knowledge and international performance. The link from nature of knowledge to international performance is assumed to be contingent upon the level of technological knowledge.
Fig. 26.1: Hypothesized model of Technological Knowledge, Nature of Knowledge and Effects in International Performance
EMPIRICAL ANALYSIS Data Collection To test the hypotheses and the model a survey was conducted among 405 Finnish Infocom SMEs and 171 responses received. The firms, mostly young and aiming to become international, include content providers and software providers for service platform and management systems. At the time of the data collection (Jan-Feb 2000) 71 firms already had international operations. The Infocom sector provides a good
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research focus group as it is developing and internationalizing rapidly. The number of operating firms has grown a great deal and the growth rate of the industry has been approximately 10 % during the last few years (see e.g. EITO 1999). The population of interest was defined as small and medium-sized Finnish companies providing value added services in the Infocom sector. These include content providers and software providers for service platform and management systems. Hardware manufacturers and companies providing mainly educational or consultancy services were not included in the study. Since the companies of interest were operating in the Infocom sector, an Internet- based questionnaire was used for data collection. The questionnaire was extensive consisting of 15 pages divided into three parts: the first part included the basic information of the firm, its products, technologies, employees, customers and competitors. The second part focused on the competitive advantages, position in the value chain and partnership issues. The final part included questions about internationalization and the future of the company. The questionnaire was pre-tested in five companies, and the time needed for completing the questionnaire was found to be approximately 45 minutes. In order to elicit responses, the respondents were offered a report of the results of the study, and a small personal gift. Due to the rapid development of the Infocom sector and the unsuitability of standard industry classification codes, there was no single up-to-date sampling frame available for the purposes of the study. Therefore, the names and contact information of the companies were searched from multiple sources, e.g. Kompass Finland Database, The Statistical Bureau of Finland database of Finnish companies, IT magazines, and Internet sites of the companies themselves, universities, cities, science parks, incubators, venture capitalists, and industry organizations. Altogether 405 companies were identified, and contacted by telephone between November 1999 and February 2000. In this phase, 17 companies were found ineligible, and 22 companies refused to participate in the study. Those 366 companies, who on the telephone agreed to participate, received the following day an e-mail message containing instructions for answering the web-based questionnaire. A reminder message was sent to those who had not returned their answer within two weeks. 171 companies returned their answers, resulting in effective response rate of 47% (171/366). In light of the response rate, and the comparison of early and late respondents (Armstrong and Overton, 1977), non-response bias did not become a problem. From these 171 respondents, 71 reported having international operations, and this study concentrates on analyzing only those companies.
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Technological Knowledge Clustering As the aim was to group the firms according to their current level of technological knowledge we used a cluster analysis following the guidelines presented by Hair et al. (1998). Hierarchical cluster analysis was performed using 31 specific technologies as the clustering variables. The respondents were asked to assess the level of their firm's knowledge in these technologies on a Likert scale from 1-5. The similarity between cases was measured by squared Euclidean distance and the clusters were formed using the Ward method. The number of the clusters was determined by change in the agglomeration coefficient. Four distinct clusters were found. The first group (29 firms) was labeled as Technology Experts. These firms had the best knowledge in mobile operating systems, network infrastructure, distributed techniques and data security. The firms performed well in other technologies as well. Due to the small number of observations, the other three clusters were grouped together and labeled simply as Others. Within this cluster the first group (22 firms) was labeled as Content Focused Firms. These companies performed best in technologies related to proving, presenting, editing, managing and distributing content. The firms had fairly poor knowledge of other technologies. The second group (86 firms) was labeled as Technology Independents. These firms did hardly have knowledge in any mentioned technologies, apart from HTML, Client-script languages and Windows NT. The third group (29 firms) was labeled as Platform Focused Firms. The knowledge of these companies was clearly focused on server operating systems. The use of the quick cluster procedure with cluster centroids from the hierarchical solution as initial seeds validated the cluster solution. It was found that the solution derived from quick clustering did not differ significantly from the results of hierarchical clustering made. The differences in item means across clusters were all significant at .01 level, see ANOVA test results in Appendix 26.1. Apart from the level of technological knowledge, there were also other significant differences between the cluster characteristics. Technology Experts can be described as young, profitable, fast grown and international market challengers. These firms intend to invest in the development of technological knowledge more than the other three groups also in the future. The firms are also good at marketing, have often partners and aim for stronger growth and internationalization within the upcoming years. Great success and expectations so far may have had an influence on the assessment of technological knowledge in these firms, "when things run great, we are good at everything", therefore the group appears to be very capable. With the closer look at the firms, it becomes apparent that the cluster of Technology Experts does not
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emphasize on any particular area. This creates somewhat unfocused picture of the cluster. Content Focused Firms are clearly smaller than others. They are also the youngest firms, usually owned and financed by private persons. Majority of their employees are self-educated professionals. Products transfer often through the Internet and have short lifecycles. The firms rarely rely on partners, are convinced of their marketing skills and consider themselves as very specialized. In the future the group plans to increase heavily their revenues but the expectations for growing the number of employees are more moderate. The firms are clearly focused on content technologies and intend to invest in them also in the forthcoming years. Cluster of Technology Independents represents a miscellaneous group of firms, which do not necessarily have focus in any technological knowledge. Some of the firms are content providers with rather small market share, with disadvantage of managing resources and processes. Majority of these firms operates solely within the domestic markets and do not plan to invest in any other than content technologies. This is natural because the firms are focused on producing content (editorial material, graphic design etc.), in which there is no need for the mentioned technologies. Within the cluster, there are also some software firms to be found. For them, e.g. industrial specific know-how is more relevant than the listed technologies. The success of these companies often requires some technological knowledge, however the firms do not develop this knowledge in-house. Platform Focused Firms are the oldest and largest within the sample. These firms have also sound profitability, have attained plenty of external financing and are often owned by another company. Know-how of the employees is strongly related to technology. Language skills and internationality require enhancement. The great deal of the firms are packaged software producers, and have achieved market leadership or are challengers. Domestic markets are not believed to offer much growth potential. However, the internationalization of these firms has been rather slow so far. In the future, technology investments will be heavily directed to data security, server operating systems, decentralized and network infrastructure techniques but not to mobile operating systems. Firms within this cluster are clearly focused on their own area and form another straightforward cluster within the sample. Measures of International Performance and Nature of Knowledge The knowledge attributes were measured on 30 Likert- scaled items. Principal component factor analysis was performed on the items in order to uncover underlying dimensions. Nine factors emerged, explaining in total 62% of the variance. The Varimax-rotated factor loadings are shown in Appendix 26.2. The factor structure conforms very well to the theory-based knowledge attribute variables; only synergies
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and autonomous versus systemic nature of the products seems to converge into one factor. The dependent variables, i.e. internationalization variables include (1) percentage of the company's customers that are foreign (2) number of foreign partners (3) number of countries where the company is involved (4) opinions on the effects of internationalization on the company's profitability, capabilities, revenues, image and in general, all measured on a Likert scale from - 2 to +2, and (5) international share of revenues (%) in years 2000 and 2002. As it has been acknowledged in the theoretical part of the paper, the international performance is a very broad and multidimensional concept. Thus, also other measures in addition to the above five should be accounted for. Our measurement does not include e.g. import activities of the firms that often play an important role in the SMEs. Hypothesis Testing The first hypothesis assumed that firms with superior technological capabilities have better international performance than other firms. In our sample, 70% of technology experts have international activities, while only 50% of the others are operating internationally. A t-test of mean differences of the international performance variables between the two groups of companies was computed in order to test the hypothesis. The results are shown in Table 26.1. Table 26.1: Effects of Technological Knowledge on International Performance Performance variable % of customers foreign No of foreign partners No of countries Effect on profitability Effect on capabilities Effect on turnover Effect on image Effect in general Intnl share of revenues 2000 Intnl share of revenues 2002
Experts (N=16) 11.11 .42 4.56 .28 .94 .78 .94 .89 21.81 47.52
Others (N=60) 6.46 .71 5.03 .53 .87 .77 1.19 1.09 11.97 27.40
T-test sig. .136 .453 .836 .325 .715 .976 .267 .347 .030 .002
The results show no significant difference between technology experts and others on the amount of foreign customers, foreign partners or target countries. Also the noneconomic opinions of the managers about the effects of internationalization failed to support our hypothesis. However, the international share of revenues clearly support the hypothesis.
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The second hypothesis stated that the international performance of the firms with less technological capabilities depends more on the nature of knowledge. In order to test this hypothesis, linear stepwise regression models were estimated separately for technology experts and others. The dependent variables in the regressions were the international performance variables, and the nature of knowledge variables were used as predictors. For the group of technology experts, the nature of knowledge failed to account for a significant amount of variance in any of the performance variables, and therefore the results of the regression models depicted in Table 26. 2 are only for companies with less technological capabilities. Table 26.2: Nature of Knowledge Determinants of International Performance Dependent variable
Independent variables
% of customers foreign No of foreign partners No of countries Effect on profitability Effect on capabilities Effect on turnover Effect on image Effect in general Intnl share of revenues
n.s. Certainty, synergies, tacitness Economies of scale Certainty, path dependency n.s. n.s. n.s. n.s. Economies of scale
Standardized coefficients n.s. .488, .275, .268 .299 -.272, -.258 n.s. n.s. n.s. n.s. .243
R2 n.s. .420 .090 .143 n.s. n.s. n.s. n.s. .059
n.s. = not significant
Technologically less capable firms appear to be able to utilize partnerships with foreign companies better, if their knowledge is tacit and synergies can be found. Companies with many foreign partners also find the technological and market uncertainty lower than those with fewer partnerships. Intensity of internationalization in terms of turnover and number of countries is naturally associated with larger possibilities for scale economies. Companies with highly path dependent knowledge and low uncertainty are less satisfied with the effects on internationalization on their profitability.
CONCLUSIONS This paper investigated the relationship between the firms' technological knowledge and international performance. We propose that the nature of knowledge moderates the impact of technological knowledge on the firm's international performance. This became evident particularly within the technologically less capable firms. In the SME
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context there is a need for several types of capabilities (i.e. technical, organizational and marketing capabilities), if the aim is to gain sustained competitive advantage. We believe that all these capabilities are important. Although the firms in our survey did not differ in the amount of foreign customers, foreign partners and number of target countries, our results indicate that international share of revenues was higher in the cluster of Technology Experts. This result emphasizes the importance of the sound technology strategy. Since the theoretical framework focuses on the role of technological knowledge and the nature of the knowledge in firm performance, it will work better with technology-based ventures. Of course, in the case of SMEs without any need for technological knowledge, other capabilities, e.g. managerial competencies and capabilities may play more important role. The suggested connection is obviously not without unambiguities. Further empirical studies, both qualitative and quantitative are needed to validate our model. The qualitative methods could serve in investigating the construct and determinants of technological knowledge in more detail. Statistical validation of our model in other industrial and cultural settings would be of significant value. The cross-sectional nature of our study sets some limits for us in making definitive conclusions about the link between firms' technological knowledge and international performance. To address this shortcoming, we are currently conducting a follow-up survey to confirm our thoughts further.
REFERENCES Aaby, N. E. and S. F. Slater (1989). Management influences on export performance: A review of the empirical literature 1978-1988. International Marketing Review, 6(4), 7-26. Armstrong, S. J. and T. S. Overton (1977). Estimating non- response in mailed surveys. Journal of Marketing Research, 18, 263-264. Bantel, K. A. (1998). Technology-based, "adolescent" firm configurations: Strategy identification, context, and performance. Journal of Business Venturing, 13, 205-230. Barney, J.B. (1986). Types of Competition and the Theory of Strategy: Toward an Integrative Framework, Academy of Management Review, 11, 791-800. Blomqvist, K. and K. Kylaheiko (2000). Main Challenges of Knowledge Management: Telecommunications Sector as an Example, hi the CD-ROM Proceedings of the 8th International Conference on Management of Technology, Miami, USA, 2125.2. 2000.
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Cavusgil, S. T. and S. Zou (1994). Marketing strategy-performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58 (January), 1-21. Chetty, S. K. and R. T. Hamilton (1993). Firm-level determinants of export performance: A meta analysis. International Marketing Review, 10(3), 26-34. Deeds, D. L., D. DeCarolis and J. Coombs (1999). Dynamic capabilities and new product development in high technology ventures: An empirical analysis of new biotechnology firms. Journal of Business Venturing, 15, 211-229. Dess, G. G. and R. B. Robinson (1984). Measuring organizational performance in the absence of objective measures: The case of privately held firm and conglomerate business unit. Strategic Management Journal, 5, 265-274. European Information Technology Observatory (EITO) (1999). Europe's ICT Market Outdistances Global Growth - EITO Analysis Sees Increase Rates of Up to 10 % in 1999, available on the web at the following address: http://www.fviteurobit.de/pages/eito/abstract/Ab-015.html, visited 3.4.2000. Foss, N. J. (2000). Equilibrium vs. Evolution in the resource-based perspective: the Conflicting Legacies of Demsetz and Penrose. In: Resources, Technology and Strategy: Explorations in the Resource-based Perspective (Foss, N. J. and P.L. Robertson, eds.), pp. 11-30. Routledge, London. Genctiirk E. F. and M. Kotabe (2001). The effect of export assistance program usage on export performance: A contingency explanation. Journal of International Marketing, 9(2), 51-72. Grant, R.M. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 17, 109-122. Hair, J. F. Jr, R. E. Anderson, R. L. Tatham and W. C. Black (1998). Multivariate data analysis, 5th ed., Englewood Cliffs, N.J.,Prentice Hall Katsikeas, C. S., L. C. Leonidou and N. A. Morgan (2000). Firm-level export performance assessment: Review, evaluation, and development. Journal of the Academy of Marketing Science, 28(4), 493-511. Kogut, B. and U. Zander (1992). Knowledge of the firm, combinative capabilities and the replication of technology. Organization Science, 3, 383-397. Kuivalainen, O., K. Kylaheiko, K. Puumalainen, and S. Saarenketo (2001). Knowledge-based view on internationalization and effect of product/service types. In: Technology Management in the Knowledge Area (Kocaoglu, D.F and T.R. Anderson, eds.), pp. 320-334, PICMET'01, Oregon, USA. Lefebvre, L., A. Langley, J. Harvey, and E. Lefebvre (1992). Exploring the strategytechnology connection in small manufacturing firms. Production and Operations Management^, 269-284.
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Matthyssens, P. and P. Pauwels (1996). Assessing export performance measurement. In: Advances in International Marketing (S. T. Cavusgil and T. G. Madsen, eds.), pp. 85-114. JAI, New York. McGrath, M.E. (1995). Product strategy for high-technology companies — how to achieve growth, competitive advantage, and increased profits. McGraw-Hill, New York. Miller, D. and J. Shamsie (1996). The resource-based view of the firm in two environments: the Hollywood film studios from 1936 to 1965. Academy of Management Journal, 39, 519-543. Shoham, A. (1998). Export performance: A conceptualization and empirical assessment. Journal of International Marketing, 6(3), 59-81. Spanos, Y.E. and S. Lioukas (2001). An examination into the causal logic of rent generation: contrasting Porter's competitive strategy framework and the resource-based perspective. Strategic Management Journal, 22, 907-934. Teece, D. and Pisano, G, (1994). The Dynamic Capabilities of Firms: An Introduction, Industrial and Corporate Change, 3, 537-556. Wernerfelt, B. (1984). A Resource-Based View of the Firm, Strategic Management Journal, 5, 171-180. Zahra, S., R. Sisodia and B. Matherne (1999). Exploiting the dynamic links between competitive and technology strategies. European Management Journal, 17, 188-203. Zahra, S.A (1996). Technology strategy and financial performance: examining the moderating role of the firm's competitive environment. Journal of Business Venturing, 11, 189-219. Zahra, S.A and W.C. Bogner (1999). Technology strategy and software new ventures' performance: exploring the moderating effect of the competitive environment. Journal of Business Venturing, 15, 135-173.
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Appendix 26.1: Means of technological knowledge in clusters
Technology
Technology Experts (N=29)
Content Focused (N=22)
Technology ay Independents nts (N=86)
Platform Focused (N=29)
ANOVA F
sig.
Content production
2,55
3,71
1,66
1,54
36,9
,000
MP3 and/or RealAudio
2,45
3,76
1,67
1,56
30,6
,000
RealVideo and/or Windows Media
2,71
3,67
1,66
1,52
34,7
,000
Content presentation and editing
3,93
4,16
2,70
2,79
31,7
,000
HTML and/or WML
4,48
4,73
3,74
3,79
7,3
,000
XML
3,96
3,29
2,14
2,67
22,2
,000
Macromedia Flash Client-script languages (javascript/VBScript
2,68
4,05
1,98
1,29
25,3
,000
etc.)
4,46
4,55
2,99
3,04
20,7
,000
Content management and distribution
2,85
3,06
1,44
1,43
70,8
,000
SMIL and/or MPEG4
2,71
2,95
1,24
1,46
46,2
,000
conversion systems (e.g. picture format)
2,96
3,64
1,73
1,45
29,4
,000
RDF and/or RSS
2,50
2,27
1,19
1,26
31,1
,000
other content management systems
3,26
3,48
1,64
1,57
36,3
,000
Data security
3,17
2,43
1,39
2,65
45,6
,000
PKI and/or X.509, PGP, IPSEC
3,25
2,45
1,43
2,67
37,0
,000
algorithms (MD5, RSA, DES, Blowfish)
3,07
2,43
1,35
2,63
32,0
,000
Server operating systems
3,69
3,19
2,12
3,84
70,2
,000
Linux (and/or FreeBSD)
4,10
3,73
2,06
4,07
41,3
,000
Windows NT
4,52
4,00
3,32
4,14
9,5
,000
Sun Solaris
2,96
2,27
1,43
3,19
29,9
,000
other commercial Unix systems
3,18
2,77
1,51
3,64
39,1
,000
Distributed techniques
3,07
1,89
1,36
2,35
37,1
,000
Corba
2,72
1,52
1,28
2,54
24,8
,000
DCOM
3,07
1,90
1,38
2,00
19,2
,000
Jini (and other Java-based)
3,38
2,24
1,39
2,48
32,1
,000
Network infrastructure
2,96
1,74
1,18
1,94
114,4
,000
SS7 and other signalling protocols
2,81
1,30
1,04
1,64
36,0
,000
GPRS
2,77
1,40
1,04
1,68
44,0
,000
HSCSD
2,54
1,30
1,04
1,43
43,4
,000
SMS
3,89
2,50
1,41
2,68
53,0
,000
WAP
3,92
2,85
1,53
2,71
57,6
,000
xDSL
2,77
1,85
1,13
1,86
31,7
,000
DVB
2,62
1,50
1,03
1,25
48,7
,000
Irda
2,46
1,40
1,04
1,30
41,8
,000
Bluetooth
2,62
1,55
1,08
1,70
48,8
,000
Mobile operating systems
3,33
1,93
1,17
1,33
91,6
,000
EPOC
3,39
1,70
1,12
1,50
58,0
,000
WinCE
3,15
1,95
1,17
1,40
44,3
,000
Palm OS
3,41
2,05
1,20
1,10
73,4
,000
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Sami Saarenketo et al.
Appendix 26.2: Varimax- rotatedfactor structure of knowledge attribute items |
|
|
| |
g. |
•?c
t
"
« .2 «l
«
I
IIM«
IE
*
a i
|j
^ '5
| «!
~
ti I s I I* 1 i I i I I! | 1 i|i H i i !
ri $ Item Patents act as references of our competence Patents effectively prevent our competitors from stealing our ideas Patents can help to shape the development of the industry, e.g. standards The competitors are able to break our patent We cannot exploit our competitors' ideas, because their patent protection strengthens Importance of patents for sustaining your competitive advantage
£
a
«
**
,79 ,75
,72 ,64
,73 ,60
,35
,67 ,63
,54 ,51
,35
-,42 ,63 ,61
Risk of opportunism by strategically important partners
,82
Risk of opportunism by large buyers
,79
,76 ,64
Risk of opportunism by subcontractors
,72
,63
Risk of partners breaking our contract
,71
,59
Extent of scale economies in distribution
,73
,61
Extent of scale economies in marketing
,65
,47
Extent of scale economies in production
,61
Extent of scale economies in financing
,51
How can you adjust your key competencies to new technologies Extent of synergies in using your key competencies for different purposes Importance of quick absorption/application of new knowledge for sustaining your competitive advantage Our products/services can be sold autonomously Our key competencies are in technologies that will be substituted by others We are very dependent on other companies operating in the value chain Commercialization of our key competencies is heavily dependent on other companies operating in the value chain Our previous technology choices dictate the development of our key competencies Our previous technology choices make us vulnerable to radical changes in tehcnological development
,51 -.31 ,48
,54
,68
,57
,55 -,53
Eigenvalue
,48 ,50
-,40
-,46
,44
,63
,84
,79
,84
,78 ,84
,71
,77
Degree of uncertainty about market development Degree of uncertainty about technological development Patents are important for sustaining competitive positions in our industry A large buyer forces us to make heavy investments, increasing our dependency on them Our bargaining power weakens, when there are few potential buyers Importance of tacit knowledge for sustaining your competitive advantage Because of our tacit knowledge, we do not have to worry about our ideas leaking to others
,63
,70
,39 ,41
,71 ,77
,68
,66
,55
,41
,40 ,62
,66
,53
,53 ,80 ,71 ,69 ,56
4,18 3,10 2,58 1,90 1,64 1,50 1,32 1,20 1,15
% of variance
13,9 10,2
Cumulative % of variance
13,9 24,2 32,7 39,1 44,5 49,5 53,9 57,9 61,7
KMO measure of sampling adequacy ,648
8,6
6,3
5,5
4,9 4,4 4,0 3,8
27
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
MANAGEMENT OF NEW TECHNOLOGIES AND ECONOMIC RE-ORGANIZATION IN THE EASTERN EUROPEAN COUNTRIES lolanta Bivol, Technical University, Kishinev, MD Thierry Grange, Grenoble Graduate School of Business, FR
ABSTRACT There is no doubt that the economic development of any country depends directly on the level of dissemination of science and technology. Countries, sooner or later, come to the conclusion that there is a tight correlation between innovation, technology, productivity and progress in society. This correlation depends neither on race nor on culture peculiarities, but on the economic organization of the country. Moreover, as economic growth declines, investments into science and technology assume an even greater importance. Good examples can be found in the techno-economic development level of Eastern European countries and of the former USSR republics. The economic reform practices in the given region for the past decade, show that the transition to the market economy can succeed only with the back up of a high level of integration of new technologies both in Industry and in Government. Success was evident only in countries that have managed to apply this first principle. Other countries with huge natural resources, human resources, scientific and technical potential cannot adjust to the transition crisis and set up worthy economic relationships to improve performance. This paper discusses the contributions that science and technology can make towards improving performance in Eastern European countries and in Russia and help in the transition to a new society based on efficient dissemination of high technologies and economic improvement. Keywords: New technology, transition countries, economic growth, Eastern European countries, Russia, innovation, production, Internet.
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INTRODUCTION For the last 40 years the stimulus for economic evolution in developed countries has been in the sphere of high technologies and services management and no longer in the "old fashioned" production and operation optimization. Similar to what happened in the other more "traditional" industrial branches with the outcomes of R&D investments, the new technologies of the end of the second millennium are regarded as a natural and practical issue of scientific research activities. High technologies are creating real added value and are providing new business opportunities in the industrial production sector, and some "more user friendly" solutions in the services area. Thanks to this positive contribution, they also help companies to generate a higher income per employee. The Human Resources Management has reached a new balance where the employees as well as the entrepreneurs are feeling comfortable. Globally, a new element for the stability of the western society has been generated. Many countries of the Eastern European block, before the "reorganization" of the nineties, had strong scientific and technological potential. For example, the quantity of manufacturing facilities and of R&D engineers in Russia in the beginning of the sixties was three times bigger than the rest of the world. But little by little, this leadership has faded and it transformed to a non-efficient system at the end of the seventies, and ended in disaster at the beginning of the nineties. In the developed countries the productivity per man-hour was increasing based on the technical revolution brought about by the R&D efforts made during the last thirty years. In contrast, the productivity of the Eastern European countries was decreasing. Moreover, even today, in 2002, after more than ten years of restructuring, there are some countries from this part of the world which have gone back to an economic situation similar to that of the 70s. For the last ten years of the twentieth century the economic performance of the former USSR countries turned out to be mainly dependent on the raw material that could be extracted and sold on the world market. They became almost completely dependent on external factors to succeed in their marketing. This scale of scientifictechnical regression is unprecedented. The decline in industrial production has been lasting for ten years. The companies and people suffering most from this situation are the scientists and the high technology oriented organizations, public or private, and their corresponding branches. In the post-war period there were two systems in the scientific, technical and investment policy of the USSR. The first system was the scientific, experimental and manufacturing activities of the Military-Industrial Complex (M.I.C.). The second was
Management of New Technologies and Economic Re-Organization 409 a symmetric design to the first one, but dedicated to civil affairs. The name was SREBE. The leader for developing and for using new technologies was the military system. It had 75% of all investments into scientific and research works and was directly financed from the state budget. 15% to 20% of the annual investments were spent for on development of the experimental base. Military scientific research and experimental activities were administrated by qualified specialists. There was a high individual salary standard and the administration was established on the basis of the "programming and targeting" methods. As a result, the branches of the Military-Industrial Complex were releasing an output which, nowadays, continues to generate a leading position on the world armaments market. The civil branches were financed on the residual principle, what the military did not need, having appropriate production standards and manufacturing facilities and the access to the innovation providers. The citizens' daily life was very hard because of the total lack of technological improvement in civil goods and the services they could access. There has been, in reality, a dedication of almost all R&D outcomes and resources to military priority. The M.I.C. was the only structure creating, transforming and using technologies to better its activities. This unequal "social distribution" of a "collective property" and this abuse of "social demand" led to a new economic power distribution. Let's look at the consequences of this situation on the" high tech" domain.
BERMUDA TRIANGLE FOR THE MILITARY-INDUSTRIAL COMPLEX In the USSR the 70s and 80s were a period of failed opportunities in the field of management of new technologies, and especially in the design of pertinent strategies. In the nation's economic organization, there could be four distinguished main segments of power differentiated by their capacity to recycle technologies. The first one is the military industrial complex, permanently updating its activities with the latest high tech available. The second one is the thermo-electric complex, aimed to maximize the output of the initial resources, mining, energy at large, and dedicated to the noble social goal of buying all possible western and modern equipment to provide the population the best standard of living. The third one is the public investment sector which is permanently in stagnation and lacking access to modern technologies. The last one is the consumer goods branches complex where the degradation in quality and performance of the products increased each year. As a dogmatic principle, the reproductive process in the USSR economy was extensional, suggesting a social achievement of consumption levels equivalent to
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those of the western world. This did not happen, and nobody at the highest level in the eastern members of the "nomenclature" agreed to even recognize or more simply to look at the persistent economic decline. Everybody in the population, on the contrary, was aware of the damage of that failed economical system. That is why there was a restructuring of distribution methods, as well as a restructuring of the economy at large. And that is also probably why its consequences have been so easily accepted both by the population and by managers. In the plan for the transition to a better world, the goal for the end of the year 2000 was to get the machine-building activities to contribute 42-44% of the GDP; to raise the standard and completely renew the output apparatus of all the branches of the national economy and to bring the GNP growth rate to 6%. What kind of means were suggested reach such ambitious objectives? First. To involve the branches of the MIC with the manufacturing of civil output and to stop their specialization in military oriented activities. Second. To transfer separate branches of the civil machine-building activities to a modernized MIC and to improve their competence. These two decisions can be described as a "cross fertilization" process between branches. Because they were the only solutions and because they did not cost any effort or any investment these first two steps have been implemented with relatively fair success. Third. The most important decision in the new management of the Eastern countries' portfolio of new technologies was to transfer the military technologies and equipment to the civil branches for retooling, and for the foundation of new production facilities. This step has not been accomplished yet and, if nothing changes in the management of the new technologies, will never become a reality. In the western and highly developed countries, the conversion process, in a depressed or obsolete sector, is performed gradually as seen in the restructuring of Europe's coal mines. The state actively helps the conversion of the company in search of new market niches, then finances the production re-engineering in order to produce a new manufactured article (including the acquisition of the necessary equipment) and so on. The conversion process can last 5-7 years or more as happened in the case of the textile industry. In the Russian Federation, on the contrary, during the conversion process the companies were left to deal with their own problems. They were left alone to design, plan and manage this very difficult turn around. At the beginning of 1991 there were 3-5 times less funds allotted than were necessary for the "great evolution", and at the beginning of 1995, the financing ceased indefinitely. Many aircraft and space industry enterprises had the same fate. They were in some republics of the survived USSR and the short CIS (for example Russia, Moldova, and Ukraine). These companies were equipped with unique technologies
Management of New Technologies and Economic Re-Organization 411 and specialized for the output of complex air and space devices, like MIG dashboards. After the disintegration of the USSR they lost this industrial knowledge by not adapting themselves to the reality of the new economic relationships. These companies could never restart, and today, only the buildings are the only memorial monuments to their fantastic technological contribution, lost in less than a decade. During the first decade of the 21st century, the technological system of the Military-Industrial Complex and aircraft and space industry will need huge support from the Russian state simply to have a chance to restart normal activities, without expecting any participation as a credible partner in the next "Star War" venture. But these high-tech players have a "technological window" for designing, or re-starting a new techno-strategy based on the new wealth of the Russian economy and on the new investments in classical military equipment that will be made. But are there real techno opportunities ahead for this industrial sector? Here are examples of plans that could help the remaining air and space companies to regain their famous status as techno-leaders. They should begin with the placement and fulfillment of state orders of military-technical products for the army rearmament. Secondly, they should focus on mastering the production of the high technological civil output (for example, rockets for launching civil satellites, navigation stations etc.) and increase production with the help of military branches. Russia, for example by reusing all the experience acquired with MIR station, possesses unique scientific and industrial potential. It has indisputable priority in the sphere of creating and piloting space stations for long-term cosmic flights. It also has the priority on the international market of setting in motion services and using rockets-carriers "Proton", "Soiuz", "Molnia", "Zenit", "Ciclon", "Cosmos" and their recent developments. A prospective elaboration is the rocketcarrier "Angara" consuming a more pure ecological fuel and having a flexible payload. According to the projections of the International Congress of commercial suppliers of space services, for the commercial satellites launching up to the year 2006, there will be a market of 30 billions US dollars worldwide. Russia may be able to capture a minimum market share of one third of this sum. The international market of global space communication may be influenced by the achievement of the research project on the creation of the private local satellites system - managing both mobile and fixed communication with unwrapped space aerials of big diameters " Zercalo-KC ". The new concept about the structure of the international environment monitoring is being developed in Russia, based on a hierarchical principle and using satellites which function on different orbits. It is simple to imagine that the technologies used in monitoring these new environments are coming directly from the military materials used to control and monitor intelligence.
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TECHNOLOGICAL INNOVATION AND ECONOMIC DEVELOPMENT IN THE EASTERN COUNTRIES The international statistics and studies made to measure the links between technological innovation and development state that 20-25% of the economic development of a country is conditioned by the investments into science. Public financing of the scientific research and science oriented support services of the TRIADE members are : USA - 3.4%, Japan - 3.5 %, European Union- 3%, of the GDP while in the CIF countries - only 0.7 % of the GDP. The innovation activity of the enterprises in this "Big Eastern" region continues to decrease. Today, new scientific outcomes are used by only 5-6% of the consumer goods producers. In Russia, for example, the highest innovation activity (based on R&D expenditure) at the end of the year 2000 was observed in the chemical and oil-related industry (existed in 63% of the examined enterprises branches), and in the machinebuilding and metal-processing industry (54%). The expenditure for innovation in the food industry is decreasing. The percentage of innovation active enterprises is declining and they accounted for only 29% of the total number of enterprises in the second half-year of 2000 (against 34% in the first half-year). There was a tendency to continue a higher innovation activity at the big industry enterprises but this trend has now stopped and the perception of a recession in all the western countries may accelerate this down hill curve. The lowest level of innovation activity is persisting at the individual small business, where the share of the active innovation is only 3%. In 2000 the share of the enterprises which do not practice innovation activity "because of the lack of its necessity", as their managers responded when asked on that matter, increased from 37% to 42%. Generally, the entrepreneurs have a bad image of innovation. They mistakenly think that the main outcome of the industrial and process innovation is costly and may result in their competitors gaming advantage in production capacity. In the year 2000 the share of the industrial enterprises in which competitive capacity is regarded as "high" on the market, increased from 34% to 38%. The main financial source for the innovative activity is the private capital of the enterprises. That is why the lack of this resource is regarded as the main factor for suppressing the development and mastering of new technologies, equipment, materials and output at large. In the second half of the year 2000 the most widespread innovative activities in the industry continued to be the acquisition of equipment and construction work. In the acquisition of the equipment, the leaders appear to be the chemical and oil-
Management of New Technologies and Economic Re-Organization 413 chemical industry (94% have made that type of investment), building-materials industry (91%), machine-building and metal-processing industry (78%), food industry (77%). It should be mentioned that the reorganization of production is an important reason for getting involved in some types of innovative activities. The physically and morally old-fashioned structures of the companies and of their management, however, does not permit major changes in all the areas where they should be implemented. Moreover, during the restructuring of the economy and of the companies, the funds allotted for scientific research and experiments decreased by 4 times and the number of people engaged in scientific work declined by 1.8 times, although the potential is one of the highest in the world. Evidence of this is the international organizations data from the 70 newest technologies of different countries - 17 belong to Russia. But this scientific-research oriented potential has to be consolidated using the "good old methods" that have been experimented with by the western R&D managers, as they had to tackle the same issues. •
Reinforcing the competition among scientific groups on the basis of a wider use of result oriented grants,
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Developing international scientific exchange of scientists to restore hope and awareness of their real value,
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Using more intensively information from the Internet and other sources. All the above mentioned can be accomplished provided that the scientific activity financing increases by more than 1.5 to 2 times the present level. The effective development of the research potential of the Eastern countries is possible but dependent on the extension of the states' investment in innovative industries that have immediate application. The state influence during the transition period is usually supreme. Examples can be drawn from the 50s and 60s when the state, the big companies and the banks contributed to saving Japan's steel foundry and shipbuilding industry, and in post-war Germany when they restored the "Volkswagen" and other industries. In Russia, the state must stimulate the development of high technological productions, based on a new protectionist policy that will limit importation of foreign technology transfers and that will provide to Russian companies with competitive advantages. In the theory there are enough financial resources to back up this objective simply by re-orienting the research toward companies' needs. At present the institutes of the Russian academy of science own technical solutions and process technologies which in future will be able to determine not only competitive capacity of separate producers and industrial branches, but also the main development directions of civilization. To make sure all these propositions can come to fruition, let's look at some examples of the latest technologies that could put the eastern research institutes and their related industries back on track.
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In the sphere of information processing, the output of the new information carrier - the optical-electronic three-sized memory can be related to the concurrence competent technologies developed by the Russian scientists. Successful execution of this project could transform the most modern technologies into the technologies of yesterday. Moreover, many other industries will be part of this new world solution if it turns into a product. Other optimistic perspectives are for the following areas: technologies creating the element base of electronics, mechanics, computers of the 5th-6th generations; laser technologies; holography; small specialized communicable sputniks; long waved communication channels; global systems that monitor the environment and others. The computer processor "E2K"developed by the Russian scientists of the company "Elbrus" which uses the method of double compilation, according to the technical decisions and essential characteristics surpasses the most powerful western processor "Merced". Continued development promises to increase speed and reduce cost. The "neurocomputers" (NPC), which could revolutionize the information sphere, has a structure very close to the human being's brain. Having a small size and price they operate at nearly 1000 times the ordinary computer's speed. An important issue in power engineering includes the development of nuclear energy installations with high security (subway, liquid metallic, modulating, space gas); energy installations with combined new energy-carriers (wind, geothermal, sun, biotechnological, liquid and gas-hydrogen means). The development process of the liquid radioactive withdrawals processing has a favourable outlook. This universal method of withdrawals transportation was invented by a specialist from the city of Krasnoiarsk, in Siberia. In the sphere of the extraction and processing of the strategic minerals, the new technologies of the reinforcement of the oil extraction by using vibration processes; technologies of slight dynamism at the extraction of diamonds (local thermal processes, deflation process of combustion and explosion); membrane technologies of the chemical matters division; submarine and up-marine bore installations in the icy conditions; nuclear transportable submarine boats; high temperate and supra-high frequented synthesis of the energy-carriers. In the sphere of the biotechnology perspective are the methods of inheritance administration, methods of main clearance of the technological processes; creation of ecologically pure medicines. In the sphere of new materials and chemical matters of great promise are the materials used for space and nuclear technologies (materials with high temperate, corrosion, radioactive, magnetic inflexibility); materials for unique expensive objects with lifecycle duration of 60-80 years; materials for the work in hard climate conditions at super-deep immersions; new types of composites, amorphous and multi-
Management of New Technologies and Economic Re-Organization 415 stratum materials; metallic powder, metalloid tissue; super-thin thread; materials with form memory. Other competent developments are related also to the means of transport with magnetic hangings on the basis of screen-plans utilization of the amphibian principles (in particular, aircraft-amphibian "Be-200"); with horizontal and vertical take-off; with high and super-high ecological cleanliness with combined electric, solar, wind and inertial motors; pneumo-motors; air-static means of transport. Favourable development of these technologies will help Russia to take a deserving place in the international work distribution and to considerably increase the competitive capacity of this country on the international markets. Increasing the market share of the Russian scientific goods is possible only by reducing the production expenses. This requires increasing the productivity per man hour and improving material and production efficiency. Some economists proposed to create (for example in South Korea) a national financial fund for economic development through investment in technological developments. This is to be done with the participation of the state. Big banks and many "old state monopoly" industries have access to the foreign markets and are interested, not only in their own sector development, but also in joint productions with other sectors. The fund's resources have to be insured by certain gold currency state reserves, an important detail in the former communist block, and focus on expenses strictly dedicated to the investment of innovative projects proposed by reliable and healthy companies. Another recommendation to increase the investment action is to give priority to a wider utilization of the long-term bank credits. In order to reduce the risk when dealing with companies that need production, reorganization and modernization, a warrantee of credit must be provided by the national bank and a dividend return obligation must be required by the fund. It should also be mentioned that in the CIF region the restart of a productive cooperation between the countries is a good way to foster and to accelerate the process of pushing economic development through the management of new technologies. The challenge is to get the research laboratories to develop jointventures with other labs from "sister" countries and with companies from the same geographic area. The re-establishment of the strong relationships lost after the end of communism will be polluted by the historical role given by the Russian administration to their "brothers". They were obliged to concentrate on low added value activities related to the production of supplying goods, raw materiel, and half-finished products with prices less than those on the international market. This period must be forgotten in order to be able to build scientific and economic relations based on mutual trust. At present, enterprises experimenting with cooperation with foreign partners in the sphere of innovations are very small and in a sense discouraging. The share of the
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innovative active enterprises, carrying out joint activities in setting up new technologies has dramatically dropped. For example, in the area of machines and instruments manufacturing, the proportion of these companies have been reduced from 10% in the first half, to 7% in the second half of the year 2000. The percentage of enterprises having obtained access to new technologies and participated in the exchange of technologies and licenses, is as low as 3%. In an interview of managers conducted in 2000 they expressed the opinion that the main factors in the decline of innovative activities of enterprises were financial. The problems include: deficiency of private means (71 % of enterprises), unacceptable conditions of accreditation (27%), insufficiency of investments (26%). Other important reasons preventing innovations achievements are the difficulty in obtaining credits (17%) and the lack of the necessary equipment (16%). A number of Eastern European countries such as the Czech Republic and Hungary have a new start in western technologies. Many companies of the "New Economy" and especially in the Information Technology and Internet- e-business based activities, which wish to settle in the Eastern Europe, come first to the Czech Republic, and then later penetrate other countries. For example, in May 2000 the Belgian enterprise GEVIV established two funds of venture capital for investments into small and middle enterprises in the Czech Republic and Slovakia. The Czech Republic also attracts production investments. So, Celestica (Canada), the producer of printers for computers and mobile phones is building a new manufacturing unit for 40 million US $ in Czech Republic, doubling the amount of the foreign investments engaged in this country. The market for Eastern European countries is large and it could become a real "Eldorado" for western investors. For the present it is available for the consideration of new technological investments.
SPECIALISTS SETTLE THE WHOLE MATTER The productive apparatus of the Eastern European countries need a complete renovation taking advantage of high technologies that can provide a rapid growth of productivity. A primary need is in the access to a qualified labour force. A lot of eastern economic and politic analysts consider that there are more experts than are needed, in Russia for example. But what is the concrete reality, and what does the analysis of the actual situation attest?
Management of New Technologies and Economic Re-Organization 417 In Russia, during the last ten years in particular, the state institutions dealing with research managed to keep their specialists exclusively in the sphere of energy, oil and gas extraction industry with a little exception in the machine-building industry. The direct consequence of that focus is that they lost more than 70% of the personnel in the sphere of device-building, computer assisted machine-building, machine-tool construction industry, broadcasting industry, electric and other scientific branches. People got jobs in the raw materials industry and other viable sectors based market conditions. In the machine-construction sector employment dropped from 10 million people in the early 90s to 3.9 at the beginning of 1999. Of course, the vast majority of those who remained were people at the pre-pensioned age and sometimes even older. A serious problem for Russia during that period of time was the "brain drain" for their best scientists. The first destination for these emigrants has been (and still is) the USA. Among 34 countries investigated, Russia is one of the last places intellectuals decide to emigrate to. An authorised research conducted in Switzerland by ILO in 1999 came to the following conclusion: "it is not surprising that in the conditions of economic disorder and decreasing of living standards, intellectual people in Russia are bent to emigration. In Russia there are more people eager to go abroad than in such countries as India, Philippines, Columbia, Republic of South Africa" (Economist, July 10, 1999). Today the situation is tragic, as the best specialists in high technologies leave the Eastern European countries and the former republics of USSR in great numbers. They are attracted by the considerable earnings and better work conditions and undoubtedly the perspective of career progression. The programmers of different levels from Russia, Ukraine, Byelorussia, Romania are in great demand at the enterprises all over the world. There are even companies which recruit their high qualified specialists exclusively from these counties. The consequences of this situation will probably be the following: even if in the near future the technological and the living standards of these countries will be improve, there will be no human resource to work on these new opportunities. There is another problem to tackle in the case of massive emigration of technical specialists: this is the training of a new generation of specialists or the retraining of the ones that stayed in their positions. The fact that the institutions of the CIF countries were famous with reliable teaching staff is well known, but nowadays the best specialists are old and the younger ones (because of the financial deficiency) do not compete to perfect themselves because of the poor professional opportunities they are offered. Today, the relationship of the Universities and the Enterprises are very poor and almost lost. The graduates of the above mentioned countries are taught properly
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but only theoretically due to the lack of internship possibilities in companies or in modern research institutions. In addition the development of new fields such as technology management, "e-business", etc. is lagging. These subjects have just begun to develop in the eastern European countries. Of course, it is always possible to prepare and to train required specialists in the western countries universities, but experience shows that from 10 students that have been studying in Western Europe, USA and Canada only 1 of them returns to his/her native country. What could be proposed to start solving this huge issue? There is only one way out - to bring forth acceptable work and financial conditions to the local scientists corresponding to their qualification standards and to their expectations in terms of added value.
PETRO-DOLLARS OF TODAY AND OF TOMORROW What kind of barter could be organised to generate assistance to the institutions that have the possibility to tackle this issue? One basic idea could be in looking at the specific eastern block situation dealing with raw material and oil-gas exportations. In 1999 the share of the machine-construction and machinery sector as a share of total exports has been as follows for these 4 countries: Ukraine - 8.4%, Armenia 8.2%, Russia - 6%, Tadjik Republic -0.4%. Meanwhile, the raw materials' export in the same countries is between 31%-49%. This is a unique picture. There is no such situation in any developed country with a population as big as the one in this geographic area. The proposition to create a new direct link between the raw material sector and the innovation institutions of the eastern countries to re-prime the pump of a sane economy could be accepted by the local authorities. This sector of the economy can become a sponsor for many production and science branches. Frankly speaking, the link already exists but at a very experimental level and in small dimensions. There must be a conversion of the raw materiel area, especially the oil-gas industry, into the high technological area It is important to avoid the failures of the 1970s and 1980s. During this period of time more than one hundred billion petro-dollars were invested to re launch the Russian technology research centres to have a chance to win the Reaganian Star war. Unfortunately, all the strategy and very intelligent moves did not provide the expected results, simply because in these times the choice of the military complex as the pacemaker was the wrong decision. This experience will help guide directions in the coming years if the managers accept to take in account the two main conclusions from the earlier failure.
Management of New Technologies and Economic Re-Organization 419 the choice of the right leading sector to recycle the new technologies is a major decision the financing of this technological integration can not rely on only one source, like the state, but another stakeholder has to be involved: the final consumers are also a partner with the high tech goods they buy.
DOES THE PERSON LIVING IN DIFFICULT MATERIAL CONDITIONS NEED HIGH TECH Assistance for the development of the high technologies is the consumers' purchasing power, the direct and indirect consumers of the high technologies at large. People get accustomed to living in a more comfortable environment using more technologically intensive products, working to earn money without leaving their homes and using computers and e-business devices. Of course, in the eastern Europe this behaviour has not grown as widely as in the western countries, but little by little the people are getting involved in this new urban way of life. The constant population growth with permanent increases of per person incomes could be a locomotive for the development of high technologies as well as for economic growth. The population may, at the same time, be direct and indirect consumers of the high technologies. The indirect role means, for example, the demands for assortment and quality in consumer goods and services. The increase of the consumers' demands requires new applications of high technologies to improve the performance of the offer. The development of the processing-industry's branches will back up this permanent development, and thanks to this evolution the appeal for new technology oriented solutions will grow in the same terms. In the second half of 1990 people continued to spend their earnings on traditional items: cars, food, electric machines, clothes and so on. In fact there was no growth in consumer purchasing because revenues and the offer were stable. The new western economy's lifestyle tools are the communication devices, the entertainment and leisure expenses, cable television subscription, financial operations in banks and stock exchanges, personal computers and many other items. This type of expense is considerably increasing (at 8-15% per year).This lifestyle has now been adopted by the Eastern European countries mainly for consumers' satisfaction. There is less dissemination of the new tools in industry, the networks, aircraft industry, navigation and administration systems, production of the electronic components and different auxiliary means.
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There is an opinion among politicians that the population that is engaged in growing potatoes for their survival is not interested in the high technologies. Although, by consulting the latest statistics related to the Internet use in the given region, this opinion may be changed. For example, at the end of the year 2000, 7% of the families in Poland and 10% of families in the Czech Republic had computers at home. Access to the Internet in the offices in the Czech Republic increased by 13% in 1997 and by 33% in 2000. Russia also shows surprising results in this area. The annual results of the investigations carried out by the American publication "Computer Industry Almanac", in 2001, regarding the quantity of the Internet users, shows that Russia occupies, for the first time, a place among the top 15 countries. The number of users in this country increased, according to the data, from 1.4 million users to 7.5 million at the end of 1998. This constitutes more than the five times increase of the network population in two years. Most of the Russians, according to the investigation, have no access to the Internet at home. They get access to the Internet at their schools, libraries, internetcafes or their offices. At present each tenth Russian acquires and has an experience in getting information from Internet.
CONCLUSION In the Eastern European countries the period from the years 2005 to 2015 will be characterized by a difficult task: developing the social-scientific society. This very noble global goal aims to create the foundation for stable development of the (new or old) social-oriented economy. Training high-qualified specialists in all the industrial branches and re-training specialists already in positions to be able to perform a scientific-technologic modernization of the national economy, will be the final objective of this fantastic task. This can be accomplished by creating an efficient and oriented educational system. General high education is available for all kinds of people in this part of the globe with a long and actual culture of learning for progress. Creating opportunities for raising the qualification level and awarding scientific degrees and titles to highly qualified specialists, gives a reason to characterize the future social relations as a social-scientific cooperation. Tying this with a system of innovation development appears to be the main vehicle of technological success. In other words, the social-scientific progress will be achieved on the basis of innovative activity and technological progress. Social investments shall have to rely on the complex training and raising of the specialists' qualification level and the financial security of the employees in the
Management of New Technologies and Economic Re-Organization 421 sphere of innovations, science and education. The people's prosperity growth is based on the innovative developments, the increase in production of goods and services in addition to a spoonful of technological and organizational modernization. I'd like to recall the plot of the famous novel of Jules Verne Mysterious Island. Five people left on an island found themselves with nothing, and there was no wrecked ship in the neighbourhood where they could find any first aid kit. They didn't even have lights or a pocket-knife. But there was a man, quoting the formula of F. Bacon "Knowledge is Power", engineer S. Smith. "By what activity should we begin with?" - asked the others to the engineer. "With the very beginning", answered Smith. And on the basis of his scientific and practical knowledge, the inhabitants of the desert island had built a prosper economy. There was a goal, recreating a society and there was an engineer to start the process of priming a "value creation" pump. In the particular case of the former USSR countries, they do not have to start from the very beginning as it was the situation in the Jules VERNE story. All they need is to inventory and maintain what they already have generated in terms of a scientific portfolio and social use of it, in order to build a future made of the level of progress and of the way of life all the population has been waiting for so long!
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BIBLIOGRAPHY External trade of the CIS countries. Statistical abstract (2000). Interstate statistical Committee of the CIF countries, Moscow. Andrianov, V. (2000). Potential of the economical regeneration. Economist, 10,10-16. Bezrukov, V. and Ostapovici G. (2000). On the innovative activity of the industrial enterprises,. Economist, 1, 102-111. Iancu, S. (2001). Necessary infrastructure for the innovation of the technical production. Invention an economics, 3, 56-64. Kuleshov, V. (2000). New technologies. Economist, 1, 102-111. Mihu, D. (2000). Investigation is a Cinderella. Science and technique,6,36-37. Novithkii, N. (2000). Innovative ways of economics development. Economist., 6, 344. Popovici, V. (2000). Czech Republic - top of the new technologies. Economical tribune, 33, 67-68. Popovici, V. (2000). Poland and transition to an informational society. Economical tribune, 21, 69-7.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
ORGANIZATIONAL FACTORS AND THE GENERATION OF ACADEMIC START-UPS: EVIDENCE FROM ITALY Rosa Grimaldi, Department of Management, University of Bologna, Italy' Alessandro Grandi, Department of Management, University of Bologna, Italy*'
INTRODUCTION There is much debate on the transfer of technological knowledge from academia to the market place, and on how universities can support technological and economic development of countries. Despite the controversy concerning the type and level of involvement of universities in these initiatives, it seems that there is a general consensus on the important role that they play in fostering technological development (Mansfield, 1990; Varga, 1999). Among the initiatives set up by universities to transfer technological knowledge to the market place there are university spin off companies; these are new entrepreneurial activities, generated within academic environments by a faculty member, staff member or student (Chiesa and Piccaluga, 2000; Carayannis et al., 1998). University spin-offs have been treated quite extensively in the literature and authors have mainly focused - among the factors supposed to spur the spin-off phenomenon - on the complex of external influences, including the availability of venture capital, availability of supporting services, economic climate, market and technology opportunities, industry relationships, etc. (Rogers, 1986; Dahlstrand, A.L., 1997; Doutriaux, 1987). Moreover, much of the research in science and technology policy has concentrated on examining reforms and institutional innovations that
* Rosa Grimaldi is assistant professor at the University of Bologna, Italy. Email:
[email protected] Alessandro Grandi is Professor of Management at the University of Bologna, Italy. Email:
[email protected]
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promote a culture for entrepreneurship within universities (Autio and Klofsten, 1998; Smiloretal., 1988). Little attention has been given to the process through which a business idea is generated by academics. In order to successfully commercialize the academic scientific and technological knowledge it is important to create the conditions inside universities favoring both the generation of high quality technological knowledge and its commercial exploitation. In this paper we highlight the importance of some organizational factors (team working, articulation of roles, communication and networking, commitment and will to innovate, innovative climate, market orientation, prior joint experience) for successful innovations to occur and for creating a fertile environment favoring the valorization and commercial exploitation of research results (Rothwell, 1992; Tidd et al., 1997; Allen, 1977; Roberts and Fusfeld, 1981; Roberts and Malone, 1996). Academic spin-offs do represent a particular innovation process through which innovative knowledge is first generated and then transferred to the marketplace in the form of new companies. On this ground we argue that the above-mentioned organizational factors may affect the successful commercialization of technological knowledge generated within Universities, through academic spin-offs. Our unit of analysis is represented by the academic context in which innovative technological knowledge, worth to be exploited, is generated. More precisely, we refer to organizational characteristics of academic research groups, to factors affecting the process through which academic research results are exploited. As a measure of success of newly established companies, we look at two characteristics of Business Ideas (BI), which we refer to as predictors of success: 'the BI Articulation' (referring to its broadness of details and to a clear and detailed communication of its mission/objectives) and the 'BI Market Attractiveness' (referring to its capacity of looking attractive to potential customers). We put forward two main research hypotheses on the way these two predictors are affected by some organizational characteristics of academic spin-offs founders. The empirical analyses are carried out on a database of 40 Italian academic spin-off companies. The conclusive section highlights the importance of the organizational features in the process of creating new entrepreneurial initiatives likely to succeed and outlines a few implications for future research.
ORGANIZATIONAL FACTORS SUPPORTING INNOVATIVE PROCESSES Much of the previous research has dealt with the creation and development of new organizations by academics, commonly known as the academic or technology based
Organizational Factors and the Generation of Academic Start-ups 425 spin-offs. The literature counts few works analyzing, with a micro approach, the contexts in which the entrepreneurial ideas are generated and the organizational factors which help them to take off. We refer here to the academic 'settings' in which business ideas originate. More specifically we refer to academic settings as informal structures (and therefore they cannot be defined as departments or research labs), coming out of the process of interaction among different university-related individuals. The academic settings that we refer to are made up of academics/research groups involved in both the generation and the exploitation of innovative technological knowledge. There is quite an extensive literature on factors supporting successful innovative processes in industrial contexts, e.g. the generation of advanced technological knowledge and its commercial exploitation. Part of this literature has highlighted the importance of organizational factors (Galbraith, 1973; Roberts e Fusfeld, 1981; Allen, 1977) for successful innovations to occur. We draw on this literature and apply some concepts to the specific case of academic spin-off generation process. The uncertainty and complexity involved in innovation mean that many promising inventions die before they make it to the outside world. One-way around this problem is if there is an organization that is prepared to champion its cause and to provide some energy and enthusiasm to help it to become an innovation. Innovations do not emerge in a vacuum and one important influence on success and failure is the organizational context in which they are created and implemented (Tidd et al., 1997; Rothwell, 1992). Among the main organizational factors, making for a more or less supporting context, there are: the roles played by key individuals (Roberts and Fusfeld, 1981), the way in which competencies and skills of different individuals are brought together, the extent to which people are involved and committed to innovation, the way in which information flows and communication and collaboration take place, within and outside the organization, the way the organization itself goes about learning and sharing knowledge (Tidd et al., 1997). Tidd et al. (1997) come up with a set of organizational components, which support innovation in industrial contexts and appear to be linked with success (Table 28.1).
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Table 28.1 Organisational factors supporting innovative processes Organisational Key features factors Vision and Ideas which challenge the status quo faces an uphill struggle to gain commitment to acceptance; innovation requires considerable energies and enthusiasm to overcome barriers of this kind. To do that, a strong commitment is innovation required and also to ensure that individuals with good ideas are able to progress them without having to leave the organisation to do so There are several roles which key figures can play which can help Key individuals/Art managing the complexity of the generation of a new technology. Five key roles have been identified in the literature, corresponding to iculation of critical functions: idea generator, internal entrepreneur, leader of the roles project, technological gatekeeper, sponsor Effective team Experiments indicate that groups have more to offer than individuals in terms of both fluency of idea generation and in flexibility of working solutions developed. Effective team building is a critical determinant of innovation success. Key elements include: clearly defined tasks and objectives, effective team leadership, good balance of team roles and match to individual behavioural style, diversity in background, etc. Developing mechanisms for improving clarity and frequency of Extensive communication communication are critical to innovation success, particularly when the generation of innovation requires the combination of different and Network knowledge sets which may be widely distributed across the of external organisation or may not be available in house and have to be accessed relations through external relations. Characteristic of successful innovating organisations is an orientation Market focus/Outward which is essentially open to new stimuli from outside. Developing a sense of external orientation towards major technological looking developments and ensuring that this pervades organisational thinking attitude at all levels is of considerable importance in building and maintaining an innovative organisation Building a creative climate involves systematic development of Creative appropriate organisational structures, communication policies and climate/ Entrepreneurial procedures, reward and recognition systems, training policy, etc. In an organisation with a supportive and innovative culture, individuals with culture bright ideas can progress them with support and encouragement from the system Source: adapted from Tidd et al. (1997)
ORGANIZATIONAL CHARACTERISTICS OF RESEARCH GROUPS AND THE SUCCESS OF BUSINESS IDEAS The literature briefly reviewed in the previous section has highlighted the importance of several organizational factors for successful innovations to occur in industrial contexts. Drawing on these contributions, we assume these factors to be relevant also
Organizational Factors and the Generation of Academic Start-ups 427 for successfully commercializing scientific and technological knowledge through academic spin-offs. The literature on newly established companies has highlighted the difficulties related to measuring success of new ventures. For newly established companies or for those that are likely to start up it is not possible to use the indicators, which are traditionally used to measure the success of already existing companies, as there is no data or information to work out such indicators. It is common in the literature concerning the criteria used by venture capitalists for their investment decisions in new ventures to address characteristics of the market, the external environment, the technology, the business, the founding team as 'predictors of success' (Stuart and Abetti, 1987; Roure and Keeley, 1990; Roure and Maidique, 1986; MacMillan et al., 1985; Meseri and Maital, 2001). Drawing on these contributions in this paper we use some characteristics of Business Ideas as 'predictors of success'. Two such predictors have been worked out: a) Business Idea Market Attractiveness; b) Business Idea Articulation. The BI Market Attractiveness (Hall and Hofer, 1993) refers to the capacity of the BI of looking attractive to potential customers, either because it satisfies the requirements of an already existing market demand, or because has the potentials of creating a new one (Hills, 1984; Van de Ven et al., 1984). MacMillan et al. (1987) report the degree of market acceptance of the new product/service, the capacity of the new business to create a new market, to stimulate an existing one, and to target markets with significant growth rates' among the criteria used by venture capitalists in New York metropolitan areas to identify more promising businesses. Meseri and Maital (2001) found that one of the criteria used by venture capitalists to assess the potentials of projects is 'demonstrated market demand and the ability to penetrate that market'. The literature suggests that Business Ideas with these characteristics look promising to potential investors too, and therefore have greater possibilities of attracting founding in the start-up phase, and, again, are more likely to succeed (Roberts, 1991). The BI Articulation refers to the degree of details of the Business Idea and to the extent to which it communicates effectively its mission and objectives (Van de Ven et al., 1984; Lumpkin, et al., 1998; Frederickson and Mitchell, 1984). It also refers to the generation of a well defined, broad and detailed planning highlighting from the very beginning the main features of the new entrepreneurial initiative. Several empirical evidence seem to suggest that the broadness of detail of the new businesses has a positive influence on the success of newly established companies (Bracker et al., 1988; Sahlman, 1997) and that the lack of planning or poor planning can lead to firm failure. Roure and Keeley (1990) suggest that newly established companies need broad and well-defined plans, since they grow rapidly and they have to communicate within and outside their organizations their missions in an effective
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way. Meseri and Maital (2001) found that one of the criteria that venture capitalists were looking at while making their investments decisions was 'clearly defined project goals'. Having identified these two 'successful' characteristics of business ideas, we will turn now to the organizational characteristics of academic research groups which are likely to affect them. Market orientation/focus of the research group is a critical factor, since in many cases determinants of innovative processes (stimuli, technological opportunities, etc.) may come from the demand-side (Schmookler, 1966; Rothwell, 1992). Rothwell (1992) among the critical factors for successful industrial innovation highlights 'strong market orientation', e.g., emphasis on satisfying user needs, efficient customer linkages, where possible, involving potential users in the development process. Also when major stimuli to new venture creation do not come from the market, but from the availability of scientific and technological knowledge with strong market potentials, it is important, nevertheless, to verify that the new business has the potential to be attractive to potential customers (Roberts, 1991, Tidd et al., 1997). Developing an outward looking attitude towards major technological developments and ensuring that this pervades organizational thinking at all levels is of considerable importance for successful innovations to occur (Rothwell, 1992; Von Hippel, 1977). Tidd et al. (1997) argue that developing a sense of external orientation and the tendency to interact with the market place are key characteristics for entrepreneurial teams, enabling them to build and maintain a successful innovative organization. It makes sense to think that, through this outward looking attitude, the research group of origin becomes acquainted with market' s requirements, and that such market knowledge is then transferred into their research activities, and, in the specific case of academic spin-offs, in characteristics of business ideas. Market orientation provides information about the tendency of research groups to interact with potential industrial partners. We argue that also the frequency of interactions with external agents contribute to a better understanding of market's requirements, which is reflected in the business idea. Hansen (1995) argues, on the basis of the existing literature, that the frequency of communication linkage use is expected to be positively related to new-venture initial growth. In a closely related field, the literature on innovation processes finds that the intensity of interactions is critical to innovation success (Tidd et al., 1997; Allen, 1977). The frequency of interaction is particularly important in the first phases of an innovative process, when much problem solving depends on combining different knowledge sets which may be widely distributed across external institutions. In the specific case of companies set up by academics we argue that a high frequency of interaction with external partners (firms, other non-academic research institutions, agencies for technology transfer) enables clear and regular communication, a better understanding of market needs,
Organizational Factors and the Generation of Academic Start-ups 429 providing inputs for shared problem solving and for developing technological knowledge which can potentially satisfy demand expectations and meet market requirements. On this ground we formulate the first research hypothesis: HP1: The Market Attractiveness of the BI at the time of founding is positively influenced by the market orientation of the academic founders and by their frequency of interaction with external agents. Conventional wisdom appears to take it for granted that firm performance is positively affected by a clear communication/definition of the firm's mission. The degree of articulation of Bis may be positively affected by the heterogeneity of roles and personal characteristics within the founding teams (Sahlman, 1997). The BI is the output of a process in which different actors interact among themselves. It is reasonable to think that BI characteristics/attributes will be influenced by the ability of research groups to interact and to articulate different bits of knowledge and different competencies into a single output, e.g., the BI. In relation to this, the complexity of the process of generation of a BI suggests the importance of articulation of roles/functions within the research group (Tidd et al, 1997; Rothwell 1992; Roberts and Fusfeld, 1981). The literature has stressed the importance of organizational structures based on differentiated roles for successful innovation to occur (Allen, 1977; Rothwell, 1992; Roberts and Fusfeld, 1981; Tidd et al., 1997; Galbraith, 1982). We refer to Roberts and Fusfeld's (1981) structure of roles. They identify five key roles, corresponding to the functions of the informal organization: idea generator, internal entrepreneur, project leader, technological gatekeeper and project sponsor. Each role deals with activities or phases within the innovation process that are specific and differentiated in terms of the competencies and personal characteristics required. The heterogeneity of personal characteristics, prior experience, background, which is at the basis of role articulation, makes it easier to cope with the difficulties that typify a new venture generation process. It also prompts the team members to develop a positive attitude to interaction among themselves, given the natural need to complement one other. This positive attitude towards interaction (exchange of knowledge-based experiences, expertise, etc.) becomes a peculiarity of the founding team members, reflected in their attitude to the integration of their competencies with those of other individuals, both internal and external to the organization. We argue that the articulation of roles among different partners leads to a better articulation of the BI, e.g., a clearer definition/communication of its objectives. We argue that the degree of prior joint experience of the academic spin-offs founders also has a positive effect on BI planning breadth. If founders have been
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working together, they are used to dealing with different aspects of the same problem and to sharing and integrating their different jobs, and perhaps knowledge bases, into a final outcome/product. In this case persons interactions are generally positive and result in greater trust, self-disclosure, and commitment between them (Rusbult and Van Lange, 1996). Frances and Sandberg (2000) argue that knowledge of the other person (teams' experiences with one another) increases the predictability of his action, self-disclosure, mutual trust, increases expected interaction and cooperation, effective organizational interfacing and good team-spirit and communication. Familiarity with one another fosters a safe environment, which facilitates the generation of alternative views and promotes understanding, more effective decision-making processes, thus resulting in higher quality decisions. It also entails quicker readiness to exploit the perceived opportunity and improved access to resources, both managerial and financial. Roure and Maidique (1986) in their analysis of eight case studies of success and failure found that one of the characteristic affecting the success of technological start-up was the 'degree of prior joint experience'. Joint past experience is supposed to provide team members with the ability to find a good matching between projects' requirements and the behavioral preferences of the individuals involved (Tidd et al., 1997). From an organizational point of view all these factors have a bearing on the successful definition and development of projects. We claim that the degree of BI articulation does not depend primarily on the availability of different knowledge bases and competencies in the team of founders (competencies not available in-house can always be obtained through external sources); what is important is the attitude, the tendency of the founders to articulate different bits of information, knowledge and competencies - on the basis of attitudes and behavioral preferences of the individuals involved - into a unique and well articulated BI. On this ground we formulate the second research hypothesis: HP2: The BI articulation at the time of founding is positively affected by the degree of prior joint experience and by the articulation of roles within the academic founding team.
THE EMPIRICAL ANALYSIS We studied a sample of 40 Italian academic spin-off companies. The majority of the companies were founded over the last two years. The average company size is rather small; we have in fact no significant data on turnover (since some companies have just been founded and most of them were founded in the last two years), but we have been able to infer the companies' small size from the employee numbers, given that
Organizational Factors and the Generation of Academic Start-ups 431 84% of the companies in the sample have no employees at all, and the only people working for them are their owners. The main industries involved are: electronics (30%), mechanics (7%), software (11%) and Internet (18.7%). 23% of companies sell products, 43% sell services and 34% are involved in both products and services. The majority of companies are located in the north of Italy (87%), with few companies in the south (10%) and even fewer in the center (3%). We carried out face-to-face structured interviews with - on average - two academic founders from each spin-off company in the sample. Interviews lasted about 80 minutes on average and in some cases were supplemented by written materials provided by the companies. We used a questionnaire as a grid to interview academic spin-off founders. During the interviews, the entrepreneurs felt at ease in answering and in recalling such events. They answered without hesitation, which suggests that their knowledge was complete enough to respond accurately. The variables that we account for in our empirical analysis refer to characteristics of the research groups of origin and relate to the three years previous to the spin-off establishment. Table 2. provides information about the items that we accounted for in order to build up multi-items variables. Items were reduced to single variables through Factor Analysis. The majority of variables used in our empirical analysis are composite measurements, combining multiple items; answers for all items are given on a Likert scale ( 1 - ^ 5). We found such scales - widely used to measure attitudes, opinions, personalities and descriptions of people's lives, intentions and behaviors (Spector, 1992) - suitable for measuring characteristics of the research groups of origin. The existing theoretical and empirical literature on entrepreneurship and new venture creation has provided useful indications on how to transform our theoretical constructs into measurable variables. Previous studies have made extensive usage of self-reported data, relying on respondents' perceptions to describe individuals' characteristics (Watson et al., 1995; Duchesneau and Gartner, 1990; Stuart and Abetti, 1987).
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Variables Meaning and measurement of variables BI Articulation The variable refers to the broadness of details of the BI with regards (BIART) to: I) Broadness of details of planning; II) BI far-sightedness; III) Strategic analysis of different scenarios. The variable refers to the extent to which the new product/service is BI Market attractiveness likely to be attractive to potential customers; it is made up of the following four items; I) the BI targets a market enjoying a significant (BIMKT) growth rate; II) the BI will stimulate an existing demand; III) the BI introduces new benefits to customers (will create a new market); IV) the BI anticipates future technological trends. This is a single item variable and relates to the extent to which team Roles articulation founders structure of roles fits in the five key informal roles described (ROAR) by Roberts and Fusfeld. The variable refers to the number of prior joint experiences the Joint Experience members of the founding team have been sharing before founding the (PJEXP) new venture. It is made up of a single item. The variable refers to the extent to which the research group of origin Market orientation of is open to stimuli from the outside. It is made up of four items, the research referred to activities carried out by the research group of origin: I) Consulting; II) Collaborative research with industrial partners; III) group Technology transfer; IV) Patenting. (MKO) Frequency of The variable refers to the frequency of interaction of the research interactions group with: I) Firms; II) Research institutes; III) Institutions for with external technological transfer of research results; IV) Public organisations; agents (INTEXT) Table 28.2: Variables used in the study The validation of hypotheses has been done through regression analysis. Ordinary Least Squares has been used to estimate the parameters of the equations. Before running regression analyses, we computed the Cronbach alpha for multiple item scale constructions, as a measure of internal consistency of variables (correlation among items). For a statistical testing of our hypothesized factor structure, to verify that items were measuring the same construct, we ran a Confirmatory Factor Analysis. Items have been collapsed to a single variable through Factor Analysis for all composite measurements, with the exception of the variable 'Frequency of interaction with external agents', which items have been collapsed into a single variable through the arithmetic averaging of answers (we were interested in the additive effect of the items representing frequencies of interaction with different external agents, rather than in correlations among them).
Organizational Factors and the Generation of Academic Start-ups 433 Results relating to the reliability analysis (Cronbach alpha) proved to be amply acceptable. Confirmatory Factor Analysis provided confirmation of all the variable groupings (results in Table 28.3).
Table 28.3: Characteristics measurements
Variables
Number Reliability Barlett test of items (Cronbach a) 3 12.4b 0.73 0.65 4 17.79b 0.83 4 41.93a
BI Articulation BI Market Attractiveness Market orientation of the research group a Significance < 0.01 level; b Significance < 0.05 level
KMO 0.66 0.62 0.71
We ran bivariate correlation analysis to detect the interrelationships among the independent and dependent variables. The analysis showed that the two dependent variables are unrelated to one another. It also showed that the independent variables of hypothesis 1 have a correlation of 0.45. It makes sense to think that the market orientation of the research group of origin has an impact (or vice versa) on the frequency of interaction with external agents. Yet, the correlation between these two variables is below the threshold commonly used to detect multicollinearity problems (Berry and Feldman, 1985). The regression results shown in Table 28.4 are significant. We have good values of adjusted R for both regressions.
Table 28.4: Regression results
Dependent variables Regression 1 Regression 2 BIMKT BIART — ,281b MKO — .670a INTEXT — ROAR .369a — PJEXP .196b .32 Adjusted R2 .36 12.09a 9.88a F-test a Significant < 0.01 level; b Significant < 0.05 level; Independent variables
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CONCLUSIONS This research draws attention to the way factors emerging in the early stages of academic spin-off life cycles can affect some 'success' characteristics of innovative business ideas, and, hence, can help predicting the future performance of new ventures. The empirical findings prove the adequacy of the research hypotheses and, more generally, that of the theoretical framework. Among the characteristics of the research group of origin, we believe that particular attention should be devoted to academics' market orientation. In the case of Italian university spin-offs, quite a conservative attitude towards fundamental or theoretical research inside universities seems to prevent academics from transferring research results to the marketplace and from taking an active role in entrepreneurial initiatives. We believe that a more 'outward looking' attitude on the part of universities could: a) reduce the internal barriers that 'would-be entrepreneurs' have to face to start up their entrepreneurial initiatives; b) set up the conditions within universities to leverage research and technology towards the commercialization of research results. Our results show that BI attractiveness is also influenced by the frequency of interaction with external agents. It seems reasonable to think that research groups characterized by a high frequency of interaction with external agents are more likely to involve end-users in the development of their innovations, to account for demand needs in their researchers and hence to come up with business ideas attractive from the demand side point of view. Results of the second regression suggest that a good mix of individuals, used to working together, with complementary personal attitudes (articulation of roles) and with prior joint experience, increases the likelihood of having a BI well defined and with clear objectives. These considerations suggest that much attention should be paid to the way that teams arc composed and to how they are built up. Combining individuals with different attitudes creates variety and, at the same time, helps by attributing specific tasks on the basis of personal attitudes, which in turn increases the tendency towards interaction and communication inside the founding team. However, the availability of different roles within a group opens up a new, worth exploring perspective: to what extent can the ability of group members to interchange roles over time positively affect the success of entrepreneurial initiatives both at start-up and in more advanced phases of companies growth? To what extent the capacity to interchange roles increases the groups' capacity to cope with the uncertainty characterizing initial phases of a new business development? We shall explore further these issues in future research.
Organizational Factors and the Generation of Academic Start-ups 435 Our final comment has to do with the variable 'prior joint experience'. Our findings support the hypothesis that it positively influences the Bl articulation. This might be true only in the initial phases of start-up (founding time), when familiarity among founders does reduce conflicts during the BI definition and foster the rapid achievement of agreements for the BI approval. However in more-advanced steps (BI growth) familiarity among founders might be counterproductive mainly because of two reasons: a) lack of creativity and new ideas brought in by new entrants (individuals not familiar with the research group); b) familiarity among members might prevent the group to accept both the emergence of the new roles and the fact that roles might interchange over time. This, for instance, would make the group reluctant towards innovative ideas coming from individuals who traditionally had never covered up the role of 'idea generators'. We have a final remark on the typology of data elaborated. We will extend our analysis to other variables in order to account for the influence of different aspects of the factors mentioned on the BI 'success' characteristics. Finally, the study suffers from all the shortcomings of analyses based on self-reported qualitative data. We intend to gather more quantitative data, and to identify some reliable measurements of success for new ventures, in order to analyze the effects of organizational factors on the real performance of companies in different phases of their growth.
REFERENCES Allen, T. (1977). Managing the Flow of Technology. Cambridge, Mass: MIT Press. Autio, E. and Klofsten, M. (1998). A Comparative Study of Two European Business Incubators. Journal of Small Business Management, 36 (1), 30-43. Banting, P.M. (1978). Unsuccessful Innovation in the Industrial Market. Journal of Marketing, 42(1), 99-110. Braker, J.S., Keats, B.N. and Pearson, P.N. (1988). Planning and Financial Performance Among Small Firms in AG. Strategic Management Journal, 9 (6), 591-604. Carayannis, E.G., E.M. Rogers, K. Kurihara, and M.M. Allbritton (1998). High Technology Spin-offs from Government RD Laboratories and Research Institutes. Technovation 18 (1), 1-10. Chiesa, V. and A. Piccaluga (2000). Exploitation and Diffusion of Public Research: the Case of Academic Spin-off Companies in Italy. R&D Management 30 (4), 329-340. Dahlstrand, A.L. (1997). Growth and Inventiveness in Technology-based Spin-offs Firms. Research Policy, 26, 331-344.
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Doutriaux, J. (1987). Growth Pattern of Academic Entrepreneurial Firms. Journal of Business Venturing, 2, 285-297. Frances, D.H. and Sandberg, W.R. (2000). Friendship within entrepreneurial teams and its association with team and venture performance. Entrepreneurship Theory and Practice, 25, 2, pp. 5-25. Frederickson, J.W. and Michell, T.R. (1984). Strategic Decision Processes: Comprehensiveness and Performance in an Industry with an Unstable Environment. Academy of Management Journal, 27, 399-423. Galbraith, J.R. (1973). Designing Complex Organisations. Reading, MA: AddisonWesley. Hall, J. and Hofer, C. W. (1993). Venture Capitalists' Decision Criteria in New Venture Evaluation. Journal of Business Venturing, 8, 25-42 Hansen, E.L. (1995). Entrepreneurial networks and new organisation growth. Entrepreneurship Theory and Practice, 19 (4), pp. 7-10. Hills, G.E. (1984). Market Analysis and Marketing in New Ventures: Venture Capitalists' Perceptions. Frontier of Entrepreneurship Research, Wellesley, MA: Bab son College. Lumkpin, G.T., Shrader, R.C. and Hills, G.E. (1998). Does Formal Business Planning Enhance the Performance of new Ventures?. Frontiers of Entrepreneurship Research, 43-54. Wellesley, MA: Babson College. MacMillan, I.C., Zemann, L. and SubbaNarasimha, P.N. (1987). Criteria Distinguishing Successful from Unsuccessful Ventures in the Venture Screening Process. Journal of Business Venturing, 2 (2), 123-137. Mansfield, E. (1991). Academic research and industrial innovation. Research Policy, 20, 1-12. Meseri, O. and S. Maital (2001). A Survey Analysis of University Technology Transfer in Israel: Evaluation of Projects and Determinants of Success. Journal of Technology Transfer, 26, 115- 126. Roberts, E. B. and Malone, D.E. (1996). Policies and Structures for Spinning off New Companies from Research and Development Organisation. R&D Management, 26 (1), 17- 48. Roberts, E.B. (1991). Entrepreneurs in high technology. Oxford University Press. Roberts, E.B. and A. R. Fusfeld (1981). Staffing the Innovative Technology Based Organisation. Sloan Management Review, spring, 19-34. Robinson, R. B. and Pearce, J.A.II. (1983). The Impact of Formalised Strategic Planning on Financial Performance in Small Organisations. Strategic Management Journal, 4 (3), 197-207. Rogers E.M. (1986). The Role of the Research University in the Spin-off of High Technology Companies. Technovation, 4, 169-181.
Organizational Factors and the Generation of Academic Start-ups 437 Rothwell, R. (1992). Successful Industrial Innovation: Critical Factors for the 1990s, R&D Management 22 (3), 221-239. Roure, J.B. and Maidique, M.A. (1986). Linking Pre-founding Factors and High Technology Venture Success. Journal of Business Venturing, 1, 295-306. Roure, J.B. and Keeley, R.H. (1990). Predictors of Success in New Technology Based Ventures. Journal of Business Venturing, 5, 201-220. Rusbult, C.E and Van Lange, P.A.M. (1996). Interdependence processes, in E.T. Higgins and A.W. Kruglanski (eds.), Social Psychology: handbook of basic principles, pp.564-595. New York: Guilford Press. Sahlman, W.A. (1997). How to Write a Great Business Plan. Harvard Business Review, 75(4), 98-108. Schmookler, J. (1966). Invention and Economic Growth. Cambridge, Harvard University Press. Segal, N.S. (1986). Universities and Technological Entrepreneurship in Britain: Some Implications of the Cambridge Phenomenon. Technovation, 4, 189-204. Smilor, R.W., D.V. Gibson and G.B. Dietrich (1990). University Spin-out Companies: Technology Start-ups from UT-Austin. Journal of Business Venturing, 5, 63-76. Spector, P.E. (1992). Summated rating scale construction, Sage Publications. Stuart, R. and Abetti, P. A. (1987). Start-up Ventures: towards the Prediction of Initial Success. Journal of Business Venturing, 2, 215-230. Tidd, J., J. Bessant and K. Pavitt (1997). Managing Innovation:
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Technological Market and Organisational Change. England: Wiley. Van de Ven, A.H., Hudson, R. and Schroeder, D.M. (1984). Designing New Business Start-ups: Entrepreneurial, Organisational and Ecological Considerations. Journal of Management, 10, 87-107. Varga, A. (1999). University Research and Regional Innovation. A Spatial Econometric Analysis of Academic Technology Transfers. London, Kluwer Academic Publishers. Von Hippel, E. (1988). The Sources of Innovation', Oxford University Press, New York. Watson, W. E., L. D. Ponthieu and J.W. Critelli (1995). Team Interpersonal Process Effectiveness in Venture Partnerships and its Connections to Perceived Success. Journal of Business Venturing, 10 (5), 393-412.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
KNOWLEDGE STOCKS AND SUSTAINABLE COMPETITIVE ADVANTAGE: THE CASE OF THE METALLURGIC SECTOR IN SPAIN* Patricia Ordonez, de Pablos, The University ofOviedo, Spain*
INTRODUCTION Researchers know that human resources can contribute to the creation of a sustained competitive advantage in the firm. They are key knowledge-based resources. But are there other key knowledge-based resources in the firm that also contribute to the creation of a sustained competitive advantage? How are these resources -both human resources and other knowledge-based resources- created or acquired, extended, deployed and renewed? Do human resource management systems have a saying in all this process? To answer these and more research questions, this paper is structured into three major sections. First section provides a conceptual framework for gaining understanding about the "black blox" of the firm. After a concise review of literature on strategy, human resource management and knowledge stocks, we attempt to close the gap between human resource management systems and organizational performance. Second, we present the empirical study carried out in the metallurgic sector of the Spanish manufacturing industry during the period 1995-1999 to test the research hypothesis of the conceptual framework proposed. Finally we summarize major results and implications for management as well as we lay avenues for further research.
* This working paper is based on theory and partial data from a major research under progress that analyzes intellectual capital, human resource management systems and organizational performance in the Spanish manufacturing industry. This major research constitutes my doctoral dissertation. " Patricia Ordonez de Pablos is Professor of Business Administration in the Faculty of Economics at the University of Oviedo, located in Oviedo (Asturias), Spain. Email:
[email protected]
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KNOWLEDGE-BASED RESOURCES AND COMPETITIVE ADVANTAGE Resource and capability theory of the firm In the early 8 0 s , the Resource and Capability Theory of the Firm emerged. This theory analizes two major topics: on the one hand, which resources create a competitive advantage and on the other, diversification issues. Let's focus on the first stream of research in the resource and capabilities theory of the firm: the strategic resources. A competitive advantage happens, as Barney (1991) suggests, when "a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors" (p. 102). However, the final goal of a firm is not just a competitive advantage but also a sustained competitive advantage that exists only when other firms are not able to duplicate the benefits of a competitive advantage (Lippman and Rumelt, 1982). This sustained competitive advantage comes from resources that are valuable, scarce, non imitable and without substitutes, that is, strategic resources. Thus the competitive success of an organizational strategy depends on its strategic resources, especially on intangible resources, as well as the dynamics of these intangible resources. Literature suggests interactions between resources and strategy. An organizational strategy determines the view of the firm on its activities as well as indicates how to achieve the necessary coordination to deal with the environment. Although interesting proposals come from the resource and capability theory of the firm, however, the theory does not explain what happens inside the "black box" of the firms. It does not address how these strategic resources are created or acquired, nurtured, deployed and renewed. So in order to build a holistic model that explains how firms build their strategic resources and how these resources impact on organizational performance variables it is necessary to turn to the literature of strategic human resource management. The black box of the firm: Challenges for research
In the literature on Strategic Human Resource Management (HRM) we find a gap explaining how human resource management systems contribute to the creation of a sustained competitive advantage. Several studies find a positive relation between certain human resource management practices or policies and organizational performance. However, literature and empirical evidence alike does not explain or
Knowledge Stocks and Sustainable Competitive Advantage
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provide sounding evidence about what happens in the black box between HRM variables and organizational performance.
Fig. 29.1: The black box of the firm: Some insights
On the other hand, literature on Resource and Capabilities Theory of the Firm and Intellectual Capital alike state that strategic knowledge-based resources contribute to the creation of a sustained competitive advantage. However these views do not explain how these strategic resources are created, deployed and renewed. Linking both streams of research, it is possible to close the gap and explain how human resource management systems contribute to the creation of a sustained competitive advantage using the design of specific human resource management policies to build strategic resources. In this sense, human resource management systems play a key role in the building of human capital. Through the use of combinations of human resource management practices, firms can build their human capital (Ordonez de Pablos, forthcoming). The idea that human resources can be a source of competitive advantage is not new. Human resources meet the criteria proposed by the resource and capability theory of the firm to qualify as a source of competitive advantage: they are valuable, rare, non imitable and without substitutes (Barney, 1991). The resource and capacities theory of the firm suggests that human resources management systems can contribute to sustained competitive advantage through facilitating the development of resources that are firm specific, produce complex social relationships, are embedded in a firm's history and culture and generate tacit knowledge (Wright and McMahan, 1992). As these authors put it "human resources are perhaps unique in their ability to give rise to and to be influenced by unique historical conditions, causal ambiguity and social complexity (p. 309). Given the current recognition among strategic management researchers and practitioners that sustained competitive advantage arises more from a firm's internal resource endowments and deployments that are imperfectly imitable than from the firm's product-market position, an examination of the role that the HR system plays in facilitating or stifling the development of such organizational competencies is warranted (Lado and Wilson, 1994: 700). However firms may also get human capital through the externalization of employment by outsourcing certain functions to
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market-based agents (Rousseau, 1995). Some theorists have advocated the benefits of internal development of skills, capabilities and knowledge whereas others have advocated externalization. Despite the benefits, each employment mode has its own set of costs. Although time and competition tend to erode the strategic position of human capital, firms maybe able to counteract these natural forces (Lepak and Snell, 1999). The resource-based view of the firm suggest that firms can avoid the decay of human capital by striving to make knowledge, skills and capabilities more valuable and/or unique. As Lepak and Snell (1999) state "to make the deployment and value of human capital more specific, managers logically may try to enhance the uniqueness of human capital by customizing or adjusting skills [...] managers may use HR investments to increase the uniqueness of human capital so they might strive to make human capital more valuable (p. 43-44). One way to get this specific human capital is through an external human resource management system.
Knowledge stocks in the firm A stream of research that analyzes knowledge stocks in the firm is the intellectual capital field. The intellectual capital literature was born in the mid 90's. It is a relatively new field where much work needs to be done even at theoretical level. Basically this field addresses how to measure intellectual capital and how to report the results of these measurements. One of the first steps towards the advance of the field is the homogenization of concepts. After much debate and controversy, it can be said that intellectual capital represents a bundle of strategic knowledge-based resources that although they contribute to the creation of a long term competitive advantage they do not appear in the financial statements of the firm. For a better analysis of intellectual capital, we need to identify which constructs integrate this resource. Most authors accept that intellectual capital comprises three major constructs: human capital, relational capital and structural capital. Human capital represents the knowledge, skills, capabilities, experience and commitment of the employees of the firm, that is, knowledge stocks at individual level. Relational capital is the knowledge embedded in firm's relations both with its employees and third parties, like current and potential customers, suppliers, shareholders, local and national administrations, environment and other agents, that is,
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knowledge at group level. Finally, structural capital represents knowledge embedded in organizational structures like organizational culture, systems, policies and routines, that ism knowledge at organizational level (Ordonez de Pablos, 2001). Summarizing, human capital, relational capital and structural capital represent strategic knowledge stocks that can contribute to the creation of a long-term competitive advantage. Thus we propose the following research hypothesis:
If these knowledge stocks are strategic, then firms must clearly commit themselves to the creation, development, deployment, renewal and protection of these resources in order to achieve a long-term competitive advantage.
EMPIRICAL RESEARCH Methodology and data collection Here we present the case of the metallurgic sector in Spain1. It forms part of a major research under process that encompasses the whole Spanish manufacturing industry during the period 1995-1999. The survey questionnaire -developed by the author of this paper- was designed in an easy to read booklet format with contained questions covering different areas human resource management, knowledge stocks, and organizational performance. Many of the TDM (total design method) recommendations suggested by Dillman (1978) were adopted. The questionnaire was accompanied by a covering letter where the purpose of the survey was fully explained. It administered to 2,136 Spanish industrial firms in 1999. Finally, we received 130 valid survey questionnaires.
1 This working paper presents the case of the metallurgic sector in Spain. As stated before, the paper derives from a major research under progress that covers the whole manufacturing industry in Spain during the period 1995-1999 and it forms part of my doctoral dissertation
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Patricia Ordonez de Pablos UNIVERSE GEOGRAPHIC FIELD DATA COLLECTION METHOD SAMPLE UNIT POPULATION CENSUS SAMPLE SIZE SAMPLE ERROR
1-irms with 100 or more employees from the Spanish manufacturing industry National Postal survey Human resources directors, knowledge Management directors and managing directors. 2.136 123 8.33*
CONFIDENCE LKVEL
9 5 * Z= 1.96 p=q=0.5
SAMPLE PROCEDURE
The survey questionnaire was sent to the total firm census Survey questionnaires were sent late May and early June 2000
TIME OF DATA COLLECTION September 2000.
Table 29.1: Technical data of the global study As stated above, the model and hypothesis tested here are just focused on the Spanish metallurgic sector - a sub-sector of the Spanish manufacturing industry- with a total of 45 firms. Independent and Dependent Variables We built a causal model to explain the relations among key variables. The model presented in this paper -which simultaneously analyzes how a particular human resource management system influence the acquisition of knowledge stocks at individual level and how strategic knowledge stocks have an impact on organizational performance- integrates three major blocks of variables: human resource management variables, knowledge stock variables and organizational performance variables. The external human resource management system was measured with human resource variables suggested by Balkin and Gomez-Mejia (1990), Peck (1994), and Snell and Dean (1992). Knowledge stock variables were built following the empirical works of Bontis (1998), Bontis et al., (2000) and Ordonez de Pablos (2001). Organizational performance was measured as sales growth. Hypotheses The aim of this sub-model is to investigate two major issues in the metallurgic sector in the Spanish manufacturing industry during the period 1995-1999. Firstly, we examine the impact of a certain human resource management system on the acquisition, development and deployment of knowledge stocks at individual level (human capital). And secondly, the influence of knowledge stocks at different levels on organizational performance is analyzed.
Knowledge Stocks and Sustainable Competitive Advantage The following hypothesis are tested:
Figure 29.2 summarizes the hypotheses of our model. Paths between constructs are expected to be positive in all cases.
Fig. 29.2: Human resource system-knowledge-based resources -organizational performance in metallurgic firms in Spain
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Methodology The best-known causal modeling technique is LISREL. However, LISREL is poorly suited to deal with small data samples. In order to avoid some limitations exhibited by LISREL, an alternative causal modeling technique was developed. It is called Partial Least Squares (PLS). In contrast with LISREL-type models, strategic management research presents a low familiarity with PLS-type models (Chin, 1998; Chin and Newsted, 1999; Fornell and Larcker, 1981, 1982).
RESULTS A structural equation modeling technique called partial least squares (PLS) was used to test our model. In this study on the metallurgic sector in Spain during the period 1995-1999, the sample size of 45 respondents is high enough for PLS. As Hulland (1999) states, one of the key benefits of using PLS is that it may work with smaller samples, In general, the most complex regression will involve: a) the indicators on the most complex formative construct or b) the largest number of antecedent constructs leading to an endogenous construct Sample size requirements become at least ten times the number of predictors from a) or b), whichever is greater. Our data meet the external and internal validity criteria. Constructs and indicators clearly satisfy this condition as well as convergent and divergent validity. Table 29.2 presents path coefficients, t-statistics and predicted sign for each path included in the human resource management system-knowledge-based resources -organizational performance model, which was tested in the Spanish metallurgic sector.
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Predicted sign
Path coefficient
t-stat
HI: External HRMS -> Knowledge at individual level
+
0,273
2,921**
H2: Knowledge at individual levels Organizational performance
+
0,316
1,6796
H3: Knowledge at group level -> Organizational performance
+
0,199
1,7909
H4: Knowledge at organizational level -> Organizational performance
+
0,450
3,0887***
Hypotheses and paths
*p<0,l **p<0,05 ***p<0,01 Table 29. 2: Path coefficients for the nietatlurgic sector in Spain
•
HI tested the relationship between an external human resource management system and knowledge at individual level (human capital). The results show a positive, substantive and significant path coefficient of 0,273 (p<0,05).
•
H2 tested the relationship between knowledge stocks at individual level and organizational performance. The results show a positive but not significant path coefficient of 0,316.
•
H3 tested the relationship between knowledge stocks at group level and organizational performance. Its coefficient path has a value of 0,199 and it is positive but not significant (p<0,01).
•
H4 tested the relationship between knowledge stocks at organizational level and organizational performance. The results show a positive and significant path coefficient of 0,450 (p<0,01).
DISCUSSION
Let's address the discussion of the results considering two sets of hypothesis. The first set of hypothesis deals with the direct relationship between a particular human resource management practice system and knowledge stocks at individual level.
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An external human resource management system -or buy system- is focused on the acquisition of human capital (knowledge stocks at individual level) from the labor market. As Tsui et al., (1995) state, a buy system may provide organizations with more discretion in both the number and types of workers used and allow them to access to innovations while focusing critical resources on the development of core capabilities (Lepak, 1999). We found a positive and significant relation between the external HRM system and the acquisition of human capital. Additionally firms may also try to increase their human pool with an internal human resource management system -also called make system. This HRM system allows to build human capital tailored for firm's specific needs as well as it helps developing employees with idiosyncratic knowledge, which is the root for building a sustainable competitive advantage. The firm may also try to use a mix of buy and make systems depending on the specific type of human capital it wish to manage. The second set encompasses the link between knowledge stocks (intellectual capital) and organizational resources. In particular, it addresses the relationship between particular constructs of intellectual capital and organizational performance. Only one of the hypothesis linking intellectual capital constructs with organizational performance is accepted. Structural capital has a positive and significant relationship with organizational performance. Human capital and relational capital although they show a positive relationship with organizational performance it is not significant. Linking intellectual capital and organizational learning literature, we propose an explanation of how human capital converts into structural capital. Human capital represents knowledge at individual level. This knowledge is the start point of Nonaka and Takeuchi's (1995) spiral of knowledge creation. Through the interaction of tacit and explicit knowledge, four knowledge conversion processes are developed: socialization, externalization, combination and internalization. This spiral moves from individual level towards organizational or inter-organizational level, finalizing the first knowledge creation spiral by generating embedded knowledge, that is to say, structural knowledge. A similar process is described by the 41 framework proposed by Crossan et al., (1999). They conceive of organizational learning as a dynamic process of strategy renewal occurring across three levels of the organization: individual, group and organizational. These authors propose a 41 framework focused on the relationships between the three levels of learning and two learning flows. At individual level, the intuiting process takes place. At group level, the interpreting and integrating processes are developed. Finally, the institutionalizing process is the last stage in the organizational learning process.
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CONCLUSIONS AND IMPLICATIONS FOR MANAGEMENT Here we present major conclusions and strategic implications for management derived from our study focused on the metallurgic sector in Spain during the period 19951999, with a total of 45 firms1. One key reason to be learned is that firms must develop dynamic capabilities in order to continuously update and renew their knowledge stocks, that is to say, their intellectual capital. Firms may contribute to the building of their sustainable competitive advantage through the design of the architecture of human resources. They can use human resource management practice systems to acquire knowledge stocks at individual level (human capital). These systems are called buy or external system. Additionally firms can invest on organizational learning. Organizational learning (Crossan et al., 1999) is a dynamic process that takes place through different levels: individual, group and organizational. Knowledge creation spiral proposed by Nonaka and Takeuchi (1995) helps to understand how knowledge at individual level moves to knowledge at organizational level through four knowledge conversion modes: socialization, externalization, combination and internalization. This knowledge creation spiral crystallized in knowledge embedded in organizational structures, that is to say, structural capital. As shown by results of our investigation, only knowledge stocks at organizational level -structural capital- have a positive and significant relationship with organizational performance. Through efficient integral learning process, firms can transform their human capital into structural capital, that is to say, the firm can transform knowledge embedded in employees (human capital) and in relations with other agents into knowledge embedded in organizational structures.
AVENUES FOR FURTHER RESEARCH The next phase of this research will extend the proposed model to include more constructs that contribute to the understanding of these issues. There are also HRMS targeted to develop knowledge at group and organizational level. On the one hand, for example, a human resource compensation policy that favors teamwork and the exchange of knowledge among departments of the firm contribute to the development of knowledge at group level (relational capital). On the other, a policy focused on the
1 If after reading this paper on the metallurgical sector of the Spanish manufacturing industry, the reader is also interested in knowing empirical evidence on the major research on the manufacturing industry in Spain (mechanical, electrical and other sectors), once the final data analysis is ready, the author of the paper can be reached at
[email protected]
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conversion of individual knowledge into organizational knowledge, such as organizational culture, routines or processes, for example, helps to build structural capital and avoid that strategic knowledge owned by certain individuals disappear if these individuals decide to leave the firm. Thus we come with a more refined definition of structural capital. This organizational resource represents the conversion of knowledge stocks at individual and group level respectively into stocks of knowledge at organizational level. What's the difference? The difference is that now this knowledge is owned by the firm not by specific individuals or by relations of employees with third parties (supplies, customers, shareholders and so) and thus protected against unexpected leave of employees or rupture of a key relation with an agent. On the other hand, it would be interesting to analyze more complex interrelationships among the knowledge stock constructs. Does human capital have impact on relational capital and structural capital and vicecersa? Is this influence just one way or both ways? What about other possible interactions among constructs? Our methodology -structural causal modeling (SEM) with PLS technique- can allow us to identify indirect effects among constructs.
REFERENCES Amit, R. and Schoemaker, P. J. H. (1993). Strategic assets and organizational rent, Strategic Management Journal, 14, pp 33-46. Balkin, D. B. and Gomez-Mejfa, L. R. (1987). New perspectives on compensation. Englewood Cliffs, NJ: Prentice-Hall. Barclay, D., Higgins, C. and Thompson, R. (1995). The partial least squares (PLS) approach to causal modelling, Technology Studies, 2, 2, 285-323. Barney, J. (1991). Firm resources and sustained competitive advantage, Journal of Management, 17(1). 99-120. Bontis, N., (1998). Intellectual Capital: An exploratory study that develops measures and models, Management Decision, 36, 2, 63-76. Bontis, N., Chong Keow, W.C. and Richardson, S. (2000). Intellectual capital and business performance in Malaysian industries, Journal of Intellectual Capital, 1, Vol. 1. Bontis, N., Crossan, M. and Hulland, J. (2003). Managing an organizational learning system by alining stocks and flows, Journal of Management Studies, forthcoming. Bontis, N., Dragonetti, N., Jacobsen, K. and G. Roos. (1999). The knowledge toolbox: a review of the tools available to measure and manage intangible resources, European Management Journal, 17, 4, 391-402.
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Brown, S. L. and Eisenhardt, K. M. (1998). Organizing knowledge, California Management Review, 40(3): 90-111. Bueno, E. (Dir.) (1999): Gestion del conocimiento y capital intelectual: Experiencias en Espaha, (in Spanish). Knowledge management and intellectual capital: Experiences in Spain. Comunidad de Madrid-IU Euroforum Escorial Madrid. Carmines, E. and Zeller, R. (1979). Reliability and Validity Assessment, Sage Paper Series on Quantitative Applications No. 07-017. Beverly Hills, CA: Sage Publications Inc. Chin, W. W. (1998). The partial least squares approach for structural equation modelling, in G. A. Marcoulides (Ed.): Modern methods for business research, Lawrence Erlbaum Associates. Chin, W. W. and Newsted, P. R. (1999). Structural equation modeling analysis with small samples using partial least squares, in Hoyle, R. (Ed.). Statistical strategies for small sample research, Sage Publications. Crossan, M., Lane, H. and White, R. (1999). An organizational learning framework: From intuition to institution, Academy of Management Review, 24, 3, 522537. Crossan, M., Lane, H., White, R. and Djurfeldt, L. (1995). Organizational learning: dimensions for a theory, International Journal of Organizational Analysis, 3, 4, 337-360. Dierick, I. and Cool, K. (1989). Assets stock accumulation and sustainability of competitive advantage, Management Science, 35, pp. 1504-1511. Dillman, D.A. (1978). Mail and Telephone Surveys: The Total Design Method, New York: Wiley & Sons, Inc. Edvinsson, L (1997). Developing intellectual capital at Skandia, Long Range Planning, 30, pp. 366-373. Edvinsson, L. and Malone, M.S. (1997). Intellectual Capital. Realizing
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company's true value by finding its hidden brainpower, Harper Collins Publishers, Inc., laed. Fornell, C. and Bookstein, F. (1982). Two structural equation models: LISREL and PLS applied to consumer exit-voice theory, Journal of Marketing Research, 18. Fornell, C. and Larcker, D. (1981). Evaluating structural equation models with unobservable variable and measurement error, Journal of Marketing Research, 18, 39-50. Hagel, J. and Singer, M. (1999). Unbundling the corporation, Harvard Business Review, 77 (March-April): 133-141. Hamel, G. and Prahalad, C. K. (1994). Competing for the future. Boston: Harvard Business School Press.
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Hulland, J. (1999). Use of partial least squares in strategic management research: A review of four recent studies, Strategic Management Journal, 20, 195-204. Itami, H. and Roehl, T. (1987). Mobilizing Invisible Assets (Harvard: Harvard Business School Press. Lado, A. A. and Wilson, M. C. (1994). Human resource systems and sustained competitive advantage: A competency-based perspective, Academy of Management Review, 19: 699-727. Lei, D. and Hitt, M.A. (1995). Strategic restructuring and outsourcing: The effects of mergers and acquisitions and LBOs on building skills and capabilities, Journal of Management, 21: 835-859. Lepak, D. P. and Snell, S. A. (1999). The human resource architecture: Toward a theory of human capital allocation and development, Academy of Management Review, 24: 31-48. Lippman, S. and Rumelt, R. P. (1992). Uncertain imitability: An analysis of interfirm differences in efficiency under competition, Bell Journal of Economics, 13; pp. 418-453. Miles, R. and Snow, C. C. (1992). Causes of failure in network organization, California Management Review, 28: 62-73. Miles, R. E. and Snow, C. C. (1994). Fit, failure and the hall of fame. New York: Free Press. Mintzberg, H., Quinn, J. B. and Voyer J. (1995). The Strategy Process. Englewood Cliffs: NJ: Prentice-Hall. Nonaka, I. and Takeuchi, H. (1995). The Knowledge Creating Company. New York: Oxford University Press. Nunnally, J. (1978). Psychometric Theory, 2nd edition. New York: McGraw-Hill. Ordonez de Pablos, P. (2000). Herramientas estrategicas para medir el capital intelectual organizativo, Strategic tools to measure organizational intellectual capital, (in Spanish). Revista de Estudios Empresariales, No. 102, Junio 2000. Universidad de Deusto. Ordonez de Pablos, P. (2001). Relevant Experiences On Measuring And Reporting Intellectual Capital In European Pioneering Firms, in World Congress on Intellectual Capital Readings, Butterworth-Heinemann. Ordonez de Pablos, P. (2001). Stocks de conocimiento en el sector metalurgico en Espafia (Knowledge stocks in the metallurgic sector in Spain). Working Paper. University of Oviedo, Spain. Ordonez de Pablos, P. The nurture of knowledge-based resources through the design of architecture of human resource management systems: implications for strategic management, International Journal of Innovation and Learning, Special Issue, forthcoming. Inderscience Publications, UK.
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Peck, S. R. (1994). "Exploring the link between organizational strategy and the employment relationship: The role of human resources policies", Journal of Management Studies, vol. 31(5), pp. 715-736. Peteraf, M A . (1993). The cornerstone of competitive advantage: A resource basedview. Strategic Management Journal, 14, 179-191. Pfeffer, J. (1994). Competitive advantage through people. Cambridge, MA: Harvard Business School Press. Prahalad, C. and Hamel G. (1990). The core competence of the corporation, Harvard Business Review, May-June, 79-91. Quinn, J.B. (1992). Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry. New York: Free Press. Reed, R., and DeFillippi, R. (1990). Causal ambiguity, barriers to imitation and sustainable competitive advantage, Academy of Management Review, 15, pp. 88-102. Roos, G., Roos, J., Edvinsson, L. and Dragonetti, N.C. (1998). Intellectual Capital Navigating In the New Business Landscape, New York University Press, New York, NY. Rousseau, D. M. (1995). Psychological Contracts In Organizations: Understanding Written And Unwritten Agreements. Thousand Oaks. CA: Sage. Rumelt, R. P. (1984). Towards a strategic theory of the firm, in Lamb, R.B. (ed.). Competitive Strategic Management. Prentice-Hall, Englewood Cliffs, NJ, pp. 556-570. Schuler, R. S. and Macmillan, I. (1984). Gaining competitive advantage through human resources practices, Human Resource Management, 23: 241-56. Skandia (1996). Supplement to the Annual Report. Customer value. Snell, S. A. and Dean, J. W. (1992). "Integrated manufacturing and human resource management: A human capital perspective", Academy of Management Journal, 35(3), 467-504. Snow, C.C., Miles, H. and Coleman, H. (1992). Managing 21 s1 century network organizations, Organizational Dynamics, 20(3): 5-20. Sveiby, K.E. (1997). The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets. Berrett-Koehler: New York. Sveiby, K-E. (2000). http://www.sveiby.com.au/vikings.htmttthree, accessed on 15 November. Tapscott, D. (1995). The digital economy. New York: Mcgraw-Hill. Tapscott, D. (1997). Strategy in the new economy, Strategy & Leadership, 25: 8-14. Tissen, R., Andriessen, D. and Deprez, F.L. (1998). Creating The 21 St Century Company: Knowledge Intensive, People Rich. Value-Based Management, Addison Wesley Lingman, Nederland BV.
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Volberda, H.W. (1996). Building Flexible Organizations for Fast-moving Markets, Long Range Planning, Vol. 30, n°2, pp. 169-183. Wiig, K.M. (2000). Knowledge management: An emerging discipline rooted in a long history, in C. Despres and D. Chauvel (Eds.). Knowledge Horizons: The Present and the Promise of Knowledge Management, Butterworth Heinemann. Wright, P. M. and McMahan, G. C. (1992). Theoretical perspectives for strategic human resource management, Journal of Management, 18, No.2, pp. 295320. Wright, P. M., McMahan, G. C. and Me Williams, a. (1994). Human resources and sustained competitive advantage: A resource-based perspective, International Journal of Human Resource Management, 5(2). 301-326.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
PERCEPTIONS O F TECHNOLOGY POLICY IN DEVELOPING COUNTRIES: THE SOUTH AFRICAN CASE Ian Hipkin, University of Exeter, UK David Bennett, Aston University, UK
INTRODUCTION Technology policy is a crucial component in strategic decision-making, which necessarily now focuses on global considerations. The extent to which firms in developing countries can enter global markets will depend on their ability to acquire and use new technology through the development of core technologies in the context of knowledge, competence and high-tech skills. Resource, financial and competencybased constraints restrict developing countries in the strategic selection of technologies. These limitations are emerging as serious barriers to technological development. The literature identifies a large number of significant issues in technology transfer to developing countries. Among these strategy and technology research have in the past tended to develop in parallel. Cultural, political, organisational and technological factors have been analysed in a study by Hipkin and Bennett (2001). In this chapter topics pertaining to the strategic use of technology are discussed, with particular emphasis on policy decisions in a context where technology is a significant factor in the defence, expansion and development of competencies and capabilities. Technological competencies embrace physical assets, non-physical knowledge, and require external know-how when capabilities, finance and time are constrained. This is a challenge to all firms, but even more so in developing countries, with their inadequate resources and limited technical expertise. Technology-based strategies require the conversion of knowledge into core * Ian Hipkin is a lecturer in management at the University of Exeter. E-mail:
[email protected] " David Bennett is Professor of Technology Management at Aston University. E-mail:
[email protected]
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competences if technological parity and competitive advantage are to be achieved. A recurring theme is first mover advantage where strategic decisions should reopen or exploit windows of opportunity to help an organisation focus on new technology and to see it as a distinct and malleable tool (Tyre and Orlikowski, 1993). Weick (1989: 518) comments that "the point at which technology is introduced is the point at which it is most susceptible to influence. Beginnings are of special importance because they constrain what is learned about the technology and how fast it is learned". Since strategy and technology research have developed in parallel (Loveridge and Pitt, 1992), this paper explores the linkages between strategy and technology in a developing country context. It may be argued that developing countries should give priority to more immediate and pressing needs than technology-based competitive advantage, but items such as health and social infrastructure also demand technology and expertise from the developed world. In order to gain significant entry to world markets, the technology strategies of developing countries will have to recognise trends, and meet the priorities encountered in the developed world: shorter product life-cycles, greater product diversity, more rigorous quality standards and demanding customers, fragmented markets and environmental consciousness (Sharif, 1997). New technology, whether imported or developed at home, is a key requirement for expanding the export base of a developing country. Each country has its own blend of history, politics, economic development and business practices. Since the abolition of apartheid South Africa has assumed a leading role among developing countries as the most powerful economy in Africa. The country has a sound infrastructure, a relatively healthy and a market-led economy, an abundance of raw materials, and the means to exploit them. Against this, crime is rife and HIV/Aids remains a formidable problem. There is a dire shortage of technically skilled people to service the technology that is vital for future prosperity. There are few academic studies on technology transfer to South Africa, and because circumstances are in many respects unique, reference to the wider literature on technology transfer to developing countries has limited application. Technology transfer to South Africa is thus a special case, although its experiences can be useful to other countries at similar levels of economic and technological development. This is a study of perceptions of technology policy in South Africa. While it applies the same importance-control grid utilised in the paper by Hipkin and Bennett (2001), it research differs from the authors' other publications in that it specifically investigates the perceptions of a sample of South African managers regarding technology policies and strategy. The aim is to investigate how strategic factors affect technology decisions. Of course, it is not possible to exclude issues that interface directly with strategy, so the analysis includes references to technology, operations, knowledge and general management.
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The structure of the chapter is as follows: technology in a strategic context in developing countries is examined; the methodology and the importance-control grid are described; results are presented with explanations for the findings; finally, the implications are discussed in a broader context. TECHNOLOGY POLICY IN DEVELOPING COUNTRIES The strategic use of technology in developing countries requires a balanced assessment of capital and labour intensity. The high levels of automation found in developed countries may be inappropriate in developing countries as firms are frequently unable to operate and maintain high technology systems. In developing countries technology frequently requires processing and modification (Platt and Wilson, 1999) since the new operating context may be incompatible with originally intended functionality. The extent of adaptation is a function of the design characteristics, performance standards and quality requirements of the product or service. However, resources, financial limitations and competency-based constraints restrict developing countries' selection of technologies. Their implementation calls for routines and procedures to transfer tangible and intangible assets (Moore and Birkinshaw, 1998). The limits to technology transfer are related to the embeddedness of a number of factors in the broader fabric of the organisation (Collinson, 1999). Owners1 and acquirers should determine appropriate technology to suit the level of development in the acquiring country (Blumentritt and Johnson, 1999; Plenert, 1994). Developing countries acquire technology on a turnkey basis (such as transfer of a total system in the form of self-contained machines), or through adaptation and localisation of components. In either case technology-based strategies require a form of partnership. In high technology partnerships knowledge derived from technological capabilities is not easily transmitted between partners (Katz et al 1996), because successful implementation of most technologies largely depends on the tacit accumulated experience and expertise of key individuals in the partnership. Although a certain amount of knowledge is documented and explicit by nature, Katz et al (1996) see the main challenge as the 'fine tuning' of a complex system where experiences, skills, and understandings that have been learned over time must be internalised by those who will operate the system. The literature suggests that the collegiate nature of a knowledge-based partnership requires collaborative and flexible learning objectives, encouraged by leadership commitment in a climate of trust and tolerance for information sharing, overlapping of responsibilities and integrating knowledge in a learning environment
1 Following the terminology of Bennett et al (1999), the term technology supplier is used interchangeably with the "owner" of the technology, and the recipient with the technology "acquirer"
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(Inkpen, 1998). The complexities of knowledge transfers are exacerbated by developing countries having to create technological skills where they may not have existed before. A resource-based view of technological knowledge recognises that distinct capabilities and knowledge form the basis of differential firm performance (Helfat and Raubitschek, 2000). These come about as supply chain management and vertical integration become vital components of technology policy. Where technology is a strategic resource, core knowledge forms the foundation for a variety of products, integrating different activities, capabilities, and products in one or more vertical chains. This places unique demands on the acquiring company's coordinating abilities and control mechanisms. As management of the supply chain becomes part of technology
policy, local adaptation of technology
invariably means greater
involvement with regional networks and local sourcing. This may necessitate quality assurance and training of second or third tiers in the vertical supply chain, and building a network of capabilities (Leonard-Barton, 1995). THE STUDY In recognition of the problems identified above, and in particular those relating to technology and knowledge in a strategic context, the paper examines the perceptions of technology strategy of 87 South African managers who were attending business school management development and executive management programmes at the University of Cape Town in 2001. Managers were from the following sectors: construction, automotive, consumer goods manufacturing, heavy manufacturing, mining, IT, public sector, and utilities. In the first stage of the research 23 managers attending the first programme were asked to list issues they believed were important in the strategic management of technology in their organisations. Because the intention in this research was to concentrate on strategic and technology issues, cultural, political, economic and human resource matters were removed as these have been discussed previously (Hipkin and Bennett, 2001). Where necessary, the authors clarified what the managers had wished to convey in naming the factors. The authors eliminated overlapping items, resulting in 42 items to be scored by managers. The managers in the first and subsequent groups were then asked to score how important these items were in TT, and to what extent they could control them, both now and in 3 years' time. Prior to scoring, definitions of each factor were given to managers to ensure a consistent interpretation of all items. It was explained that "importance" referred to significant issues in the workplace, where errors and lack of adherence to desired performance requirements might potentially carry serious
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consequences. "Control" related to a manager's power to direct, regulate and influence. The scoring was on a Likert scale of 1 (not important/no control) to 5 (most important/most control) for the following criteria: How important this item is now, in so far as it affects your working environment How much control can be exercised over this item now How important this item will be in three years time How much control can be exercised over this item in three years time Using factor analysis of current importance scores, 3 items were eliminated so only 39 items appear in the analysis. From the factor analysis items were grouped into 6 factors that explain 75% of the total variance. Table 30.1 shows the items and their factor headings, with the average scores (in bold) from the 87 participants for each item. Statistical analyses showed no significant differences in responses by race and gender. The purpose of this study was to obtain the opinions of, and insight into, the perceptions of a strategically important sample of managers. As Linz (1988: 180) has pointed out, in such situations "sample size is less important than are experience, competency and objectivity of participants ... the testimony of even a single expert informant on a particular topic is still valuable if treated with caution". Follow-up interviews of about 30 minutes' duration, structured around the factors, were held with 17 managers in order to clarify and explain emerging results. The purpose of the interviews was to understand and interpret quantitative data through a qualitative assessment.
THE IMPORTANCE-CONTROL GRID The research follows the methodology of Naude et al (1990) in studying the relationship between the importance of different factors in a manager's operational environment, and the extent to which a manager can control them. The framework enables the researcher to isolate individual parameters and to study these in relation to the complexity of a manager's environment. By plotting the scores on a grid, distinct areas may be identified: core issues, which managers see as the most important and over which they can exercise most control; these require the greatest management time, effort and planning complex issues, are perceived as being important but over which management can exercise limited control
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Ian Hipkin and David Bennett simple issues, are of lesser importance and are easily controlled by managers peripheral issues, which arc generally of limited importance and over which little control can be exercised.
The grid provides a methodology for identifying such problems, and can be extended to suggest action for improving technology adoption. The form of the importance-control grid is shown in Figure 30.1, on which only the current and future factor scores have also been plotted. The abbreviations used are: strategic (S), technical (T), operational (O), technology partnerships (P), knowledge (K) and management issues (M). The importance-control grid depicts the degree of alignment between importance and control: the greater the distance of a factor from the diagonal, the larger the degree of imbalance. This is likely to lead to frustration or inappropriate managerial intervention. The frustrating extremes for managers occur in quadrants 2 and 4. Spending disproportionate time on "simple issues" (quadrant 2) represents poor utilisation of managerial resources. The deemed importance of "complex issues" (quadrant 4) cannot be matched by a manager's ability to control, since "complex issues defy understanding and manipulation, and can be expected to frustrate those dealing with them" (Naude et al, 1990: 524). The discussion below concentrates on those factors that reflect greater degrees of imbalance, and significant differences between present and future scores.
Figure 30.1: The importance-control grid: current and future importance and control factor scores
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RESULTS AND DISCUSSION Table 30.1 shows the mean importance and control factor scores for the present and for 3 years hence. The first group of managers was asked to list issues that were important in formulating technology policy, so it would be expected to find most factors on the right hand side of the grid (quadrants 3 and 4 in Figure 30.1). The items in Table 30.1 are discussed under the factor headings and reference is made to interviews held with 17 managers.
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FACTORS
2
STRATEGIC
New business climate (global markets) Technology to shift from product to process base Revisit vertical integration Technology to provide first-mover advantage Technology to support know ledge-based business aims Distinctive competency to be derived from technology Ways of managing new technology (JV, partnership) Technology to neutralise advantages of competitors New relationships with stakeholders Alignment of business goals, systems and technology Technology as basis of an intangible resource base TECHNICAL ISSUES Adaptation of technology lo local conditions Assimilation of new technology Greater output through new technology Higher quality from new technology Process optimisation for full benefit from technology Short lead lime for spares Transfer of core technology from owner to acquirer OPERATIONAL ISSUES Cost a major factor in technology selection Quantification of hidden costs of technology Justification of technology on a costybenefit basis Internal infrastructure to accommodate new lechnology Clear objectives to be achieved by new technology Revisit maintenance management TECHNOLOGY PARTNERS Changing approach to supply chain management nsiablishment of technology base from partnership Supplier networks Moves to appropriate local sourcing Operational compatibility between owner and acquirer Management of contractual arrangements KNOWLEDGE Codification and documentation of knowledge Development of communications and IT systems Creation of know ledge-based/learning organisation Diffusion of intangible knowledge in the organisation MANA GEMENT ISSUES Change management for technology implementation Understanding of new technology Transfer of equipment, managerial philosophy, values Promoters/champions essential for new technology Short term returns expected from technology
S SI S2 S3 S4 S5 S6 S7 S8 S9
Importance now 4.0
Contr now 3.4
Importance
Control
3 years 4.4
3 years 3.8
4.4
1.8 3.8 4.0 4.2 4.0
4.0 3.9 3.9 3.9
2.0 3.2 3.7 3.7
4.3 4.4 4.3
4.2 4.2 3.9
3.3 3.9
4.6 4.6
3.7 3.4
4.3 4.5 4.4 4.7 4.1
4.3
4.3 4.0 4.2 3.4
3.1 4.0
Sll T
3.7 4.5 3.4
4.3
3.9
4.3 4.4
3.3 3.3 3.2
4.4
Tl T2
4.0 4.6
T3 T4
4.5 4.6 3.7 4.4
3.7 3.5 3.7
4.7 4.7 4.2 4.3
3.3 3.8 4.0 4.0 4.3 4.2
4.3 4.6
3.5 3.7
4.6 4.6
2.7 2.8 3.0 4.4
sin
T5 T6 T7 O Ol O2 03 04 05 O6 P PI P2 P3 P4 P5 P6 K Kl K2 K3 K4 M Ml M2 M3 M4 M5
4.0 4.5 4.5 4.4
3.0
3.0 3.0 3.0 2.2
4.6
2.0 2.0
4.4 4.4
3.6 4.1
4.5
4.3
3.9
3.6
3.6 4.1
4.0
4.7 4.7 4.2 4.0
3.6 3.2 3.2
4.5 4.3 .3.0
3.0
4.5 4.7 4.3
3.5 3.3 4.2 4.5 4.1 4.5 4.5 3.4 4.1 4.2 4.3 4.6 4.2 3.7 4.0
Table 30.1: Factors influencing the management of technology
4.3 3.1 3.6 4.1 2.2 2.5 3.5 3.6 3.5 3.2 4.3 3.0
4.7 4.5
4.7 4.1 4.0 4.3 4.2 4.2
4.3 3.8
4.5 4.6 4.1 4.3 4.2 4.0 3.5 3.7 4.6 3.4 4.0 4.2 2.7 2.8
3.8 4.0
4.8 4.5 4.0
4.0 3.7 4.4
3.3
2.7
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Strategic issues Factor and item scores (with the exception of globalisation) for strategic issues are in the core quadrant. The new business climate plays an important part in technology strategy, but managers can do little to control this. Three items (S2, S5, S8) have relatively high importance scores, but managers do not envisage commensurate control. These were new concepts to managers who struggled to see their immediate application. The use of technology in shifting from a product to a process base (S2) was recognised as an enticing development, but managers saw limited scope for this unless a total system encompassing product design and manufacturing technology could be acquired. Technology as a basis for supporting knowledge-based business aims (S5) was important if knowledge were to become a distinctive competence. Most managers saw little immediate control over this but envisaged greater application in the future as knowledge became more easily transferable. Neutralising technological advantages of competitors (S8) was recognised as a true strategic application of technology, but like the other two items, managers saw these as futuristic concepts, requiring levels of technological and management expertise not readily available in South Africa. Technical issues Technical issues lie in the core quadrant. At present managers have limited control over these because imported technology left managers with little influence over the outputs of a new system. Warranty constraints meant that only the technology owner could adapt technology to local conditions (Tl). Assimilation of new technology (T2) was a long process, particularly because of low skills levels. More control in the form of greater assimilation through adaptation and familiarity was envisaged in the future. At the early stages of new technology introduction, managers exercised limited control over quality (T4) and process optimisation (T5) because mastery of technology had to be achieved first. This concurs with the general comments of Grant and Gregory (1997) regarding assimilation of technology. At the early stages of new technology adoption, the acquirer is dependent on the owner for spares (T6) and transferring core technology (T7). Future control scores are considerably higher, as managers envisage that they, as customers for new technology, will be in a position to demand more from the owner. As B-2-B expertise developed, the internet would greatly assist in spares acquisition. Operational issues These issues are likely to cause managers the most frustration, as importance scores are amongst the highest, and control scores are generally the lowest. Managers
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acknowledged that cost justification (O3) of technology was not easy, and strategic objectives were used as a pretext when new technology was acquired, but could not be justified in cost-benefit terms. Little could be done about the cost of technology (Ol). Quantification of hidden costs of technology (O2) was also an unknown entity, but managers were aware that broader unforeseen problems invariably arise. Maintenance importance scores (O6) are among the highest (concurring with Leonard-Barton's (1995) assertion that maintenance is one of the most problematic issues in technology management). Managers felt they could control maintenance through a number of interventions. Technology partners These items show general alignment between importance and control, although there are wide differences in importance scores. Managers accepted that supply chain management (PI) would become of strategic importance. Some were actively seeking new technology partners, and recognised the future value of networking. Local sourcing would become even less important, although government black economic empowerment initiatives would require some firms to conduct business with local black entrepreneurs. During the early stages of new technology implementation, operational compatibility between owner and acquirer (P5) was difficult. Effective partnerships would be encouraged as collaborative agreements developed into productive and strategically effective relationships. Several respondents believed that managers did not appreciate the importance of compatibility between owner and acquirer. As users gain experience in using partnerships, they become more adept at using technology partners for learning and knowledge acquisition (Inkpen, 1998). At all stages of new technology acquisition, an essential item was a sound contractual arrangement (P6). Knowledge With the exception of the learning organisation (K3), current knowledge items were important, but managers felt they could do little to control the learning organisation and diffusion of intangible knowledge (K4). While they saw the relevance of these, managers acknowledged they had little idea of how to manage them. The learning organisation remained an elusive concept (Inkpen, 1998; Nonaka and Takeuchi, 1995). Because of difficulties in gathering data the strategic use of knowledge remained a distant aim, but the challenge was to diffuse the knowledge gained through visits abroad and additional training by the acquirer's experts, seen as "islands of information" (Dutta, 1997), to operational staff. Future control scores increased somewhat, but knowledge management remained an uncertain prospect.
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The concepts of tacit and explicit knowledge were largely unknown. Managers saw tacit knowledge as difficult to control, whereas explicit knowledge was easier to manage. Knowledge and the learning organisation were matters of training and system development (such as production control and maintenance systems). Attaining high levels of knowledge by poorly trained labour with little technical background was a formidable challenge. One frequently proposed solution is automation and proceduralising of processes so that the acquirer's work force can remain at a low level of knowledge. Bohn (1994) refutes this, claiming that a high level of knowledge about a process must precede high degrees of proceduralisation. The managers agreed, indicating that when technology failed, they were worse off as their staff were unable to solve the problem, thereby perpetuating their dependence on the owner for maintenance and modifications. Management issues Items grouped under this heading relate to barriers to implementation. The most significant item was understanding new technology (M2), which would become even more important in the future. Change management (Ml) and transfer of equipment, systems and values (M3) also featured prominently in discussions. Promoters or champions of technology were not deemed important at present, but as complexity increased and more partnerships were created, a champion would become indispensable. Short-term returns from technology referred to more than direct financial returns, and included quality, empowerment, and less tangible concepts, over which managers did not envisage much control.
IMPLICATIONS IN A BROADER CONTEXT Compared to the extensive literature on technology transfer to certain countries (for example, China), technology policy in developing countries like South Africa is a poorly researched area. The results of this research concur with some findings in the literature, but also reveal differences. On the basis of the underlying premise of the importance-control framework, the implications for managers are that positive action is required for 'complex' items found in quadrant 4, and those that lie some distance from the diagonal. In most instances, managers perceive that they will have more control over issues in the future, thereby bringing scores closer to the diagonal. Managers attributed this to greater stability in the South African environment after the turbulent years for business since the end of apartheid. The legacy of the country's past would remain for decades, with education, in particular, not being transformed for years. Shortages of technical and managerial skills would continue to constrain
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technological development: "South Africa's economic structure resembles that of the most developed countries ... but the labour force does not match." (Financial Mail, 5 January 2001). New approaches to supply chain management and technology partners would be pursued as ways of addressing skills shortages. The 'siege economy' syndrome that prevailed during the apartheid years is being replaced by recognition that strategic alliances were a significant way to benefit from new technology. While the strategic issues in Table 30.1 would challenge managers in any country, respondents were more pragmatic about the implementation of such strategies. These were the 'right' strategies, but operational constraints would inhibit their realisation. The importance of issues in technology transfer such as the assimilation of high technology systems and knowledge-based learning support the views of Grant and Gregory (1997) and Leonard-Barton (1995). The additional contribution here, from a technology policy point of view, has been the extent to which these can be controlled. Technology was seen as an essential component of strategic thinking, but the country is not yet ready for a full knowledge-based economy as other apparently more pressing issues were being addressed. The threat is that technology will develop further and the world will have moved on, leaving developing countries even further behind, demonstrating the gap between strategic thinking and technology implementation. Although managers claimed to recognise the importance of technology for strategic decisions, in the majority of cases technology was acquired to meet operational goals, such as improved quality and reliability of delivery. Rather than looking at technology as a strategic resource, they considered only the operational side of it. This limited perspective seldom looks beyond existing products, and only seeks operational efficiencies. The implication for developing countries is that while low cost demands of consumers may be met, the effects are limited innovation and less searching for competitive advantage through process technology. Operational efficiencies, at best, support strategic objectives in a passive and neutral way.
CONCLUSION In using the framework to analyse managerial perceptions, Naude et al (1990: 524) speak of "an underlying dynamic nature to strategic issues implying a migration around the grid". The differences between current and future scores show a move towards the diagonal where importance is associated with commensurate control. Once balance is achieved, importance recedes, and managers need merely to maintain these issues, rather than concentrate on their control. This study shows there is some
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way to go before important technology can be controlled for competitive advantage in a knowledge-based context. The strategic role of technology is as important for developing countries as it is elsewhere. The linkages between strategy and technology include 'non-technical' and operational issues. Developing countries suffer from a number of disadvantages hampering internal technological development and inhibiting their becoming global players. It will be difficult to implement strategies that rely heavily on a knowledgebased economy, so the supply chain must become a network of capabilities (LeonardBarton, 1995). In developing countries capabilities will remain with the technology owner for longer than may be the case with developed countries. This study suggests that technology policy comprises more than choosing technology as a means to production, and now includes the control of a broader selection of technical and nontechnical factors to link technology strategy through a network of capabilities. BIBLIOGRAPHY Bennett D, Vaidya K and Zhao H (1999) Valuing transferred machine tool technology relating value to product attributes and preferences of acquirers, International Journal of Operations and Production Management, 19(5), 491-514 Blumentritt R and Johnston R (1999) Towards a strategy for knowledge management, Technology Analysis & Strategic Management, 11(3), 287-300 Bohn RE (1994) Measuring and managing technological knowledge. Management Review, 36(1), 61-73
Sloan
Collinson S (1999) Knowledge management capabilities for steel makers: a BritishJapanese corporate alliance for organizational learning, Technology Analysis & Strategic Management, 11(3), 337-358 Dutta S (1997) Strategies for implementing knowledge based systems, IEEE Transactions on Engineering Management, 44(1), 79-90 Financial Mail (South Africa) (2001) Quality, not just quantity counts, 5 January Grant EB and Gregory MJ (1999) Adapting manufacturing processes for international transfer, International Journal of Operations and Production Management, 17(10), 22-35 Helfat CE and Raubitschek RS (2000) Product sequencing: co-evolution of knowledge, capabilities and products, Strategic Management Journal, 21, 961-979 Hipkin IB and Bennett D (2001) Technology management issues in South Africa: a study of managerial perceptions, Tenth International Conference on Management of Technology, IAMOT 2001, Lausanne
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Inkpen AC (1998) Learning and knowledge acquisition through international strategic alliances, Academy of Management Executive, 12(4), 69-80 Katz R, Rebentisch ES and Allen TJ (1996) A study of technology transfer in a multinational cooperative joint venture, IEEE Transactions on Engineering Management, 43(1), 97-105 Leonard-Barton D (1995) Wellsprings of knowledge, Boston: Harvard Business School Press Linz SJ (1988) Managerial autonomy in Soviet Firms, Soviet Studies, XL(2), 175-195 Loveridge R and Pitt M (eds.) (1992) The strategic management of technological innovation, Chichester: Wiley Moore K and Birkinshaw J (1998) Managing knowledge in global service firms: centres of global excellence, Academy of Management Executive, 12(4), 8192 Naude P, Human P and Malan L (1990) Managerial perceptions of the future in a volatile society: the South African case, Omega, 18(5), 521-528 Nonaka I and Takeuchi H (1995) The knowledge-creating company, New York: Oxford Platt L and Wilson G (1999) Technology development and the poor/marginalised: context, intervention and participation, Technovation, 19, 393-401 Plenert G (1994) Technology transfer - a developing country perspective, Proceedings of the Fourth International Conference on Management of Technology, March 4, Miami, Florida, 415-419 Sharif MN (1997) Technology strategy in developing countries: evolving from comparative to competitive advantage, International Journal of Technology Management, 14(2/3/4), 309-343 Tyre MJ (1991) Managing the introduction of new process technology: internal differences in a multi-plant network, Research Policy, 20, 57-76 Weick K (1989) Theory construction as disciplined imagination, Academy of Management Review, 14(4), 516-531
31
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
GAP BETWEEN STRATEGY AND MANAGEMENT O F TECHNOLOGY: A REVIEW O F INDIAN SCENARIO P. K. De
ABSTRACT Strategy that includes efficient management of technology is a key component and the driving force in attaining competitive advantage by any nation. By integrating technology management into the overall strategy, a nation can develop a well-defined policy towards technology development. In fact, the gap between strategy and management of technology is a critical determinant of technological performance in respective countries. While each country acquires the resources like skill, technological capabilities, strategies and knowledge in course of time, nations differ on quantity of innovation that finally diffuses to market. Although India has good potential due to its large pool of technical manpower, vast natural resources and good manufacturing background, the country could not make significant technological progress except in areas like information technology, telecommunication, space science and atomic energy. A significant reason for this has been the low emphasis on management of technology fundamentals in the formulation of strategy. This study reviews the technology policies, technology infrastructure, technology acquisition, technology diffusion, and the extent of coordination among policy planners and adopters that affects the National Systems of Innovation. The paper critically analyzes various reasons for the gap between strategy and management of technology in India. It provides a framework indicating the tasks to be resolved for narrowing the gap between strategy and management of technology in India. Keywords: Strategy, Management of Technology, Technology Policy, Technology Acquisition, and Technology Diffusion Dr. P. K. De is a Professor of Operations Management at XLRI Jamshedpur, a Business School at Jamshedpur 831001, India. Email:
[email protected]
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INTRODUCTION A strategy of a nation is a means by which the internal strengths and weaknesses are linked with the opportunities and threats provided by its environment. Technologies by themselves do not establish the overall strengths of a nation. They suggest the opportunities to improve on productivity and quality of life. At the same time strategy in isolation is not very useful. A country needs knowledge, skills, scientific background, engineering and technical abilities, but also the capacity, the motive, and the capabilities of handling the above with proper strategy. Technology is the ensemble of theoretical and practical knowledge and skills that are used by firms to develop and produce its goods and services. Strategy with efficient management of technology is a key component and the driving force in attaining competitive advantage. By integrating proper management of technology into the overall strategy, a nation can develop a well-defined policy towards technology development. Management of technology is as important as management of other resources like financial and human resources. Appropriate management of technology will depend upon careful consideration of a large number of techno-economic, sociological, and administrative parameters. As the global boundaries are gradually shrinking, countries have better access to the latest technological advancements. The transformation of the potential of technology into the overall growth of a nation depends on the successful formulation and implementation of strategy (Lall, 2000). While each country acquires the resources like skill, technological capabilities and knowledge in course of time, nations differ in the quantity of innovation that finally diffuses to the market. It depends on the methods and instruments by which innovations are adopted. Though India has good potential due to its large pool of technical personnel, vast natural resources and good manufacturing background, the country could not make significant technological progress except in areas like information technology, telecommunication, space science, and atomic energy. A significant reason for this has been misalignment of its technology policies and national strategies. The technological growth in many areas lagged behind due to weak technology infrastructure. Sometimes it is argued that India should not be compared with other countries owing to vast differences in terms of size, resources, socio-economic background and diversity in culture. However, the fact remains that the country has not been able to bring in structural reforms in all the sectors, especially technology. The gap between strategy and management of technology has become an impediment to excellence, particularly in the wake of the ongoing economic liberalization that started in 1991. The paper critically analyzes various reasons for this gap in India. The study reviews technology policies, technology infrastructure, technology acquisition, technology diffusion, and the extent of coordination among policy planners and
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adopters that affects the National Systems of Innovation. It also discusses the impact of socio-economic environment in formulating the strategy. At the end, the paper gives a framework indicating the tasks to be resolved in the process of narrowing the gap between strategy and management of technology in India.
STRATEGIC ELEMENTS FOR INDIA'S TECHNOLOGY DEVELOPMENT Strategy in technology development in India can be expressed as a statement - what the nation wants to become, where it wants to go, and how it plans to achieve it. The effective development and implementation of strategy depends on the capabilities of the nation, which include the ability not only to formulate the strategic goals but also to implement them. Strategy is about defining intentions (strategic intent) and allocation of matching resources to opportunities thus attaining the strategic fit between them. Strategic intent of India in technology development can be mentioned as an expression of the intentions of the nation, what it wants to do and how. Strategic formulation and planning will not be worthwhile unless they are reflected in decision making at all levels of the organizations, and then to the country. A strategy, therefore, means, a consistent approach over time, which is intended to yield results in the medium and long-term. The strategy for technology development emphasizes the monitoring and evaluation of external opportunities and threats in light of the strengths and weaknesses of the nation. Strategic elements for India's technology development are shown in Figure 31.1. It includes environmental scanning (both internal and external), strategy formulation (strategic and long-range planning), strategy implementation, and evaluation and control (Hunger and Wheelen, 1999). It incorporates the integrative aspects of technology policy with environmental and strategic aspects. The attainment of an appropriate match between a nation's environment and its strategy has significant effects not only on the technology development of the country but also on the performance of different sectors. The three important features of a good strategy for technology for India are: • Clear strategic vision of technology development of the country, • Sharper focus on what is strategically important for technology development, and • Improved understanding of the rapidly changing technological environment of the country and the world.
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Source: Adopted from Hunger and Wheelen, 1999; Centler, 1998
Fig. 31.1: Strategic Elements for India's Technology Development
The technology strategy of India, which is a series of goal-direct decisions and actions for technology developments, should have been designed in such a way so as to take into account the key strengths (resources and capabilities), and environmental opportunities and threats. The technology strategy of India has not been specified properly and could not capture and subsequently integrate the state of underlying
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structural relationship. Different functions such as manufacturing, marketing, and research and development should have been integrated to evolve an effective strategy. The nature and efficiency of various actors in the strategy formulation and implementation processes play a vital role in reducing the gap between strategy and management of technology. The people entrusted with these tasks need to have the relevant background. The inadequacy of expertise hinders the technology development in India, hi devising strategies to take advantages of the potential offered by the technology development and technological change, it will be useful considering the following: •
Ability to determine the appropriateness of technology.
•
Ability to assimilate and diffuse technology efficiently throughout the country.
•
Ability to adapt, improve and develop technology.
•
Required education and training.
•
Suitable governmental regulatory framework.
•
Appropriate information network base.
•
Conducive policy environment.
The lack of initiative taken by the government in identifying the emerging areas of technology advancement, assessment of existing technology level of the country, and delay in designing suitable incentives to cover the technological gaps hamper the technological developments. Interim political instability, bureaucratic style of functioning, lack of long-term vision and restrictive technology licensing policies are some of the impediments in developing effective strategy.
TECHNOLOGY POLICY Technology policy in a developing economy can be described as the network of policies that affect how the economy acquires technology from others, diffuses and adopts technology, and subsequently improves the technology. Technology policy is concerned with the management of innovation. To make the innovation policies effective, policy makers should develop and change policies over time (Dodgson, 2000). Key policies concerning technology development in India are National Development Policies, Science and Technology Policies, Human Resource Policies, Industry-University Collaboration, Labor Policies and Financial Sector Reforms. India, like many other developing nations, has adopted the policy of economic liberalization, privatization and globalization. But India lags behind in terms of technology development. In spite of significant capabilities in terms of technical
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manpower, natural resources, and a good manufacturing base, technological innovation has not taken off satisfactorily due to weak technology policies (De, 1998:2, 2001). Technology policies should have been aimed at attaining technical competence and self-reliance. Effective technology strategies require a considerable degree of confluence between technological elements and human resource development strategies (Dodgson 1992). The "Scientific Policy Resolution" in 1958, "Technology Policy Statement" in 1983 and the subsequent technology policies instituted by the government in India through more than half a century of planning after political independence in 1947, did not generate adequate thrust to become technologically competitive (De, 1998:2). The technological achievement of India can be seen through the "Technological Achievement Index" (TAI) along with "Human Development Index" (HDI) in Table 31.1. Technological Achievement Index, as developed by UNDP, is a composite index based on four dimensions - technology creation, diffusion of recent innovation, diffusion of old innovations, and human skills.
India
Technology Achievement Index (TAI) 0.201 0.299
Human Development Index (HDI) 115 87
China Korea 0.666 Republic 0.381 Argentina Brazil 0.311 Norway 0.579 0.744 Finland Mozambique 0.066 Japan 0.698 Germany 0.583 USA 0.733 Source: Human Development www. undp. org/hdr2001 /indicator
27 34 69 1 10 157 9 17 6 Report,
2001;
Table 31.1: Technology Achievement Index (TAI) and Human Development Index (HDI) The Human Development Index (HDI) is a composite index developed by UNDP for measuring average achievement in three basic dimensions of human development - a long and healthy life, knowledge, and decent standard of living. India attained a Technology Development Index of 0.201 (where Finland has the maximum at 0.744) with the Human Development Index ranking of 115 out of 161 nations studied by UNDP. If the reflections on how India performed over the nine five-year plans and some annual plans during the past five decades in strategic management of technology
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are analyzed and the planning experiences are put together, one conclusion emerges out that the technology planning failed to live up to the expectations. There was no clear association between high degree of technology planning efforts and its performance in terms of growth (Rao and Rao, 1999). TECHNOLOGY INFRASTRUCTURE For efficient management of technology and to minimize the gap between strategy and management of technology, a country should develop appropriate technology infrastructure. In India, the development of technology infrastructure has not kept pace with the technological growth. Bottlenecks in technology infrastructure continue to impose constraints on technological developments. R&D, technology transfer, technology acquisition, technology assimilation, technology absorption, technology diffusion, and technology up-gradation, all play important roles. Technological independence or adequacy is determined largely by the R&D position of the country (Matheson and Matheson, 1998). From Table 31.2 it can be seen that the R&D expenditure in India is only 0.7% of GNP (Gross National Product), whereas many developed nations spend much higher proportions (Global Competitiveness Report, 1999).
India
R&D Expenditure (as % of GNP, 1987-97) 0.7 0.7 0.1 0.4 0.7 2.8
Research Institutions 27 28 49 45 41 30
Research Collaborations 49 27 41 55 31 19
China Thailand Argentina Chile Korea Republic 21 Singapore 1.1 8 Brazil 0.8 40 35 Japan 8 17 2.8 2.4 6 Germany 9 USA 1 2.8 2 Source: Human Development Report, 2001; Global Competitiveness Report, 1999 Table 2: R&D Expenditure and World Rankings in Research Collaborations and Research Institutions Also, the indicators like scientists and engineers in R&D, technicians in R&D, science and engineering students, and articles in scientific and technical journals, as shown in Table 31.3, reflect a poor technology infrastructure of the country. From the points of view of Research Institutions and Research Corporations, India ranked 27th and 49th
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out of 59 countries (Table 31.2). While, India is performing moderately where Research Institutions are concerned, the country should put more efforts towards Research Collaborations. Scientists & Engineers in R&D (per million people, 1987-97) 149 454 2,193
Technicians in R&D (per million people, 198797)
Science & Engineering Students (% of total students, 198797)
India 108 25 China 200 43 Korea 318 32 Republic 147 Argentina 660 28 Brazil 168 59 27 Japan 4,909 827 21 1,472 Germany 2,831 47 USA 3,676 19 Source: World Development Indicators, 2001; www.worldbank.org
Scientific and Technical Journal Articles (1997) 8,439 9,081 4,619 2,119 3,908 43,891 36,233 166,829
Table 31.3: Scientists, Engineers and Technical Journal Articles in Research and Technological Developments (R&D) It has been observed that in many developed nations, funding for R&D by industry is generally more than 50 percent. Sometimes it even reaches 80 percent. In India, Research funding by industry is only around 20 percent and the balance is by the government and others (De, 1998:2). For National Systems of Innovation (NSI), four comprehensive groups are involved. The first three categories are industry, research establishments and academia. They are the actual research producers, while the government performs the role of coordinator among them in terms of policy instruments, perspective for the future. The development of technological capacity requires not only the strengthening of national education facilities that provide the trained manpower, but also the strengthening of the scientific and technical capacity necessary to adapt the improved technology. The innovativeness of science and technology can be seen in Table 31.4 through science and technology patent applications filed. The number of patent applications filed by non-residents is 3.78 times of those by residents in India. With vast pool of technical manpower and a wide network of research establishments the number of patent applications field by residents could have been more.
Gap Between Strategy and Management of Technology 2
India
China Korea Republic Argentina Brazil Japan Germany USA
Patent Application Filed
Patent Application Filed
By Non-residents (Nos.) 7,997 88,285
By Residents ( Nos.) 2,111 14,004
71,036
50,714
861 5,459 2,535 48,331 360,338 77,037 67,790 134,981 141,342 121,445 World 5,034,563 785,229 Source: World Development Indicators, 2001
477
Ratio of Applications Filed by Non-residents and Residents
3.78 6.30 1.40 6.34 19.06 0.21 1.99 0.86 6.41
Table 31.4: Science & Technological Patent Application of Different Countries Filed
STRATEGIC OPENNESS THROUGH TECHNOLOGY ACQUISITION, TRANSFER AND DIFFUSION The gap between strategy and management of technology has been analyzed from the point of view of openness through technology acquisition, technology transfer, and technology diffusion. 'National Technological Capability' is a complex mix of skill, experience, and effort that a country uses to improve and create technologies. 'Technology Creating Capability' depends on good scientific training, opportunities for linking with scientific expertise in universities and research institutes, and protection of Intellectual Property Rights (IPR). The national base of capabilities and learning determines how well a country is able to cope with new technologies. National technological maturity involves the industrial sector's ability to move from easy to complex technologies from know-how to know-why. Industrial success depends on how each country learns and organizes it to use constantly changing technologies on its technical competence. A country should not remain static at the bottom or middle of the technology chain (Metcalfe and Boden, 1992). Though existence of technological gap is a natural phenomenon in a world where different countries are positioned at different levels of technology, each country should try to develop proper technology strategy in the evolutionary process. Technology Acquisition An important process of technology development is technology acquisition, which has become a common practice for developing nations. Technology acquisition strategies involve Foreign Direct Investment (FDI) alliances and technology licensing. Table 31.5 presents the Foreign Technology Collaborations (FTCs) approved, number of
478
P. K. De
FDIs approved, total FDI amount approved, and actual FDI inflow in India during 1991 and 1999. From the gap between FDI amount approved and actual FDI inflow, it can be seen that, though the amount of FDI approvals has increased the actual FDI inflow is not encouraging. Table 31.6 shows that the share of FDI inflow and outflow for India is much lower compared to many developing and developed nations. The differences between developed and developing economies suggest that substantial gains can be accrued by the transfer of technologies from advanced to developed countries (Pati and Sahu, 1992). Technology Transfer plays a vital role towards technology acquisition. Technology transfer allows one nation to acquire the skills of another nation in an effort to reduce the technology gap. It provides the opportunity to the recipient country to minimize the skill gap much faster than internal development would allow. Table 31.7 shows that only 0.3% companies, out of those having Parent Corporation based in the economy of other countries, are based in India. Also, regarding Foreign Affiliate companies located in Economy, India has only 0.2% of global share. It reflects that the Indian economy is still not attractive to have either Parent Corporation or Foreign Affiliate to be located in India. No. of No. of FTC's FDIs Approve Approve d d 661 289 1991 1992 692 828 1993 691 785 1,062 1994 792 982 1,355 1995 1996 744 1,559 660 1,665 1997 1998 595 1,191 498 1,726 1999 Source: Indian Economic Survey,
Amount Actual Gap Between Amount Approved Inflow Approved and Actual (INR (INR Inflow Crore) Crore) (INR Crore) 534 183 351 3,888 675 3,213 8,859 7,072 1,787 14,187 10,898 3,289 32,072 25,252 6,820 36,147 25,758 10,389 54,891 16,425 38,466 30,814 17,474 13,340 28,367 16,868 11,499 2000-2001; www.indianbudget.nic.in
Table 31.5: Total Foreign Technology Collaborations (FTCs) and Foreign Direct Investment Approvals of India Openness to Trade A major shortcoming in India's technological sector is its lack of international competitiveness and consequent poor export performance. It can be seen in Table 31.8 that though there is some increase in the ratio of export to GDP since the liberalization measures in 1991, the rate of increase is less. The low ratio of export to GDP in India is not only a result of being a large country but also due to less attention to exports in the past and also due
Gap Between Strategy and Management of Technology
479
Foreign Direct Investment Flow (US $ Bn) 1985-1995 Annual Average Inflow Outflow 0.5 0.023
India
1997
1998
1999
2000
Inflow Outflow 3.6 0.1
Inflow Outflow 2.6 0.048
Inflow Outflow 2.2 0.1
Inflow Outflow 2.3 0.3
5.4 4.7 43.8 2.6 7.3 2.3 28.5 2.6 3.3 24.2 24.3 88.6 174.4 131.0 692.5 711.9
10.6 2.5 40.3 1.8 24.1 1.2 31.4 1.4 12.7 22.7 55.9 109.8 295.0 142.6 1075.0 1005.8
10.2 3.7 40.8 2.3 11.2 0.9 33.5 3.0 8.2 32.9 176.1 48.6 281.1 139.3 1270.8 1149.9
Korea Republic China
0.8 2.8 4.4 1.3 44.2 11.7 1.6 2.6 Argentina 9.2 2.2 0.4 3.7 Brazil 1.8 18.7 0.5 1.7 Japan 3.2 0.7 25.2 26.1 Germany 12.2 3.3 17.6 41.8 44.4 103.4 USA 41.0 95.8 World 477.9 180.3 199.5 466.0 Source: World Investment Report, 2001
Table 31.6: Gap in Foreign Direct Investment Flows (Inward and Outward) to inefficient export policy. The quality of many products below international acceptable quality level has attributed to this aspect (Rao, 1996). The overall exportimport scenario along with average annual GDP growth rate is shown in Table 9. These reflect the scenario regarding openness to trade. The export level is low as compared to the size of country's population and resources.
India
Korea Republic China Brazil Japan Germany USA
Parent Corporation Based in Economy No. % 187 0.3 7,460 11.8 379
0.6
1,225 4,334 8,492 3,387
1.9 6.9 13.4 5.4
Foreign Affiliate Located irl Economy % No. 0.2 1,416 6,486 0.8 364,34 44.3 5 1.0 8,050 3,321 0.4 12,042 1.5 2.3 19,103
480
P. K. De
.., ., World
^ i n 63,312
100.
821,81 '
100.
U
o
U
Source: World Investment Report, 2001. Table31. 7: Number of Parent Corporations and Foreign Affiliates in Number (Country wise latest available year)
Technology Transfer Export Import Openness to Trade (INR (INR Export/GDP Import/GDP (INR Crore) Crore) Crore) As % As % 1990-91 32,553 511,089 43,198 8.45 6.37 1991-92 44,041 589,273 8.12 4,785 7.47 _ _ 1992-93 53,688 63,375 1993-94 781,345 69,751 9.36 73,101 8.93 1994-95 82,674 89,971 1,073,27 106,35 1995-96 11.43 122,678 9.91 1 3 1,243,54 118,81 1996-97 11.17 138,920 9.55 7 6 1,390,04 130,10 1997-98 154,176 9.36 11.09 2 1 1,616,03 139,75 1998-99 178,332 11.04 8.65 3 3 1,786,45 162,92 19999.12 204,583 11.45 9 5 2000 Source: Indian Economic Survey, 2000-2001; www.indiabudget.nic.in GDP
vjur
Table 31.8: Ratios of Export to GDP and Import to GDP (Openness to Trade) Proper technology transfer, particularly for a developing nation like India, facilitates reducing the gap between strategy and management of technology. An increasing globalization of Indian organizations, while enabling them to function more effectively in technology sector, has created thrusts that need to be addressed for sustaining and improving the technological competitiveness. The recipient organizations should have the capability to adequately assess the technology, which they intend to transfer for its proper assimilation and adoption. The effectiveness regarding absorption of new technology, technology transfer, and technology sophistication can be seen in Table 31.10. India ranked 38th, 39th and 42nd respectively out of 59 countries in the above-mentioned parameters. Bureaucratic inefficiency, control on royalties, inadequate price of technology and industrial licensing are some of the major impediments considered serious by technology suppliers to India (De, 1999).
Gap Between Strategy and Management of Technology E>;port (us$: Millions)
Innport (US$ Millions)
1990 1999 31,485 54,047 218,49 57,374 46,706 China 4 171,69 Korea 76,360 73,295 2 Republic 6,846 27,747 Argentina 14,800 28,184 55,746 Brazil 35,170 297,30 464,69 323,69 Japan 2 2 6 423,49 626,02 474,71 Germany 5 7 3 615,99 956,24 537,14 USA 4 0 3 Source: World Development of Indicators, 2001 India
1990 23,028
1999 67,250
481
GDP .verage Annual % „ irowth 1990-99 6.0
A
189,797
10.7
143,972
5.7
32,589 63,648
4.9 3.0
395,527
1.3
605,298
1.3
1,221,21 8
3.3
Table 31.9: Overall Export-Import Scenario Technology Diffusion Speedier diffusion of technology is an important feature and it reduces the gap between strategy and management of technology. Efforts to increase the diffusion of technology among firms and to encourage its efficient use can substantially increase the technological competitiveness of a country. Technology strategy should be so designed that it should reduce the technology time lag between invention and innovation as well as between innovation and diffusion in the invention-innovationdiffusion chain. Suitable R&D effort, proper technology transfer, and subsequent assimilation and adoption reduce the technology time lags. India ranked 38th and 7th out of 59 countries regarding low technology exports and high technology exports respectively (Table 31.11). It shows that India is still concentrating more on low technology exports rather than high technology areas.
482
P. K. De Absorption of New Technology
Technology Transfer
India
38 39 22 8 Mexico Chile 32 26 24 Korea 20 Republic 9 Singapore 2 Israel 32 6 4 Taiwan 21 21 5 Malaysia Source: Global Competitiveness Report, 1999
Technology
Sophistication 42 41 27 23 9 7 17 26
Table 31.10: World Rankings of Developing Countries in Technology Absorption, Technology Transfer and Technology Sophistication
Low Technology Exports as % of total goods exports
High Technology Exports as % of Manufactured Exports 7 23 60 40 64 32 9
India 38 44 China Philippines 7 Thailand 19 Malaysia 9 Mexico 16 Argentina 9 Korea 18 36 Republic Singapore 7 67 Hong Kong 56 3 Source: Human Development Report, 2001; www.undp.org Table 31.11: Diffusion of Recent Innovations
SOCIO-ECONOMIC ASPECTS Technology changes society and influences the socio-economic dimensions of the people of the society. Technological development should have the potential to improve on the quality of life of the people in the society. India has a large pool of technical manpower in the world and displays an impressive growth in the areas of information technology, telecommunication, space science, and atomic energy (De, 2001). The analytical and logical ability of engineers and technicians are appreciated. In spite of having a good human resource base as a core competency, the overall technological development is handicapped due to its excessively large
Gap Between Strategy and Management of Technology
483
population. A sizable amount of national resources are being consumed to meet the basic needs of the large population. The user-oriented information through information and communication technology is shown in Table 31.12. It indicates that a low level of fulfilment of these needs. Technology strategy should be properly designed to improve on the socio-economic need of the population.
Kauio Country
India
China Argentin a Brazil Korea Republic Japan Germany
(per 1000 people)
Televisi on
121 334
(per 1000 people) 75 292
681
293
0.69
FAX machin e (per 1000 people) 0.2 1.6
47.34
2.4
Interne t (per 10000 people
444 333 38.97 3.3 1,03 NA* 361 100.65 3 960 719 269.25 127 948 580 233.29 79.1 2,14 2419.8 USA 844 78.4 6 6 * ITC: Information & Communication Technology Source: World Development Indicators, 2001
Personal Computer (per 1000 people)
* Expenditure % of GDP
3.3 12.2
3.46 4.86
49.2
3.41
36.3
5.82
181.8
4.42
286.9 297.0
7.06 5.27
510.5
8.87
# NA: Not available
Table 31.12: User-Oriented Information through Information and Communication Technology
SUGGESTED MEASURES F O R IMPROVEMENT Bridging the gap between strategy and management of technology and creating the right environment should be the vision for India's technological development. The following suggestions are made in this regard: •
Detailed exercises should be carried out to identify the core competencies again. Technology policy should be reviewed and re-formulated keeping in view the core competencies. The following steps can be used in designing the technology strategy: To identify the distinct technologies and sub-technologies in the value chain. To identify potentially relevant technologies and to determine the likely path of adopting the same.
484
P. K. De To increase relative capabilities in most significant technologies to attain competitive advantage.
•
Governmental regulatory framework should encourage inflow of foreign direct investment.
•
Technology transfer policies should be streamlined with reduced bureaucracy. Limits on royalty payments and other restrictions on technology licensing agreements should be reviewed to encourage technology acquisition and transfer.
•
Overall R&D expenditure, both by government and private agencies, is to be enhanced. R&D policies should be so designed that the proportion of R&D expenditure by private organizations increases substantially.
• •
Closer interaction must be developed among industry, academia, and government. Research establishments should be provided with more facilities. Governmentsupported research establishments should be made much more accountable.
•
Intellectual property should be protected with proper legislation.
•
Education system, at all levels, is to be revamped to generate an educated and skilled workforce required for the adoption of technological changes.
•
Appropriateness of technology should be considered keeping in view the available resources.
CONCLUSIONS Strategy with efficient management of technology is essential in attaining competitive advantage by any nation. By integrating appropriate strategy and proper management of technology, a nation can develop a suitable technology policy for a sustainable growth. Though India has good potential due to its large pool of technical personnel, vast natural resources and good manufacturing background, the country has been unable to make significant overall technological growth due to the existing gap between strategy and management of technology. This has resulted in misalignment of the technology policies and national priorities. Interim political instability, bureaucratic style of functioning and lack of long-term vision have further attributed in widening the gap. These factors have become impediments to excellence. By formulating a suitable strategy and with proper management of technology India can attain prosperity particularly in the wake of ongoing economic liberalization
Gap Between Strategy and Management of Technology
485
BIBLIOGRAPHY Centler, Mark K. (1998). What is Strategic Management? In: Strategic Management in Action, pp. 5-27. Prentice-Hall International Inc. De, P. K. (1998:1). Technological Competitiveness of a Developing Economy: The Case of Independent India. Technology Management: Strategies and Applications, 4, 95-106. De, P. K. (1998:2). A Critical Assessment of Technology Policy of India for a Sustainable Growth. In Management of Technology, Sustainable Development and Eco-Efficiency (Louis A. Lefebvre, Robert M. Mason and Tarek Khalil, eds.), pp. 351-358. Elsevier Science Ltd., Amsterdam. De, P. K. (1999). Technology Transfer in Liberalized Indian Economy: A Critical Analysis. In Civilization, Modern Technology and Sustainable Development (Tarek Khalil, Hussein El-Gammal, Louis A. Lefebvre, Yasser Hosni and Hassan El-Laithy, eds.), Conference Proceedings of the 8111 International Conference on Management of Technology, IAMOT 1999, Part I, pp. 163178. De, P. K. and A. K. Pani (2001). Innovation in Information Technology: A Critical Review of Indian Scenario. Paper presented at the 10th International Conference on Management of Technology, Lausanne, Switzerland, March 19-22,2001. Dodgson, Mark (1992). Strategy and Technological Learning: An Interdisciplinary Microstudy. In Technology Change and Company Strategies (Rod Coombs, Paolo Saviotti and Vivien Walsh, eds.), pp. 136-163. Hartcourt Brace Jovanorich Publication. Dodgson, Mark (2000). Policies for Science, Technology, and Innovation in Asian Newly Industrializing Economies. In Technology Learning and Innovation (Linsu Kim and Richard R. Nelson, eds.), pp. 229-268. Cambridge University Press. Global Competitiveness Report (1999). World Economic Forum. Human Development Report (2001). www.undp.org/hdr2001/indicator Hunger, J. David and Thomas L. Wheelen (1999). Strategic Management, pp. 3-19. Addison-Wesley. Indian Economic Survey (2000-2001). Akalank Publication, March 2001. www.indianbudget.nic.in Lall, Sanjaya (2000). Technological Change and Industrialization In the Asian Newly Industrializing Economies: Achievements and Challenges. In Technology
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Learning and Innovation (Linsu Kim and Richard R. Nelson, eds.), pp- 13-66. Cambridge University Press. Matheson, David and Jim Matheson (1998). Technology Strategy. In The Smart Organization: Creating Value Through Strategic R&D, pp. 173-181. Harvard Business School Press. Metcalfe, J. S. and M. Boden (1992). Evolutionary Epistemology and the Nature of Technology. In Technology Change and Company Strategies (Rod Coombs, Paolo Saviotti and Vivien Walsh, eds.), pp.49-71. Hartcourt Brace Jovanorich Publication. Pati, S. C. and R. K. Sahu (1992). Role of Technology Assessment in Development Planning. In Development Industrialisation and Technology (P. K. Shukla and S. K. Roychudhury, eds.), pp. 162-171. Akashdeep Publishing House, Delhi. Rao, K. Viyanna and V. Chandra Shekhra Rao (1999). Infrastructure Sector in India in the Post-liberalisation Era. The Asian Economic Review, 41, 11-19. Rao, P. Bhaskara (1996). Technology Management & Development Planning, Kanishka Publishers and Distributors, New Delhi. World Development Indicators (2001). http://www.worldbank.org. World Investment Report (2001). www.unctad.org.
32
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
GOVERNMENT'S SUPPORT FOR SMALL & MEDIUM ENTERPRISES FOR PROSPERING HONG KONG ECONOMY: IMPACTS O F GLOBALIZATION & CHINA JOINING
WTO A. A. Shabayek, The University of Hong Kong, Hong Kong, China WAN K. M. Sammy, The University of Hong Kong, Hong Kong, China
INTRODUCTION International surveys show that Hong Kong has an edge over its competitors in many areas. Such areas include simple and low taxation, user-friendly procedures for starting and winding up businesses, stable political environment, free trade, marketoriented monetary and financial policies, a sound independent legal system, uncorrupted government, and close relationship with major markets in the world. In addition, Hong Kong has better advantage via its role as an intermediary between the East and the West in international trade, sound Information Technology (IT) infrastructure through its robust communication networks, and quality managerial talent. But whilst Hong Kong remains attractive to international investors, there exist some causes for concern concerning SMEs that represent vast portion of the industry. SMEs are defined as manufacturing firms which employ fewer than 100 persons, and non-manufacturing firms which employ fewer than 50 persons. As of December 2000, there were approximately 290 000 SMEs in Hong Kong, accounting for 98% of local enterprises.
Dr. A. A. Shabeyek is a professor of engineering and technology management of the University of Hong Kong and has served as a consultant of a number of technology-based businesses. Email: shabaykl @aol.com. Mr. WAN K. M. Sammy is a quality and safety consultant of the Analogue Group. Before taking up the post, he has been involved in research at the University of Hong Kong. Email: kmwan @ graduate.hku.hk.
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A. A. Shabayek and WANK. M. Sammy
SMEs are the backbone of Hong Kong economy and constitute more than 60% of Hong Kong workforce. In addition, the SMEs contribute the growth and development of Hong Kong's economy. However, the SMEs in Hong Kong are facing many challenges that hinder their contribution for Hong Kong's economy. Some of the challenges are caused by technological development, others by ups and downs in global or regional economic cycles. The challenges include the economic recession as a result of the 1997 Asian financial crisis, the impact of the downturn economy of USA, the ready accession to the WTO, the globalization of world economy and the emergence of a knowledge-based economy. Nevertheless, with reforms, adjustments and increase in competitiveness of SMEs, this can create a significant recovery force for Hong Kong's economic recession. As Hong Kong has a fairly stable macroeconomic system, the development of successful local SMEs represent enormous asset and in favourable to the national economy. The Hong Kong government keeps hands-on-support the development of SMEs via the introduction of incentive programs. Most of these programs encompass simple and clear tax regime with low tax rate, good financial infrastructure, ample supply of human resources, creating cultural environment that nurture new technology and product/service value-added, as well as a sound legal system to protect individual rights and intellectual properties. Under the principle of market economy, the Government should also assist SMEs to exploit their established advantages to the full potential, to overcome their limitations; in economies of scale; financial resources; technology upgrading; manpower, and marketing. The aim of the strategy is to strike a balance between maximum support and minimum governmental intervention. This paper attempts to introduce the measures for supporting and expanding SME in Hong Kong and discusses the challenges and barriers that arise within and outside the SMEs to prevent or impede the development of SMEs.
PRESENT SITUATION An entrepreneurial and industrious workforce has made Hong Kong an important international financial, trade and transport hub. Making full use of Hong Kong's advantages in business and commerce over the last hundred years, the people of Hong Kong have contributed to Hong Kong's economic take-off. Indeed, a number of international enterprises in Hong Kong today started their businesses as SMEs. This shows that SMEs are the primary pillar and driving force of Hong Kong's economic development. Flexibility and lower start-up and operating costs have enabled SMEs to spring up, and reposition and adjust themselves quickly in response to market and economic changes. Moreover, they can easily expand or contract within a short period
Impacts of Globalization & China Joining WTO
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of time, to embrace new business opportunities or pull out where there is an oversupply. SMEs have not only survived the impact of big enterprises and the law of economies of scale, but have carved out niches for themselves that enable them to coexist with big enterprises. Many SMEs are strategic partners of big enterprises.
Figure 32.1: Distribution bv number of persons engaged bx SMEs in Hong Kong. Note: Figures refer to end March 2001, Source: Hong Kong Census and Statistics Department
Figure 32.2: Number ofSMEs by size in Hong Kong Note: Figures refer to end March 2001, Source: Hong Kong census and Statistics Department
490
A. A. Shabayek and WANK. M. Sammy
SMEs play a pivotal role in the labour market as well. In Hong Kong, nearly 60% of the working population in private sector is employed by SMEs (Figure 32.1). Not only do SMEs provide diversified working experiences for our workforce, they also help enhance their quality. Indeed, SMEs serve as the starting point for career path of many young fresh graduates, the venue for entrepreneurs to realize their vision and aspirations, and the life-long workplace for many people. It is believed that the contributions of SMEs in promoting the growth of Hong Kong's economy, providing job opportunities (Figure 32.2), enhancing the quality of human resources, nurturing a culture of entrepreneurship, fostering creativity, and opening up new business opportunities will play an increasingly important role in the new economy. However, SMEs in Hong Kong have to meet the challenges brought about by three major economic developments, namely the globalization of world economy, China's impending accession to the WTO, and the new economic order that has taken shape as a result of advances in IT. On the other hand, SMEs in Hong Kong also have to meet the challenges due to the changes of local economy such as the high living cost and high operating costs. In order to handle the problem in the long run, enterprises need to enhance productivity and value-added capability, focus on innovation, make maximum use of technology, open up new markets, upgrade product/service quality, and enhance market knowledge.
GOVERNMENT SUPPORT MEASURES In the past few years, the Government has used over $10.6 billion to introduce a number of SME support programs. The Trade and Industry Department (TID) has become the frontline department responsible for the support of SMEs. hi performing its duties, the TID works closely with, and is assisted by, other departments. The SME Office of the Trade and Industry Department co-ordinates the support programs provided by different government and non-government bodies and acts as a one-stop information center. Non-government subvention bodies providing support services to SMEs include, for example, the Hong Kong Trade Development Council and Hong Kong Productivity Council. In addition to Government departments and supportive organizations, various trade associations, in particular SME associations have all along been playing an important role in supporting the development of SMEs in Hong Kong. These associations provide the trade sector and SMEs with valuable information; encourage and help SMEs identify, embrace and prepare for challenges and opportunities; organize various training courses, seminars and overseas study tours (Table.32.1). The supportive organizations collect the views and survey the
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needs of the trade and SMEs, and reflect these issues to the Government for future planning.
Vocational Training Council Employees Retraining Board Hong Kong Productivity Council Hong Kong Trade Development Council Clothing Industry Training Authority Total Table 32.1: Financial subsidence on major SME support
HK$ (billion) 2.13 0.4 0.21 0.36 0.02 3.12 organizations.
Note: Figures refer to end March 2001, Source: Hong Kong Trade and Industry Department
The Chief Executive has laid out Government's future direction for SME support in his policy address, which is to help SMEs to solve different problems at different stages of development. The objectives are to help SMEs to start a new business, expand the existing ones and raise their competitiveness. The SME Committee, which is Government's principle advisory body on matters relating to the development of SMEs, has been re-constituted and is charged with the responsibility of coming up with practical recommendations. To facilitate access to overseas markets, it is important that products produced for export are able to meet overseas standards, and that the conformity assessment services which verify such compliance are recognized and accepted internationally. The Hong Kong Accreditation Service, the Product Standards Information Bureau, and the Standards and Calibration Laboratory, of the Innovation and Technology Commission, operate a comprehensive range of standards and conformity assessment services. Productivity and quality are crucial factors to enhance the long-term development of Hong Kong industries and their competitiveness in overseas markets. The private sector is committed to improve on productivity and quality, while Government and other institutions work in concert to provide such services. The Government and its agencies operate a number of funding support schemes and programs to help industries develop innovative ideas and enhance their technological capability (Tables 32.2 & 32.3). The schemes such as Applied Research Fund, Small Entrepreneur Research Assistance Program, Innovation and Technology Fund, Business Installations and Equipment Loan, Export Marketing Fund, Training Fund, etc which are useful to encourage the development of SMEs in Hong Kong.
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Innovation and Technology Fund Special Finance Scheme for SMEs Skills Upgrading Scheme Applied Research Fund Employees Retraining Board Hong Kong Science and Technology Parks Corporation New Technology Training Scheme Information Technology Assistant Training Programme Total
HK$ (billion) 5 2.5 0.4 0.75 1.6 0.25 0.1 0.019 10.619
Table 32.2: SME support programmes in Hong Kong. Note: Figures refer to end March 2001, Source: Hong Kong Trade and Industry Department
Education is the fundamental answer to increasing the supply of quality manpower in the labour market in the long run. The Government invests substantially in education, with particular emphasis on language proficiency, critical thinking and analytical power, as well as IT. Actually, the Financial Secretary announced in the 2001-02 Budget the setting aside of $300 million for the establishment of a training fund to subsidize SMEs' training initiatives. All of these are important to supply quality and competent manpower to keep pace with our economic and SME development. The Asia-Pacific Economic Co-operation (APEC) has been actively encouraging members concerning Asian economies to assist their SMEs to form strategic partnership with enterprises of other member of outside world's economies. For this purpose, many economies have set up trading partner-matching database to facilitate this process. A business partner matching mechanism has been established to encourage and promote the formation of strategic partnership between US enterprises and their counterparts in Thailand and Singapore. In order to maintain a favorable business environment for SME, the Government should maintain a clear, simple and low taxation system for SMEs. The absence of levying sales tax has a positive effect on the retail and tourism-driven sales sectors, particularly when the economy is just recovering. In addition, SMEs should consolidate their resources and make use of Hong Kong's competitive advantages to engage in high value-added activities to offset the impact of high operating costs in areas such as rent and wages. The Government should provide support so as to enhance people's capability of starting businesses and minimize the obstacles they may encounter in complying with different government rules and regulations.
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STUDIES O N MANUFACTURING INDUSTRIES Most of the Hong Kong industries are small and medium industry that can make use of its high flexibility to adjust its production in proper ways. Since the recent ten years, Hong Kong economical structure still undergoes a deep-rooted change. Due to massive relocation of manufactures to the mainland of China, its potential of gross domestic production decreases. The statistics declared that Hong Kong manufacture is shrinking (Table 3). Meanwhile, the rapid progress of service sector has taken over manufactures as a principle part. Based on the primary industrial structure, the application of advanced technology improves the traditional manufacture. The introduction of high technology promotes the manufacturing upgrading for high efficiency, high quality and high value-added. After the 1997 Handover, Hong Kong is the special administration region of China under the policy of "One country, Two Systems". Hence, it is necessary to maintain Hong Kong a relative independent economic system. A healthy economy is capable to carry out an efficient policy of "One country, Two systems" for manufacturing sector. Provided that the economy being completely external dependent, high efficient and flexible industrial system is required as economic pivot, otherwise it is difficult to maintain the lasting economic growth. It is difficult to become integrative economic service centre without industrial support. By comparison, the workforce and economic structure in Singapore is smaller than those in Hong Kong. Even though Singapore is relatively maintaining its service at the competitive edge, it still makes a greater effort in industrial growth via increasing productivity. It is an urgent problem now whether Hong Kong maintains and develops its local industry's growth. INDUSTRY GROUP Selected component
IWJ A1,
1998
1999 A] ,
2000
A]|
Food, beverages and tobacco
158.3
143.9
141.6
137.2
129.2 85.6
m
MOK/J A]|
Wearing apparel (except f<x>lwear)
105.6
99.2
99.2
102.1
'textiles (including knitting)
106.4
95.1
89.9
93.3
67.2
Paper products and printing
269.7
248.8
224.9
212.6
231.2
63.9
55.5
47.2
40.4
35.3
Chemical, rubber, plastic and non-metallic mineral products basic metals and fabricated metal products Klectric & electronic products, machinery and optical goods Miscellaneous manufacturing industries Ml manufacturing industries
80.4
72.3
58.1
51.6
39.9
166.0
154.7
151.7
153.0
133.1
84.3
74.4
65.7
68.5
68.9
120.6
110.1
103.1
89.9
89.8
Table 32.3: Index of industrial production by industry group & selected component industries (1986=100).
Note: (1) Provisional figures, Source: Hong Kong Census and Statistical Department
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According to the selected principle statistics for manufacturing establishments from 1994 - 1999, it is revealed that there is a decrease in wages because of the competition arises from low cost production regions such as mainland. In addition, the negative effects of the Asian Financial Crisis, since 1997, that continued to affect Hong Kong exports and induce decrease in wages and even increase of unemployment rate. Consequently, the wages of employees engaged in manufacturing industries decreased by about 10% each year from 1997. The lower incomes discourage consumers in spending and consequently decline in retail sales. The global economic upswing continued to bolster China's exports of goods in the first half of 2000 and stabilize Hong Kong's imports of goods (Table 32.4). The import of goods also staged a sharp rebound along with the pick-up in domestic demand. The combined visible and invisible trade account nevertheless remained in surplus, at HK$12 billion (US$2 billion) in the first half of 2000. The prospects for the Hong Kong, China economy beyond the short-term remain bright, benefiting from the sustained robust growth in China as well as the further economic reform and liberalization in China upon its accession to the WTO.
Principal Commodity
1995
1996
i of Total I mports ii-ito USA 1997 •1998 1999 2000
11.0
9.7
7.9
8.4
7.7
7.4
Toys, baby carriages, games & sporting goods
1.6
1.5
1.7
1.6
1.5
1.4
Electrical machinery, apparatus & parts Photographic apparatus, optical goods, watches & clocks Travel goods, handbags & container
2.2 4.3 1.6
1.7 4.2 1.5
2.4 2.3 2.0 1.7 3.8 3.9 4.1 3.1 1.4 1.7 1.5 1.6 % of Total Imports into China
Articles of apparel & clothing accessories
5.5
4.4
3.5
2.9
3.5
4.2
Man-made filaments
10.9
8.5
8.2
7.7
6.9
6.2
Electrical machinery, equipment & parts Cotton
10.1 14.9
Plastics articles
8.9 7.3 5.9 6.2 9.9 14.5 12.3 17.1 17.3 15.8 % of Total Imports into Europe
Articles of apparel & clothing accessories
8.5
7.6
7.5
6.5
7.5
6.6
Toys, baby carriages, games & sporting goods
3.3
2.7
2.0
2.6
3.3
3.2
Electrical machinery, apparatus & parts Photographic apparatus, optical goods, watches & clocks
2.0 9.7
2.1 7.6
2.1 6.6
2.5 7.4
2.6 7.7
2.8 5.6
Table 32.4: Comparative share of Hong Kong's principal export commodities in total imports.
Source: Hong Kong Census and Statistical Department
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OTHER FUNCTIONS FOR SUPPORTING OUR SME 1. Quality and Environmental Management The accession to the WTO and the globalization of world economy result a worldwide competition for SMEs in Hong Kong. In this regard, quality, effective and reliable environmental friendly products become important in order to gain a global market share. Hong Kong's manufacturers are now aware of the importance of quality assurance and environmental protection. Many manufacturers have adopted international quality standards and environmental management systems, e.g. ISO 9000 and 14000 series. There are many legislative requirements relating to environment protection for manufacturing industries. The Industrial Support Division of the Trade and Industry Department assists manufacturers in complying with various environmental requirements. With growing global competition, quality and environmental management systems are becoming increasingly important to the leadership and management of all organizations. Many SMEs in Hong Kong have acquired the ISO 9000 and 14000 series certification on quality and environmental management system. The frequent monitoring, reviewing and continuous improvements of their services and products can ensure customer satisfaction and increase productivity and efficiency. At the same time, the statutory, regulatory and ethical requirements related to our society can be complied. All these provide a beneficial environment for the development of SMEs in a competitive manner. 2. Information Technology (IT) In accordance with the "Survey on Information Technology Usage and Penetration in the Business Sector", SMEs in Hong Kong are fail to make a progress in IT application, only about 50% of them have personal computers and about 30% have access to the Internet (Table 32.5). The survey reveals that the SMEs are lack of IT resources to enhance their productivity and efficiency.
State of IT application HK
Overall
Lar e 9 Enterprises
c
Medium Enterprises
Small Enterprises
% of organizations equipped with personal computers
52.5%
92%
78%
48%
% of organizations having access to Internet
37.3%
78%
63%
34%
7.3%
43%
18%
5%
% of organizations having their own webpage or website
Table 32.5: IT applications in enterprises in Hong Kong.
Note: Figure refer to end December 2000, Source: Hong Kong Census and Statistical Department
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Actually, the use of IT in SME's operation can decrease costs and enhance productivity, the prevalence of e-commerce has also brought about a revolutionary impact on the operation mode of SMEs. In particular, the use of mobile phones in ecommerce (mobile commerce) is an emerging trend. The world has begun to notice the phenomenon of "digital divide" in societies where enterprises or individuals can make good use of IT become more successful. Therefore, if SMEs fail to apply IT and provide proper training for their staff to prepare for the e-commerce era, the development and competitiveness will be hampered in the long run. In order to encourage the application of IT in SMEs, the Government introduced Electronic Data Interchange (EDI) services for major trade documents over the past few years (e.g. Restrained Textiles Export Licenses (RTEL)). The use of EDI has the obvious benefits in terms of speed, accuracy and cost savings and is a growing trend in the international trading arena. Government is committed to the development of EDI service in Hong Kong and its extensive usage in all business enterprises, so that they can benefit from the advantages of EDI and for Hong Kong to keep in pace as an international trading centre. The adoption rate of e-business among local SMEs has shown a slight improvement over the years according to a survey conducted in September 2000 by the Institute of Information and Media Industries (IIMI) of the Hong Kong Productivity Council (HKPC) and IBM China/Hong Kong Limited (IBM). In addition, the survey also shows that the top major problems among local SMEs in adopting e-business are the lack of financial resources and skills. Therefore, it is important to develop a comprehensive training program along with training funding schemes for the enhancement of e-business capabilities and plans to establish a computer emergency response team coordination centre to cope with increasing information security problems is important.
CHALLENGES FOR FUTURE DEVELOPMENT SMEs in Hong Kong have to meet the challenges brought about by three major economic developments, namely the globalization of world economy, China's impending accession to the WTO, and the new economic order that has taken shape as a result of advances in IT. /. Globalization of world economy Globalization of world economy facilitates free import and export of goods and services, and gradually removes restrictions on investment and tariff barriers. Production processes are therefore no longer limited to a single region. This in turn will give rise to market and price competition at the global scale. Globalization
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enlarges the market for SMEs on one hand, and exposes them to worldwide competition, including competition from low cost regions, on the other. Local SMEs have to be proactive in mapping out marketing strategies, with a view to consolidating existing markets and capturing new markets. With the globalization increase of world economy, the rules of business and commerce are also undergoing a process of globalization and standardization. These rules impose certain requirements on management methods, corporate integrity and governance standards of enterprises. Some large local enterprises have acquired a good understanding of these rules long ago, and have been endeavoring to perfect their governance methods and procedures. As a result, their current governance standards are fully comparable to those of multinational corporations in other regions of the world. Although SMEs tend to have a simple management structure, they too must establish a well-defined relationship, as well as clear division of authority and responsibilities among their stakeholders, such as the management, board of directors, shareholders, employees and creditors. Modern enterprises have to observe modern rules of business. As the world globalization has emerged for enhancing the trade worldwide on one hand with more competitive environment for value added high quality product, on the other hand, any impact of economy turndown in one part of the glob will be definitely echoes the other part. For example, the terrorist attack on USA in September 11 of 2001 will indeed, as we see, have big hit on the global economy for a long period of time. This indeed is emerged challenge that will live with us for some times. It is worthwhile mentioning that dealing with such challenge needs economical government support as well as industrial collaborations with prudent management.
Figure 32.3: Different industrial nations with different systems (traditional trading system).
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Figure 32.4: Different industrial nations under one system (WTO).
2. China's accession to the WTO China's accession to the WTO and, in consequence, the opening up of the vast Mainland market will have profound impact on SMEs in Hong Kong. While enormous business opportunities will be generated, there will be keener competition from foreign enterprises with direct presence in the Mainland. Moreover, as foreign enterprises will be able to invest directly in the Mainland, Hong Kong enterprises have to reposition themselves and to gear up for a more robust intermediary role, in order not to be left behind. As Hong Kong becomes a world-class city, it unavoidably becomes a more expensive place to live and to do business. Indisputably, the cost of living is high in Hong Kong, particularly if we compare them with those of neighbouring economies. However, to address the problem in the long run, enterprises need to enhance productivity and value-added capability, exercise effective cost control to stabilize price levels, focus on innovation, make maximum use of technology, open up new markets, upgrade product/service quality, and enhance market knowledge. Moreover, an increasingly short product cycle calls for enhancement in production techniques, supply chain management, and IT application. 3. Financial Obstacles Before the Asian financial turmoil, the booming local property market prompted many SMEs to obtain Equity loans on their properties from financial institutions. This was a particularly common practice for many SMEs whose business and financial
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conditions failed to fully meet the financial institutions' criteria for approving unsecured loans, and those who wanted to secure loans with disclosure of minimal information. As the prices of local properties plummeted after the economy turndown, SMEs had found it hard to secure loans with their properties as collateral. In addition, the SMEs often run into difficulties when trying to raise capital. As a result, the Government and its agencies operate a number of funding support schemes and programs to help industries develop innovative ideas and enhance their technological capability. The schemes such as Applied Research Fund, Small Entrepreneur Research Assistance Program, Innovation and Technology Fund, etc which are useful to encourage the development of SMEs in Hong Kong. Also program for supportive long term loan with very low interest rate have been introduced by the Hong Kong government to help the SMEs in financing new as well as existing projects.
CONCLUSION & DISCUSSION It has become clear that the days of Hong Kong as a low cost-manufacturing center are ending and that a significant fraction of the economic activity must move upmarket to higher value-added products and services. Finance, services, tourism, trade, e.g. container terminals of Hong Kong Harbour, will always be major elements of the economy; and their needs are by enlarge well understood by policy makers. The Hong Kong government starts to focus on supporting SME's as they represent the backbone of Hong Kong's economy. By going in this direction and keep committed to inject fund in promising high technical industrial project, hopefully the SME's will be flourishing and consequently the national economy as well. As the globalization of world economy facilitates and for China joining the WTO, with free import and export of goods and services, and gradually removes restrictions on investment and tariff barriers, the economy of Hong Kong will be indeed benefited. Production processes are therefore no longer limited to a single region. This in turn will give rise to market and price competition at the global scale. Globalization enlarges the market for SMEs on one hand, and exposes them to worldwide competition, including competition from low cost regions, on the other. Local SMEs have to be proactive in mapping out marketing strategies, with a view to consolidating existing markets and capturing new markets. More importantly, these businesses are highly appreciated by investors. As, a result, they have flourished in the past decade. But even the most ardent advocates of Hong Kong as a service and financial center would agree that the economy must retain an industrial component, if only for a healthy balance. The argument presented here for developing technology-based businesses in Hong Kong should not be seen as setting
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up a conflict for either investment capital or policy development. At the same time, we believe that government policy for technology development and the business opportunities therein are not uniformly appreciated across the government and industry sectors. Much needs to be done to draw together these sectors with higher education institutions to make effective progress in the policy arena.
REFERENCES Asia-Pacific Economic Cooperation (2000). Economy Report, HKSAR, China Chief Executive's Policy Address (2001). Speech by Hong Kong Chief Executive, Building on Our Strengths, Investing in Our Future, Policy Address 2001, HKSAR, China. Financial Secretary's Policy Address (2001). Speech by Hong Kong Financial Secretary, Honing Our Strengths, Striving to Excel, Policy Address 2001, HKSAR, China. Hong Kong Trade and Industry Department (2001). Hong Kong Industries 2000, Trade and Industry Department, HKSAR, China. Hong Kong Trade and Industry Department (2001). Electronic Data Interchange Services Booklet, Hong Kong Trade and Industry Department, HKSAR, China. Institute of Information and Media Industries of Hong Kong Productivity Council and IBM China/Hong Kong Limited (1999). Survey on Adoption of e-business in Hong Kong, HKSAR, China. Organization For Economic Co-operation And Development (1997). Globalization And Small And Medium Enterprises (SMEs), Volume 1 Synthesis Report, Head of Publications Service, OECD, France. Ruth Hillary (2000). Small And Medium-sized Enterprises And The Environment Business Imperatives, Greenleaf Publishing Ltd., U.K. Secretary for Commerce and Industry's Policy Address (2001). Speech by Hong Kong Secretary for Commerce and Industry, Building on Our Strengths, Investing in Our Future - Competitive and Knowledge-based Industries, Policy Address 2001, HKSAR, China. Small and Medium Enterprises Committee (2001). Staying Ahead: Smart, Motivated, Enterprising, Report on Support Measures for Small and Medium Enterprises, Trade and Industry Department, HKSAR, China.
SECTION V
SUSTAINABLE DEVELOPMENT
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33
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
TOWARDS SUSTAINABLE DEVELOPMENT: INDICATORS TO MEASURE PROGRESS Mono K. Abou El-Seoud, Ph.D., and Tarek M. Khalil, Ph.D. Department of Industrial Engineering, University of Miami, Coral Gables, El. 33124
ABSTRACT Sustainable development emerged from the UN Conference on Environment and Development (1992) and has garnered great interest within the international public policy-making community. In the 1990s, sustainable development came to the top of the international and domestic policy agendas, where regional and sectoral sustainability plans have been developed. A continuing need in the transition to global sustainability is the lack of suitable metrics with which to ensure progress. Assessing a facility, a city, a country, or a region with regard to sustainability will require the development of systems approaches for which very few relationships have yet been developed. Sustainability is associated with analytical, relational and informational challenges. The measurement of sustainable development requires drawing together indicators from the three dimensions of sustainable development: the economy, the environment and the society. It involves not only single-issue complexities but also those involving multiple behaviors and impacts (environmental-economic, environmental-social, economic-social) and varying scales (local, regional, global). Hundreds of sustainability indicator sets have been developed, from those created by the United Nations to those by rural communities. Still, they have far from being universally accepted or widely used. This paper reviews the efforts undertaken by the world community to advance the concepts of sustainability and develop relevant indicators. It concludes that there is still a great need to develop scientific methods of analysis and metrics that address society's ability to link environmental, economic and social activities in a manner that can guide progress towards sustainability. Keywords: Sustainable Development, Indicators, Environment, Decision-makers, Society, Economy, Barometer of Sustainability, Ecological Footprints
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INTRODUCTION In 1987, the World Commission on Environment and Development (Brundtland Commission) called for the development of new ways to measure and assess progress. Throughout the 1990s, sustainable development (SD) came to the top of the international and domestic policy agendas. The earth summit, UN Conference on Environment and Development (UNCED), took place in Rio de Janeiro in June of 1992. The sustainable development approach emerged from the summit with a large following in the international public policy-making community. Throughout the rest of the 1990s, regional and sectoral sustainability plans have been developed. A wide variety of groups, ranging from businesses and academics to municipal governments and from national to international organizations, have adopted the concept of SD and have given it their own particular interpretations. These initiatives have increased our understanding of the meaning of sustainable development within many different contexts (World Commission on Environment and Development, 1987). The last two decades have provided compelling evidence that a combination of sound policies, advance planning, scientific knowledge and technological innovations can help us move toward a sustainable future. Policies and regulations are essential to sustainable development, not only on a local and regional level, but also on the national and international level. Governments, from developed to developing countries, should regard the protection of the environment as their responsibility. Not only governments but also all other sectors of society: industries, universities, environmental movements and individuals (Abou El-Seoud and Khalil, 2001). Although attention to purely environmental issues is important, it should be noted that economic and social concerns are integral to the concept of sustainability. Incorporating sustainability concerns into decision making requires a much better understanding of the synergy of environmental effects and the impact of varying scale (both temporal and spatial) across ecosystems (National Academy of Engineering, 1999). The 1992 Earth Summit recognized the important role that indicators can play in helping countries to make informed decisions concerning sustainable development. This recognition is articulated in Chapter 40 of Agenda 21 which calls on countries at all levels to develop and identify indicators of sustainable development that can provide solid bases for decision-making at all levels, and to contribute to a self-regulating sustainability of integrated environment and development systems. While the concept of sustainable development has widespread appeal, more than one report indicated that there is no scientific consensus on a definition of the concept or indices by which it may be measured at the macro or micro levels (National Academy of Engineering, 1999, United Nations, 1992).
Towards Sustainable Development: Indicators to Measure Progress 505 In the last decade, the development of indicators to measure sustainable development has become a hot growth field. The reasons behind such excitement are in part due to steady maturation of SD studies since the landmark report Our Common Future. In addition, recent developments in computer technology enhanced the capacity for increasingly powerful processing and provided important tools like Geographical Information Systems (GIS) software for sophisticated mapping tasks. Another important catalyst is the widespread use of the Internet with it's vastly extensive sharing of information between computer users across the world (International Institute for Sustainable Development, 1997). There is a need to develop methods of analysis and metrics that address society's ability to link environmental, economic and social activities in a manner that can guide progress towards sustainability. This paper starts with a deeper look into the concept of sustainable development and its various dimensions; followed by an assessment of the current state of knowledge of sustainable development indicators. The impact of these indictors on the decision-making process is explored. Advancement in the area of sustainable development indicators to efficiently measure progress towards sustainable development is identified as a major research and application priority.
THE CONCEPT O F SUSTAINABLE DEVELOPMENT In 1987, the World Commission on Environment and Development (the Brundtland Commission) provided the classical definition of sustainable development in Our Common Future: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." It means to some redistributing wealth intragenerationally (from wealthy developed nations to developing nations, and from wealthy elites to the poor) and intergenerationally (from ourselves to future generations) (World Commission on Environment and Development, 1987, Environmental Law Institute. 1998). The concept of sustainable development is essentially interdisciplinary, having different implications for several sections of society, professions and practitioners in different fields (Rao, 2000). Originally, the concept of sustainability was derived from the scientific literature, where it characterizes the management of natural resources in a manner that is consistent with the preservation of its reproductive capacity. On the other hand, in social sciences, sustainability implies a focus on considerations broader than economic growth and material welfare alone (Organization for Economic Cooperation and Development, 2000). In Biological Ecology, sustainability is thought of as the carrying capacity of the earth for the human species. Carrying capacity is the
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population size of a species that can be supported in a given environment (Allenby, 1999). As human culture, technologies, population levels and natural systems evolve, so will the parameters of sustainability. Sustainable development has ethical, spatial, and temporal components. Sustainability asks "Is this step necessary?" rather than accepting the attitude of "If you can do it, do it," If sustainability is anything, it is a process, not an endpoint. Accordingly, sustainability has a temporal component: sustainable for how long and within what time frame? Sustainability cannot be known until such a state has already been achieved. Also sustainability has a spatial component. Sustainability must be a characteristic of the global system as a whole, including both human activity in its totality and the underlying natural biological, chemical, and physical systems at all relevant scales. The sustainability of any subsystem of the global system-whether in a region, a country, and enterprise or even an individual- can only be defined in terms of a sustainable global system, and cannot be meaningfully said to exist in the absence of its links to the greater whole (Graedel and Allenby, 1995, Allenby, 1999). Economic, environmental and social developments are strongly linked, and equally important for the well-being of the current and future generations. But social and environmental considerations often lose out to shorterterm economic considerations and environmental and social policies are sometimes formulated without due regard to economic consequences. During the last three decades, the world has become aware of the problems that development creates to the environment. Significantly, some of these problems are now affecting the entire Earth, such as the global climate changes and stratospheric ozone depletion. To achieve sustainable development, it is essential to integrate economic policies with environmental and social concerns and to fully exploit the potential of new technologies. Synergistic "win-win-win" options can only be identified if all three dimensions of sustainable development are taken into consideration (Abou El-Seoud and Khalil, 2001). Sustainable development requires interdisciplinary effort. Effective planning for sustainable future could only be achieved through collaboration of experts from different disciplines including: environmental science, technology, economical science, social science, political science, general science, and ethics as indicated in Figure (33.1).
Towards Sustainable Development: Indicators to Measure Progress
50 7
Figure 33.1: Elements for Effective Planning for Sustainable Development SUSTAINABLE DEVELOPMENT INDICATORS Indicators are bits of information that summarize the characteristics of systems or highlight what is happening in a system. In general terms, indicators should perform the following functions: simplify, quantify, analyze, and communicate. That is to say, indicators should facilitate understanding by depicting issues in less complex terms and should make them quantifiable so that they can be analyzed in a given context and communicated to the different levels of society because as one authority said, "We measure what we value, and value what we measure." (Adriaanse, 1993, United Nations, 1996). Sustainable development indicators should translate the concept of sustainable development into numerical terms, descriptive measures, and action-oriented signs and signals. They make it easier to communicate about sustainable development. The purpose is to make different aspects of sustainable development stand out, thus reducing the level of uncertainty in the formulation of strategies and actions and enabling decision-makers to better define their priorities (Winograd, 1995). Thus indicators can help to guide national policies for sustainable development and facilitate national reporting on measures to implement sustainable development. They can provide an early warning, sounding the alarm in time to prevent economic, social and environmental damage (United Nations, 1996, Bossel, 1999). Indicators are useful because they point out trends and relationships in a concise way. They provide meaning beyond the attributes directly associated with them. They are different from primary data or statistics, by providing a bridge between detailed data and interpreted information. Indicators have been used for many years and are common
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in planning and economics where indicators such as Gross Domestic Product (GDP), the unemployment rate, the literacy rate and the population growth rate are widely monitored (United Nations, 1996). Finding an appropriate set of indicators of sustainable development for the world, a region, a country, city, or even town is not an easy task. It requires knowledge of what is important for the viability of the systems involved, and how could that contribute to sustainable development. Effective indicators should be relevant (they should show you something about the system that you need to know), easy to understand, reliable, and based on accessible data (the information is available or can be gathered while there is still time to act). The number of representative indicators should be small as possible, but as large as essential.
CRITIQUE O F SOME POPULAR SUSTAINABLE DEVELOPMENT INDICATORS For the last decade, researchers, academics, policy makers, and national and international organizations have operated in high gear weaving together the longseparated strands of socio-economic and environmental analysis into an increasingly cohesive and credible body of thought. Measures and indicators of sustainability are set apart by the way they combine social, economic and environmental trends, and by the way they illustrate the links between and among systems. Separate indicators of social, economic and environmental progress were developed during the end of 20th century. During the last decade, comprehensive indicators of sustainability began to emerge and advance rapidly (Bossel, 1999). A Single Indicator or Aggregate indexes Assessing progress toward sustainable development requires indicators of a wide range of issues. These issues may include education, population, health, income, employment, greenhouse gases, soil erosion, air quality, energy consumption, etc. Each indicator can show what is happening to the issue it represents. But unless indicators are organized and combined in a coherent way, the signals they give will be highly confusing. To achieve a coherent picture of the whole system, it is necessary to combine SD indicators. If they are not combined, the indicators produce a lot of noise, a chaotic stream of data and no clear massage. Therefore, the complex nature of sustainable development requires integrated or interlinked sets of indicators, or aggregations of indicators into indices. High-level decision-makers, government ministers, heads of corporations, and foundation executives, regularly ask for a small number of indices that are easy to understand and use in decision-making. Many concerned with sustainable development voice their desire for a single indicator to compete with the enormous political power of the Gross
Towards Sustainable Development: Indicators to Measure Progress 509 Domestic Product (GDP). Most indicator experts believe that searching for a single indicator of sustainable development is very difficult. They are skeptical that a single number could assess something as complex as sustainable development and could have any real functional value as a policy tool. On the other hand, many acknowledge that the attempt to create an index of sustainable development may be useful because it would force a concerted effort to present the complexity of sustainable development more simply (International Institute for Sustainable Development, 1997, Bossel, 1999, Winograd, 1995, Carpenter, 1995, Pinter Hardi, 1995). The ideal indicator, or suite of indicators, should have a distinct and clear meaning as it points the way toward the goals of increased industrial efficiency, profitability and environmental sustainability. The objective is to develop robust sets of indicators for public- and private-sector decision-makers to measure progress toward sustainable development. Sustainable Development indicators should provide decision makers the information they need to enhance environmental performance. The main aims are to form a coherent picture of sustainable development trends, to provide information that is relevant to decision-making questions, to capture the wealth of the available information. In response to those difficulties of GDP-like single indicator, various groups have sought to define aggregate indicators that present a more accurate picture of SD. Two of the most popular aggregate SD indexes are discussed in the following sections: barometer of sustainability and ecological footprint. Several International organizations have adopted particular frameworks for developing SD indicators. Some of these efforts are also discussed in the following section. Ecological Footprint In order to live, people consume what nature offers. So, every one of us has an impact on our planet. This is not bad as long as we don't take more from the Earth than it has to offer. But are we taking more than we should? The Ecological Footprint measures what we consume of nature. It shows how much productive land and water we occupy to produce all the resources we consume and to take in all the waste we make. Modern cities and industrial regions are dependent for growth and survival on a vast and increasingly global hinterland of ecologically productive landscapes. The resulting "ecological footprints" are disturbingly large (International Institute for Sustainable Development, 1997). Ecological footprint is an aggregate indicator that makes physical sense. It measures the total land area required to maintain the food, water, energy and wastedisposal demands per person, per product or per city. Nature provides an average of 5 acres of bioproductive space for every person in the world. Today, the average North American 'footprint' measures over 30 acres per capita to support current lifestyle. It is estimated, if everyone lived by North American material standards that two extra planets would be required to produce the essential resources, absorb the wastes, and
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maintain life-support systems for all the planet's 5.8 of rich countries have more than tripled in size since resources divided by its population- have shrunk by Institute for Sustainable Development, 1997, Bossel,
million people. Also, the footprint 1900, while the world's ecological a similar magnitude (International 1999).
Ecological footprint is an excellent summary indicator of the major environmental impacts of economic activity. This analysis emerged out of planning studies as a tool for making better development decisions, not for predicting the future. The footprints are best viewed as "ecological snapshots" of resource use in time. While clearly useful, it does not, and is not meant to, capture the social dimensions of sustainable development. They measure only natural resource use rather than wider social and economic uses, such as human resource expenditure. In addition, the ecological footprint is approximation at best and almost impossible to pinpoint with scientific certainty (International Institute for Sustainable Development, 1997, Bossel, 1999). Currently, new computer software programs are available that could size up the ecological footprints of products in 520 categories. These programs could be utilized to inform us about how large a pool of resources a product needs to be manufactured, or how much waste the product generates? (International Institute for Sustainable Development, 1997). The Barometer of Sustainability The Barometer of Sustainability is a performance scale that can be used as a tool for measuring and communicating a society's well-being and progress toward sustainability. It provides a systematic way of organizing and combing indicators so that users can draw conclusions about the conditions of people and the ecosystem and the effects of people-ecosystem interactions (Prescott-Allen, 2000). It evaluates simultaneously both the environmental and social components of sustainable development. In this two-dimensional graph, the states of ecosystem well-being and human well-being are plotted on relative scales from 0 to 100, indicating the range from bad to good conditions. The location of the point defined by these two values gives an indication of sustainability or unsustainability (Bossel, 1999, International Institute for Sustainable Development, 1997). The barometer does not allow a trade-off between human well-being and ecosystem well-being, reflecting a view that people and the ecosystem are equally important and that sustainability is a combination of human well-being and ecosystem well-being. The strength of the approach lies in its comprehensiveness and communicability. The colorful barometer grabs the attention of the public, from schoolchildren to scholars alike. This approach is also flexible in that it can be used from the local household, community or village level to the national, regional or global level. One disadvantage is that the approach is 'unscientific'. Many value judgments must be made in deciding which indices get included in the measures of human and
Towards Sustainable Development: Indicators to Measure Progress 511 ecosystem well-being in the first place, as well as in deciding how "good" or "bad" performance is on each component scale. Also, the barometer does not take into account the economic dimension of sustainable development. However, given the complexity inherent in SD thinking, the barometer promises a welcome integration of scientific measurement on one hand and transparency about values on the other. It invites users to be clear about why they use the judgment scales. The barometer is not absolute but indicative. As long as reasonable processes are followed for deciding what gets included or excluded the barometer could be proven to be the most useful measure for bringing the concept of SD down to earth in a way that everyone can understand (International Institute for Sustainable Development, 1997, Prescott-Allen, 2000). International Organization's Frameworks for Sustainable Development The creation of sustainable development indicators requires a conceptual framework that will enable the user to understand what to monitor and what should be monitored. A wide variety of international organizations have adopted this concept and given it their particular interpretations. The efforts of the United Nations Commission for Sustainable Development's (UNCSD), Organization of Economic Co-operation and Development (OECD), and U.S. Interagency Working Group for Sustainable Development Indicators (IWG SDI) in developing SD indicators is discussed in the following section. The United Nations Commission for Sustainable Development's (UNCSD) Indicators. The Earth Summit recognized the importance of sustainable development indicators. The Commission on Sustainable Development (CSD), which grew out of the Earth Summit, followed up on this interest and approved a work program on indicators of sustainable development at its Third Session in 1995. The objective of the Work Program is to make indicators of sustainable development available to decision-makers at the national level. The second and third sessions of the CSD in 1994 and 1995, recognized the wide range of existing national and international indicator work and the different status of knowledge and skill in countries concerning indicators (United Nations, 1992, 1996). The preparation of the Work Program and its adoption by the Commission resulted in the preparation of a working list of 134 indicators of sustainable development, a framework for their organization and methodology sheets for each of the indicators. The indicators include social, economic, environmental and institutional aspects of sustainable development and are placed within a Driving-Force-StateResponse-Framework (DSR). Listing all the indicators is beyond the scope of this review. For more details about the framework and the list of indicators refer to "Indicators of Sustainable Development: Framework and Methodologies" published by the United Nations in October 1996.
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The DSR framework is adapted from Pressure-State-Response (PSR) framework, a more generally agreed framework for environmental indicators. The DSR framework is a matrix that incorporates three types of indicators horizontally and the differenl dimensions of sustainable development vertically. "Driving Force" indicators encompass human activities, processes and patterns that impact on sustainable development. "State" indicators refer to the "state" of sustainable development and "Response" indicators highlight policy options and other responses to changes in the state of sustainable development. The use of the DSR framework does not mean that it is possible, at this stage, to identify any causal relationships among driving force, state and response indicators, rather it should be seen as a way of categorizing indicators to fit the needs of the producers and the users. Experience may show that some indicators tell us nothing about progress towards sustainable development and these indicators will be eliminated and others tried out. This is a process of testing and retesting until a set of indicators is available that can more accurately measure progress toward sustainable development (United Nations, 1996, 1997). Organization of Economic Co-operation and Development (OECD). The OECD developed several sets of indicators each responding to a specific purpose: the OECD Core Set of environmental indicators; several sets of sectoral indicators; key environmental indicators drawn from the Core Set. Indicators are derived from environmental accounting. When developing environmental indicators, OECD countries have agreed to use the PSR model as a common harmonized framework. In addition, they have identified indicators based on their policy relevance, analytical soundness and measurability and have developed guidance on how to use and interpret the indicators. The OECD Core Set helps track environmental performance and progress towards sustainable development. Key indicators drawn from the Core Set inform the public about key issues of common concern to OECD countries. Sectoral indicators help integrating environmental concerns into sectoral decisions (e.g. transport, energy, household consumption, agriculture). The OECD key indicators are: climate change (CO2 emission intensities), ozone layer (ozone depleting substances), air quality (Sox and Nox emission intensities), waste generation (municipal waste generation intensities), freshwater quality (intensity of use of water resources), forest resources (intensity of use of fish resources), energy resources (intensity of energy use), and biodiversity (threatened species) (Organization for Economic Co-operation and Development, 1998, 2000, 2001). U.S. Interagency Working Group for Sustainable Development Indicators (IWG SDI). The Interagency Working Group on Sustainable Development Indicators (SDI Group) has selected a small group of indicators to measure progress towards sustainable development in the United States. The SDI Framework serves as the foundation for
Towards Sustainable Development: Indicators to Measure Progress 513 selecting the Proposed SDI. The framework is based on the concept of endowments, outputs, and the processes that act on both; it organizes the basic elements of society, economy, and the environment. An inventory of indicators already selected and developed by various international and national organizations. The SDI Group selected the Proposed SDI from the SDI Inventory. They developed a list of Candidate SDI. A Candidate SDI is an indicator identified as related to or relevant to sustainable development. Each Candidate SDI must relate to the SDI Framework and to issues of concern as well as meet form and format requirements. The SDI Group selects a set of 40 Proposed SDI from the Candidate SDI List. A Proposed SDI is a Candidate SDI that most directly measures at least one aspect of sustainable development in the United States. The selection criteria ensures that Proposed SDI represent those multigeneration, large-scale, high-cost (or high gain) phenomena most related to sustainable development. The process repeats annually to assure the SDI can evolve as our knowledge and experience increases (SDI Group, 1998, 2000).
CONCLUSION In 1987, the World Commission on Environment and Development called for the development of new ways to measure and assess progress. This call has been subsequently echoed through activities that range from local to global in scale. In response, significant efforts to assess performance have been made by corporations, non-government organizations, academics, communities, nations, and international organizations. While the concept of sustainable development has widespread appeal, there is yet no scientific consensus on a definition of the concept or indices by which it could be measured at the macro or micro levels. Hundreds of sustainability indicator sets have been developed, from those created by the United Nations to those by rural communities. Still, currently available indicators are still far from being widely accepted and used. Nevertheless, as data are collected and analyzed for these indicators, patterns and relationships may emerge that highlight connections and interactions among indicators. Experience may also show that some indicators tell us nothing about progress towards sustainable development and these indicators will need to be discarded and others tried out. The point is that this is a process of trial and error, of testing and retesting until a set of indicators is available that can more accurately measure progress toward sustainable development. It involves successive approximation both in terms of being able to define what constitutes sustainable development in a given context, as well as developing the analytical skills needed to measure progress towards it. Currently, no single indicator framework satisfies all the needs for meaningful aggregation. Some frameworks, like the United Nations Commission for Sustainable
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Development's (UNCSD) indicator set or the Organization of Economic Co-operation and Development (OECD) indicators, have the advantage of governmental support, international support, and opportunities for field tests. Other frameworks, such as those of the U.S. Interagency Working Group for Sustainable Development Indicators (IWG SDI), offer a practical, decision-making oriented approach with a well-articulated framework, suitable to incorporate the most detailed breakdown of aggregate indices. The barometer of sustainability is a new indicator that manages to communicate highly complex and aggregated information using a single, easy-to-understand measurement. Ecological footprints have major tracks that they are making in policy-making and planning communities everywhere. These aggregated indexes are great improvements, but they cannot eliminate a fundamental deficiency of aggregate indicators: aggregation may hide serious deficits in some sectors, which actually threaten the overall health of the system. In addition, most sustainability indicators come as large, unwieldy reports, crammed with complex charts and graphs. Although they might be useful to policy professionals and academics, most indicator sets have limited value to the media and public. In order to build support for and an understanding of indicators, there must be a process for indicators to be legitimized through some form of public consultation or trial application. In assessment of the different sustainable development indicators we could conclude that none of them is adequate for the objectives identified. Understanding the deficiencies of the existing sustainable development indicators, there is a need to develop an approach for identifying indicators to measure progress toward sustainable development. In conclusion, sustainable development is being formulated, elaborated, interpreted and debated, but if it is ever to be implemented there must be great improvement in relevant, statistically reliable scientific measurements. Science is not completely incapable of measuring sustainability. To move to sustainable development, decision-makers need information. They need information on developing trends and pressure points, information about where they are at the moment, information about the impacts or effects of policies or interventions put into place, and information about milestones achieved or about failures that frustrate progress. Decision-makers need feedback on which adjustments to make to slow down or speed up the effects of their interventions. There is a need to develop models that provide such information, and to improve decision-making regarding sustainable development decisions.
Towards Sustainable Development: Indicators to Measure Progress 515 REFERENCES Abou El-Seoud, M. and Khalil, T. (2001). The Environment: Towards a Sustainable Future. The Sustainable Development Conference, Washington, D.C. Adriaanse, A. (1993). Some Views on environmental performance indicators at a global scale. Netherlands Ministry of Housing, Physical Planning and Environment. The Hague, The Netherlands. Allenby R. B (1999). Industrial Ecology: Policy Framework and implementation, Prentice Hall, Upper Saddle River, New Jersey. Bossel, H. (1999). Indicators for Sustainable Development: Theory, Method, Application. A Report to the Balaton Group. The International Institute of Sustainable Development (USD). Carpenter, R.A. (1995). Limitation in Measuring Ecosystems Sustainability. Sustainable World Defining and measuring sustainable development, International Center for the Environment and Public Policy. Environmental Law Institute (1998). Proceedings of the symposium Impact and Leverage: Environmental Management and the Services Sector, Washington, D.C. Graedel T. E., and Allenby B. R (1995). Industrial Ecology, Prentice Hall. Hardi, H. and Zdan, T. (1997). Assessing Sustainable Development Principles in Practice. The International Institute of Sustainable Development (USD). International Institute for Sustainable Development (1997). Developing Ideas. International Institute for Sustainable Development (USD) National Academy of Engineering (1999). Industrial Environmental Performance Metrics Challenges and Opportunities, National Academy Press, Washington, D.C. Organization for Economic Co-operation and Development (1998). Sustainable Development: A Renewed Effort by the OECD, OECD Policy Brief, No. 8, OECD. Organization for Economic Co-operation and Development (2000). The OECD Initiative on Sustainable Development, Progress report to the 2000 ministerial council meeting, OECD. Organization for Economic Co-operation and Development (2001). Key Environmental Indicators. OECD, Paris. Prescott-Allen, R. (1997). The Well Being of Nations. The World Conservation Union (IUCN). Pinter, L. and Hardi, P. (1995). Performance Measurement for Sustainable Development: A Compendium of Experts, Initiatives and Publication. The International Institute of Sustainable Development (USD). Rao P. K.(2000) Sustainable Development Economics and Policy. Blackwell Publisher. SDI Group (2000). Sustainable Measure. Interagency Working Group on Sustainable Development Indicators
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SDI Group (1998). Sustainable Development in the United States: An Experimental Set of Indicators: Interim Draft Report. Washington, D.C: U.S. Interagency Working Group on Sustainable Development Indicators. United Nations(1992). Report Of the United Nations Conference on Environment Development, UN. United Nations (1997). Earth summit+5:
Programme for the further Implementation
and of
Agendall, UN. United Nations Economic and Social Council (1997). Overall Progress achieved Since the United Nations Conference on Environment and Development, Commission on Sustainable Development (CSD). United Nations (1996). Indicators of Sustainable Development: Framework and Methodologies, UN. Winograd, M. (1995). Environmental Indicators for Latin America and the Caribbean: Tools for Sustainability. Sustainable World Defining and measuring sustainable development, International Center for the Environment and Public Policy. World Commission on Environment and Development (1987). Our Common Future, Oxford, UK: Oxford University Press.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
ENVIRONMENTAL POLICIES FROM THE BUSINESS PERSPECTIVE Gyimgyi Kovdcs, HANKEN, Helsinki, Finland' Nikodemus Solitander, HANKEN, Helsinki, Finland
INTRODUCTION The relationship between business and the environment is reciprocal: business effects the environment, and the environment effects business. Although the individual company may perceive environmental concerns as either a benefit or a cost, it cannot ignore the fact that environment and business cannot be fully decoupled from one another. A number of factors have contributed to the growing need of environmental management policies and tools for implementing them. These include a growing public awareness of environmental pollution, the goals set up at the environmental conferences in Rio in 1992, Kyoto in 1997, and Bonn in 2001, the rising costs of compliance to stricter environmental legislation, and the strive for sustainable development (Watkins and Gutzwiller, 1999). Increasingly, corporate organizations acknowledge environmental concern as a prominent factor that affects everything from the design of products to strategic decisions. Environmental management is implemented in the manufacturing processes as well as the whole product life cycle and supply chain (Webb, 1999; Welford, 1996). Today, environmental management is not only a tool for adhering to environmental laws and regulations, or even a question of ethics and morals but it has also, in many cases, evolved into an opportunity for companies to enhance their corporate values and to obtain financial gains.
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Gyongyi Kovacs is a Ph.D. candidate in Corporate Geography at HANKEN (Swedish School of Economics and Business Administration), Helsinki. Email:
[email protected] Nikodemus Solitander is an Assistant Professor (acting) in Corporate Geography at the Department of Marketing and Corporate Geography, HANKEN, Helsinki. Email:
[email protected]
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Objectives and limitations of the study The aim of this study is to identify corporate environmental policies and tools, and to categorize them either on a strategic, tactical or operational level. As our study takes an environmental management perspective, governmental policies are excluded, and the focus is on the industrial enterprise and its business environment (see Figure 34.1).
Fig. 34.1: Focus of the study The excluded systemic level of analysis pertains to societal systems, dealing with, for example, demographic changes, global warming, macroeconomic policy, income distribution and the global competitiveness of nations. These issues are important, but a focus on them and their impact on society seldom yields a basis for action by a commercial company. Also, analysis of issues at the systemic level often takes the perspective of public policy rather than that of a manager who is responsible for the performance of a company (Baron, 2000). Another limitation of the study is the perspective of the individual level - although we are talking about managerial policies and tools, we do not take into account the personality of the manager as an individual, his/her skills, preferences, or values. There are different kinds of motives and pressures on an enterprise to adopt environmentally sound principles and methods. External pressures can be derived from governmental policies, legislation and trade agreements, while internal pressures are mainly economic ones corresponding with the organization's aims. Other external sources of pressure can be industry associations (Sharma, 2000), competitors, local communities, and the media. We regard investors and shareholders as part of the company, thus as internal policy setters.
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Depending on the group of individuals initiating socio-cultural pressures, these can be seen as internal or external policy setters. Socio-cultural pressures arise from lifestyle and consumerism as well as from people's attitudes and opinions. Technological pressures and incentives can come from legislation on different levels or even from industrial competition. Economic pressures are derived from market mechanisms, while political pressure is put on companies via legislative measures (Blair and Hitchcock, 2001). Environmental policies can be considered business strategies and thereby have substantial consequences for the focus of the company. The policies can be seen to constitute the visions and aims of the company, which can then be fragmented into more tactical-operational goals. In order to achieve these goals a company has a wide range of environmental management tools at its disposal. We attempt, in this paper, to answer the following research questions: 1.
How can the decision-making sequence be described in environmental management? Is there an existing model for a timeframe in the decisionmaking?
2.
Where certain environmental concepts, tools and methods should be positioned in such a timeframe? Which concepts, methods and tools can be identified in this context? How can they be categorized?
These questions are posed from the perspective of an industrial enterprise, coming from the secondary sector; hence, agricultural production and the services sectors are not included. Methods and structure of the study To study the sequence of decision-making in environmental management, the different theoretical approaches of logistics and life cycle assessment are examined versus marketing and sales approaches. These were then incorporated into planning Also, at the planning levels; a comparison of different theories is executed to examine the applicability of the approach and its terminology in environmental management. The study is entirely conceptual. However, as there is an existing confusion about the possible positioning of different time management concepts and methods, the positioning of these in a decision-making timeframe may help to clarify their applicability in different real situations. The classification and positioning of the concepts, methods and tools identified to be of importance in environmental management, is done according to their actual definitions. The first part of this paper is a literature review, illustrating the historical development of the subject and providing basic definitions and a summary explanation of environmental management systems.
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The underlying propositions of the study are then introduced and examined. The concepts, methods and tools used in environmental management are then positioned in a decision-making timeframe that we have structured. The concluding section finally summarizes the findings of the study and is an attempt to create incentives for further research to be carried out in this field.
ENVIRONMENTAL MANAGEMENT POLICIES During the 1970s, when the concept of environmental management was initially introduced, corporate actors mostly regarded it as a passing trend, and consequently, most companies chose to ignore it (Greeno and Robinson, 1992). A decade later a change in attitudes became apparent: gradually sustainable development became accepted as a realistic and necessary goal also for the business community. But the change in attitudes came slowly; the concept of sustainable development did not become widely accepted until the 1990s. By now, minimizing the environmental impacts was not only perceived as an expense, but rather as a means of achieving overall cost reductions and raising production efficiency. Today, it can also be considered an essential part of quality management (Pearce, Markandaya and Barbier, 1990). An increasing number of companies have begun to consider environmental management as a core strategic factor and a tool for achieving competitive advantages (Shrivastava and Scott, 1992). Companies have taken a systematic approach to the organization of environmental management. A variety of definitions of an environmental management system (EMS) exist: Netherwood (1996) defines an EMS as a tool for implementing the set environmental policy in a company organization, the EcoManagement and Audit Scheme (EMAS), the European Union's environmental management scheme, defines an EMS as the "part of the overall management system which includes the organizational structure, responsibilities, practices, procedures, processes and resources for determining and implementing the environmental policy" (EMAS, 2001). Kolk (2000:103-104) defines an EMS as "the totality of organizational, administrative and policy provisions to be taken by a firm to control its environmental influence." It can therefore be said to encompass and outline the environmental policies on a strategic, tactical, and operational level.
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Fig. 34.2: Stages of implementing an EMS (modified from Welford and Gouldson, 1993) As illustrated in Fig. 34.2: an EMS can be divided into a number of different phases. In Figure 34.2 we have combined EMS stages identified by Welford and Gouldson with the Deming model. The EMS process is seen as a cyclical string of activities that follow the model of quality management and the Deming cycle: planning, doing, checking and acting. The activities do not, however, necessarily have to be performed in this particular order. In the first phase the company should create an understanding of its environmental task, on a global, national and local level. This phase is individual for each company, and is therefore perhaps the most difficult to achieve. The effort of understanding has to come from within the organization. Senior management should comprehend the importance of continuous environmental improvement and make an organizational commitment to environmental management (Netherwood, 1996; Welford and Gouldson, 1993). The second phase requires the development of an environmental policy. The environmental policy should state the overall scope, vision, and aim of the environmental strategy. The policy should also specify the company's commitment to the environment and for sustainable development, and state whether the company intends to adhere to a specific EMS standard (such as EM AS or ISO 14001). The environmental policy should also be compatible with other policies, such as health and safety policies. Since the environmental policy provides important information about the company's aims and commitments in respect to the environment, the
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environmental policy should be made public for all stakeholders and interested parties, both internal and external (Starkey, 1998; Brophy, 1996; Netherwood, 1996). In the third phase an environmental review is to be carried out. In theory, during this phase all environmental impacts are to be identified and quantified. These assessments are to be carried out on a regular basis and should also be made available for all interested parties and stakeholders. However, the depth and scope of such a review varies greatly between different companies. Some companies review only the most significant direct environmental impacts; others carry out a more comprehensive review. It is simply not possible in practice to identify all environmental impacts, although that should be the aim. The methodologies and assessment tools also vary. Some organizations carry out a fairly simple environmental SWOT analysis, while others use more comprehensive environmental impact assessments (EIA). EIA can be defined as a systematic collection and assessment of information about possible environmental effects before the actual start of the manufacturing process. The EIA tries to predict the future environmental effects and risks. The EIA is therefore usually based on pre-made models and assumptions that may not in fact fully correlate with the 'real', future environmental impacts. The environmental review can highlight unexpected impacts, which subsequently may lead to the revision of the environmental policy (Welford and Gouldson, 1993; Walker and Johnston, 1999). The fourth phase incorporates the training of personnel and the allocation of environmental responsibilities in the organization. It is of utmost importance that the staff involved in activities which have an environmental impact, develop a clear understanding of their roles and responsibilities. Environmental training programs may play an important role in heightening this awareness. The training should cover all levels of the organization, from top-management to shop-floor workers. This phase also includes detailed definitions of competency requirements and job descriptions related to the EMS (Netherwood, 1996; Welford and Gouldson, 1993; Starkey, 1998). In the fifth phase more detailed and quantifiable targets and objectives should be set, as well as the environmental priorities, e.g. is the impacts on soil 'more important' for the companies' interested parties than e.g. the impact on water. The priorities may depend on the particular industry the company is involved in, the environmental review and on the particular environmental goals set in the policy (Welford and Gouldson, 1993). The sixth phase is referred to as operational control. This involves detailed documentation of the practices, procedures and systems within the EMS. This set of documents is usually referred to as the EMS procedures manual, and should encompass environmental procedures on all organizational levels. It also involves the measurement and verification that the system is fulfilling its purpose and achieving its goals (Kolk, 2000; Wilson, 1999).
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The final seventh phase is a follow-up and review of the effects of the EMS. This is usually done by carrying out an environmental audit. The set targets and objectives should be compared to the actual outcome and results and the overall environmental performance should be assessed. Corrective action should be taken where deficiencies and flaws are found. Finally, the environmental performance is to be reported, both internally and externally, and following that, the whole process starts all over again with necessary revisions, and the setting of new environmental objectives and targets. By repeating and enhancing each stage the improvement process is continuous, and the environmental management system is made generic (Welford and Gouldson, 1993; Netherwood, 1996; Kolk, 2000).
PLANNING LEVELS The basic characteristics of business strategy identified by Dominguez Machuca et at. (1995:63-64, modified from Hayes and Wheelwright, 1984) are: •
business strategies refer to activities that imply a long time horizon,
•
for being effective, their effects have to be significant, [...],
•
they require a concentration of corporative forces and recourses for a tight scale of prioritized objectives,
• •
they require decision planning and sequential implementation, they are present for lifetime on all organizational levels and in every corporate function,
•
they encompass a wide spectrum of activities and affect transcendental as well as day-to-day decisions, and
•
they direct the energies, capacities and recourses of an organization in order to achieve a sustainable competitive advantage over the competitors
of the corporation [...].3 The planning level clearly refers to the "plan" part of Mintzberg's strategic concept (Mintzberg, 1989), which consists of the 5P's: plan, ploy, position, pattern and perspective. Environmental management strategy refers to ploy, when environmentally responsible product differentiation is carried out as a marketing maneuver, organization and product positioning follow the same pattern, while research in the area has usually been carried out to follow this perspective (Sharma, 2000, Bjorklund, 2001). Planning levels are roughly divided into strategic, tactical and operational levels. However, the arguments used for this division differ in the literature; this is why the definitions can be divided into two major groups, the timeframe and the Translation by authors
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decision-maker group. When argued with the timeframe, the strategic planning level is seen as part of long-term planning, where decisions are made for and with an extended time horizon. Accordingly, the tactical level is defined as aiming at an intermediate time horizon, while the operational level includes short-term decisions only (Ballou, 1999; Giinther and Tempelmeier, 1995; Dominguez Machuca et at., 1995). The decision-maker definition group argues for strategic, tactical and operational planning levels from the organizational perspective. Here, strategic plans are agreed on a top management level, while tactical planning is made on a lower management or department level, and operational planning and implementation takes place on the staff level. The approach of this definitions group is derived from the division of responsibilities for plans and actions taken in the corporation (Sharma, 2000; Martin, 1998).
In the context of positioning environmental management policies, concepts, methods and tools, the two approaches can be combined. Responsibility levels and time horizons can both be attached to the notions of strategic, tactical and operational, as in Table 34.1. Correspondingly, the strategic planning level is at the same time aiming at a long-term perspective and the decision-makers on this level are at the top management level of the organization. Tactical planning and decisions are carried out with an intermediate time horizon by personnel in middle management positions and operational decisions, finally, are made for short-term purposes by the staff level aiming at everyday activities and operations.
ANALYSIS AND PROPOSITIONS OF THE STUDY The study raises the following propositions: PI: There is an existing time frame in environmental management decisionmaking. According to this proposition, environmental management decision-making can be described as a sequential process, which consists of different stages. These stages correspond to planning levels, which are hierarchical in importance, timeframe and organizational hierarchy. They can generally be set as strategic, tactical and operational levels; decisions taken on the different levels can be assigned to these
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according to the intended time horizon or according to the level in the organizational hierarchy where they are taken. P2: The planning and decision-making process follows a timeline. Corporate environmental management decision-making is not only hierarchical following planning levels, but the planning itself follows a clear framework referring to time. It starts on the highest level of hierarchy, the strategic planning, which is later decomposed and implemented on tactical and operational levels. On the other hand, planning and decision-making does not end on the operational level, but the whole hierarchical planning system evolves over time. This is possible through a link back from the operational to the strategic level, providing hierarchically higher set planning with detailed information. Therefore the system can at the same time be described as following a time-line and be seen as a loop. In environmental management, environmental reporting can be used as a feedback loop and link back from operations to strategy, as illustrated in Fig. 34.3.
Fig. 34.3. Environmental reporting as a feedback loop P3: Policies, concepts, methods and tools can be roughly positioned in the framework of decision-making in time as shown in Figure 31.4:
Fig. 31.4: Proposition 3: Decision-making sequence and timeframe The environmental policies are located on a strategic level in this proposition, because they can be described as all-encompassing, general guidelines and environmental management frameworks aiming at a long time-horizon, and with decisions made on a top management level. Concepts, as used in this context, are theoretical frameworks, although designed on a more detailed level than strategies. They are deployed strategies, analyses and assumptions about future possible real occurrences. While decomposing strategies, they attach and define responsibilities and actions for the measures necessary to achieve the strategic goals and targets. They are set here on a tactical
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level because of their theoretical status, as no actual measures are taken but only assumptions are made in this stage. Tools for sustainable development and environmental protection are actual implemented methods. They encompass actual measures and implementations; on this stage, actions are taken. Tools can be technologies, functions and processes as well as information and measurement systems. In the further positioning of environmental concepts, methods and tools the tactical planning level is divided into information, technology and process tools.
POSITIONING OF CONCEPTS, METHODS AND TOOLS Fig. 34.5 summarizes our attempt to position the concepts and tools of EMS into the time frame model. The strategic dimension lays the framework for both the tactical and operational measures. Some tools and concepts cannot be clearly classified solely in one. The different phases and their components are assessed more carefully in the following section.
Fig. 34.5: Positioning of environmental management concepts, methods and tools The strategic approach. The first phase of an EMS is creating an understanding and commitment of the environmental task. The understanding has to come from within the company and initially concerns top-level management. The understanding creates a framework not only for the environmental policy, but also for the whole EMS. It also lays the framework for what the company's ethics are. The environmental policy
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states the overall scope, vision, and aim of the EMS. We position both the creation of understanding and the environmental policies on the strategic level, as both can be described as all-encompassing, general frameworks for the whole management system. Both the understanding/commitment and policies are created on the topmanagement level, and with a long-term strategy in mind. Concepts on the tactical level. We earlier defined these concepts as theoretical frameworks, but more specific and detailed than strategic frameworks. We further stated that these concepts are deployed strategies, as well as assumptions about possible future possible impacts and occurrences. As mentioned before, the tactical dimension further specifies the strategies, as it attaches and defines responsibilities and actions in order to achieve the all encompassing goals and targets set on the strategic level. Positioning the methods and tools on either the tactical level or operational level proved more difficult. Some of the policies, such as EIA or waste management (as a concept), include elements from the tactical as well as the operational level. But there are also more clear-cut concepts that can be positioned on the tactical level. These include the setting of more detailed environmental (quantifiable) targets and objectives, the definition of which environmental areas are prioritized, the supervision of the overall environmental policy, and the allocation of environmental responsibilities within the company. Tools on the operational level. The tools used on the operational level, are also the most tangible measures of an EMS. Therefore, this group also displays the widest range of policies/tools of the three levels. We have sub-divided the tools on the operational level into technological solutions, process tools, and information tools. Technological solutions include, for example, the adoption and development of Best Available Technologies (BAT). In practice, BAT involves the use of proven technologies and production methods in order to prevent or minimize emissions to the environment. Even minor technological developments and/or adjustments can reduce the impact of a company's environmental effect, also in the long-term perspective. But it should also be emphasized that in this embedment, technological tools should not be perceived as seamless solutions for diminishing or eradicating environmental impacts of business activities. Rather, they are often convenient methods to reduce, but not to eliminate, environmental problems on a short-term perspective. The information tools can be divided into information targeted for internal or external use. An instrument for external information is the adoption of environmental labeling (eco-labeling). The aim of the labeling-schemes is to ensure that products meet certain environmental standards, and are hence awarded to products that meet a range of environmental criteria, covering everything from product ingredients to packaging. The labels are widely used as part of the products' environmental
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marketing, when the manufacturer is trying to convey a green-image to the consumers (Webb, 2000; Roberts, 1995). Another form of labeling is compulsory content labeling, which is required on a legal basis. It can have an environmental dimension if, for instance, hazardous materials have been used in the production. The compulsory labeling is aimed at authorities, but also indirectly at the consumer. The publication of corporate environmental reports is another tool for external communication. Kolk (2000:130) defines environmental reports as "publicly available publications in which a company gives an account of its environmental or environmentally related activities and results in a specified period of time". Information tools aimed more for internal use are e.g. life cycle assessment (LCA), and environmental cost accounting. One of the reoccurring problems for companies when trying to implement an EMS is identifying and prioritizing the most important projects and the parts of the production process with the most severe environmental impact. A LCA can solve many parts of this dilemma: it enables the user to quantify the social, economic and environmental impacts that are caused by the production (Parkinson and Bichard, 2000). LCA is a systematic process of evaluating the environmental effects of a product, process or activity. The LCA aims to identify and quantify the energy and materials used, and to assess the impact of energy and material usage, as well as to identify opportunities for environmental improvements. The LCA should cover everything from extraction and processing raw materials, to manufacturing, transportation and distribution, to use, reuse, maintenance, to recycling, and to final disposal (Webb, 1999; Duda and Shaw, 1997). Environmental cost accounting is another form of information tool that is used for internal purposes. But contrary to LCA, it measures the monetary costs of environmental impacts, and environmental measures (Kolk, 2000). Examples of process tools are the concept of design for disassembly, i.e. designing products with the out-set that they can be recycled after having been used, and the concept of waste management, which basically strives for zero waste and a closed-loop waste system. The training of staff can also be considered a process tool. SUMMARY AND CONCLUSIONS The aim of this study was to identify corporate environmental policies and tools, and to categorize them either on a strategic, tactical or operational level. As we perceive that there exists some uncertainty of how different EMS concepts and methods are defined, the creation of a decision-making timeframe and the positioning of environmental policies, concepts, and tools within, are aimed at clarifying their terminological application. In order to achieve this we aimed to answer the following questions: How can the decision-making sequence be described in environmental management? Is there an existing model for a timeframe in decision-making? Where
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should certain environmental concepts, tools and methods be positioned in such a timeframe? Which concepts, methods and tools can be identified in this context? And how can they be categorized? We concluded that the process of environmental management decisionmaking could be set on a strategic, tactical and operational level. These hierarchical planning levels are assigned according to the intentional time horizon, or to the level of internal organizational hierarchy. The conclusion being that there is an existing time frame in the EMS decision-making process. Further, we concluded that the environmental management decision-making is not only hierarchical following planning levels, but the planning itself follows a framework of time. It starts on the highest level of hierarchy, the strategic planning-level, which is then further, subdivided into tactical and operational levels respectively. To position some policies, concepts and tools proved more difficult, as some of them could not be positioned in one or the other of the levels. This became especially apparent for some concepts, such as waste management and EIA, which both include a conceptual tactical element, but also characteristics of tools on the operational level. There is also the fundamental question of what an EMS in fact is; it does in theory cover all levels. But one of the main problems with EMS is that its strength lies in its strategic approach. The EMS approach, and the EMS standards such as EMAS and ISO 14001, does not really state specific instructions of how to achieve sustainable development or less environmental impacts per se. An EMS is defined as the whole "organizational structure, responsibilities, practices, procedures, processes and resources for determining and implementing environmental policy" (British Standard Institute, 1994, as quoted in Welford, 1996). So, it does cover the tactical and operational levels, but the strength of the concept definitely lies on a strategic level. An EMS gives you the forest but not the trees: it is helpful in defining what should be done, but not how. It is then up to the individual company and its management to decide on and implement the specific tools, in order to achieve the goals and objectives set in the environmental strategy. Suggestions for further research The field of environmental management is fairly new, and is still in its early stages of development. One area that would need further research is the question of financial incentives for an EMS. What are the financial-economic incentives to implement the chosen concepts, methods and tools, if any? The common assumption today remains, that an EMS is mainly implemented because environmental legislation forces companies to cut their emissions and minimize their environmental impact. Another area for further research could be the technological solutions on the operational level. Technological solutions are the most commonly used method of
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cutting emissions, and even minor technological developments and adjustments can reduce the impact of a company's environmental effects. However, technological tools are in the danger of being perceived as seamless solutions for diminishing or eradicating environmental impacts of business activities. They are often convenient methods to reduce, but not to eliminate, environmental problems on a short-term perspective. So, the question is how technological fixes can further be embedded into the long-term environmental strategies, and how environmental strategies and policies have to develop in order to shift the aim from trying to fix an environmental problem to eradicating it altogether.
REFERENCES Ballou, R. (1999). Business logistics management. Planning, organizing and controlling the supply chain, 4th ed., Prentice Hall, Upper Saddle River, NJ. Banerjee, S.B. (2001). Managerial perceptions of corporate environmentalism: interpretations from industry and strategic implications for organizations. Journal of Management Studies, 38 (4), 489-513. Bhargava S. and R. Welford (1996). Corporate strategy and the environment: the theory. In Corporate Environmental Management. Systems and strategies (R. Welford, ed.), pp. 13-32, Earthscan Publications, London. Baron, D.P. (2000). Business and its environment, 3 rd ed., Prentice Hall, Upper Saddle River, NJ. Bjorklund, M. (2001). Strategic insufficiencies in creating an environmentally responsible distribution system. In: Collaboration in Logistics. Connecting Islands using Information Technology. Proceedings of the 13" Annual Nordic Conference of Logistics Research (Stefansson, G. and B. Tilanus, eds.), pp.141-152, June 2001, Reykjavik, Iceland. Blair, A. and D. Hitchcock (2001). Environment and business. Routledge, London. Domfnguez Machuca, J.A.; M.J. Alvarez Gil; S. Garcia Gonzalez; M.A. Dominguez Machuca and A. Ruiz Jimenez (1995). Direction de operaciones. Aspectos estrategicos en la production y los servicios. McGraw-Hill, Madrid. Duda, M. and J. Shaw (1997). Life Cycle Assessment. Society, 35 (1), 38-44. EMAS (2001). EMAS reference documents: Text of Council Regulation 1836/93. http://europa.eu.int/comm/environment/ernas/emas_reg_en.htrn,
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2001-07-05. Greeno, J.L. and S.N. Robinson (1992). Rethinking corporate environmental management. The Columbia Journal of World Business, 27 (3/4), 222-232. Gunther, H-O. and H. Tempelmeier (1995). Produktion und Logistik, 2 nd ed., Springer-Verlag, Berlin.
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Competing through manufacturing. Wiley, New York. Kolk, A. (2000): Economics of Environmental Management. Prentice Hall, Harlow. Lawrence, L. and D. Andrews (1998). Alignment and deployment of environmental strategy through total quality management. The TQM Magazine, 10 (4), 238245. Martin, R. (1998). ISO 14001 guidance manual. National Center for Environmental Decision-making Research, Tennessee. Mintzberg, H. (1989). Mintzberg on management: Inside our strange world of organizations. Free Press, New York. Netherwood, A. (1996). Environmental Management Systems. In Corporate environmental management. Systems and strategies (R. Welford, ed.), pp.35-58, Earthscan Publications, London. Parkinson M. and E. Bichard (2000). Life cycle assessment: Who's afraid of LCA? The Safety & Health Practitioner, 18 (5), 60-62. Pearce, D.W; A. Markandaya and E.B. Barbier (eds., 1990). Economics of natural resources and the environment harvester. Wheatsheaf, London. Roberts, M. (1995). Eco-labels live again. Chemical Week, 156 (18), p.20. Sharma, S. (2000). Managerial interpretations and organizational context as predictors of corporate choice of environmental strategy. Academy of Management Journal, 43 (4), 681-697. Shrivastava, P. and H.I. Scott (1992). Corporate self-greenewal: Strategic responses to environmentalism. Business Strategy and the Environment, 1 (3), 9-20. Starkey, R. (ed., 1998). Environmental management tools for SMEs: A Handbook. European Environmental Agency, Copenhagen. Walker, L.J. and J. Johnston (1999). Guidelines for the assessment of indirect and cumulative impacts as well as impact interactions. EC DG XI, EC Report NE80328/D1/3, May. Watkins, R. and E. Gutzwiller (1999). Buying into ISO 14001. Occupational Health & Safety, 2, 52-54. Webb, L. (1999). IPPC steps up to BAT. Pulp & Paper International, 41 (4), 29-32. Webb, L. (2000). Sticking to the requirements of eco-labels. Pulp & Paper International, 42 (10), 39-42. Welford, R. (ed., 1996). Corporate Environmental Management. Systems and Strategies. Earthscan Publications, London. Welford, R. and A. Gouldson (1993). Environmental Management & Business Strategy. Pitman Publishing, London. Wilson R.C. (1999). ISO 14000 insight: EMS manual: Something every company needs. Pollution Engineering, 31 (8), 27-28.
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Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y.A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
SYSTEMS MAPPING FOR HIGH-RISK PRODUCT ACCEPTANCE Sreejit Mohan Halvard E. Nystrom University of Missouri, Rolla, Rolla, Missouri, USA
ABSTRACT This paper presents a systems mapping approach to investigate the conditions that either promote or inhibit market acceptance of high-risk products. This approach based on the soft systems methodology, is applied in a case that studies the market acceptance of plant made pharmaceuticals. An improved understanding of the situation is gained by conceptualizing the market as a system encompassing all the stakeholders involved in making as well as influencing decisions that affect the product's acceptance. The systems mapping process includes the development of a conceptual map that includes these stakeholders and the flow of information among them. It also includes developing and implementing surveys that assess the perceptions of the key stakeholders and identify their concerns. Knowledge of stakeholder perceptions and their specific concerns can help direct appropriate action that address these concerns prior to product introduction and thus mitigate some of the risks. Keywords: Soft systems, stakeholder analysis, new product introduction, conceptual mapping, biopharmaceuticals.
INTRODUCTION Emerging technologies and products can be perceived as risky, and this perception can have a significant negative impact on market acceptance much before its formal introduction. This can be shown by the case of genetically modified crops. The acceptance of these products has been limited in various parts of the world primarily due to concerns regarding the introduction of new health and environmental risks. A significant lesson that can be learned from the debacle is the importance of effectively
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managing and addressing the public's concerns about genetically modified products. Some people's reaction when confronted with genetically engineered products is to concentrate not on potential benefits but on potential risks (Enriquez and Goldberg 2000). This has created a situation in which some genetically modified products are facing limited public acceptance. With hindsight, it is clear that other introduction strategies might have been more successful. The most acceptable applications of genetic engineering are those that offer significant benefits to the consumers and those that are perceived to be ethical and safe (Hoban 1999). In the case of some genetically modified crops the consumers did not perceive a clear benefit from using them and at the same time, unanswered questions about its safety fostered a mindset of skepticism. These perceived risks swayed public opinion in Europe and Japan against these products. As a result European and Japanese regulatory authorities continue to impose restrictions on the introduction of these products. Other third-world countries seem to be following the example set by Europe and Japan, as demonstrated by the president of Zambia who rejected a significant aid package of genetically modified grain, even when many of the citizens were starving. In order to create an environment conducive to a successful new product introduction, it is imperative that risks posed by non-acceptance be minimized. A strategic approach that is preparatory, proactive and pre-emptive in nature can help achieve this by allaying the public's concerns much prior to product introduction. However, central to this approach is the recognition that it is not just the general public that might have concerns. There are other players that might have a much greater impact on market acceptance. Who are these players? What are their concerns? How do they interact among themselves? How critical are these interactions? The system mapping approach facilitates the identification of the stakeholders that either directly or indirectly influence product introduction. These stakeholders are then graphically presented in a map that highlights their relationships and the information flow among them. It is a tool that can be used to support initial dialogue and discussion and help build a sound understanding of the system. This understanding can be used to design a survey that can elicit key information about stakeholder perceptions and concerns and validate the initial map configuration. This knowledge can help identify the stakeholders that are likely to pose the greatest barrier to product introduction as well as their key concerns. The improved understanding of the system can help identify appropriate actions that address the key issues and also provide a platform for effective follow-on marketing communications (Nystrom and Srinivasan 2001). This approach is applied to the introduction of plant made Pharmaceuticals. These are biopharmaceutical products manufactured using genetically modified plants
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and used to treat medical conditions such as rheumatoid arthritis, diabetes, heart disease and cancer.
SYSTEMS MAPPING The systems mapping approach is based on the Soft Systems Methodology (Checkland 1999, Checkland and Scholes 1990). The Soft Systems Methodology is designed to provide valuable insights in the analysis of complex situations. This is because it focuses on the total view of the system rather than the individual components within the system. This helps generate new perspectives, which aids clarify the existing state of the system and identify areas that need improvement. (Nystrom and Srinivasan 2001). Generating models that reflect the state of the system is an integral part of this approach. These models help define the system and help clarify the interactions between the various components of the system. In a practical sense, the systems approach encompasses a large body of methods, tools and principles, directed toward understanding the interactions between the various systemic forces, and seeing them as part of a common process (Kienholz 1999). This provides improved understanding and significant organizational learning. Soft systems are applied to ill-defined situations made complex by human activity subsystems, while the conventional systems or 'hard' approach is applied to more structured technical problems. However, the real distinction stems from the attribution of systemicity. Hard systems thinking takes the world to be systemic while the soft approach assumes the process of inquiry into the world as systemic (Checkland 1983). The following are concepts have been identified as essential to the soft systems approach (Checkland and Scholes 1990). Purposeful Action: Human beings engaging in purposeful action characterize real world problem situations. Models are developed to describe human activity systems that have purposeful action. Models: These models are not depictions of the real world situation but are designed along a particular worldview. There can be several such worldviews. These models can help structure rational dialogue about the system and utilize the various worldviews to gain better insight into the system. Rational Dialogue: The dialogue facilitates reconciliation between contradictory viewpoints within the system, influences the process of inquiry into the system, supports rational interpretation of the results and identifies action that can improve the situation.
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Figure 35.1 presents a typical soft system application. A real world problem situation is identified, yet not fully defined but can be represented as a purposeful system. Models are created to depict specific worldviews of the system and compared with the real world situation or other such models. The comparison, carried out through analysis and rational dialogue, provides a better understanding of the real world problem situation. This process can then help identify appropriate action to improve the situation. This is valuable because the models, dialogue, analysis and identification of action plans provide organizational learning and motivation to perform the corrective action.
Figure 35.1: Soft Systems Methodology as a learning system The Soft Systems Methodology can be applied to the introduction of high-risk products and technologies through the systems mapping approach. The risk of possible negative publicity can have an unfavorable impact on the commercialization and success of new technologies (Mohr 2001). Early identification of stakeholders and their concerns can provide an effective decision making framework for generating effective and targeted communications with the stakeholders in a way that can mitigate their concerns prior to product introduction. The systems mapping approach is demonstrated in the following case study on the market acceptance of plant made Pharmaceuticals.
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CASE STUDY
Biotechnology products have come a long way from the herbicide and pesticide resistant crops that were developed in the last two decades. Several biotechnology derived Pharmaceuticals or biopharmaceuticals are already being used to treat lifethreatening illnesses such as cancer and hemophilia. Research in biotechnology now spans the entire gamut of industries ranging from health care and agriculture all the way to industrial materials, plastics and even fuel. The following case study focuses on the market acceptance of plant made Pharmaceuticals.. Plant made Pharmaceuticals are basically therapeutic biopharmaceuticals that are being developed to fight medical disorders like rheumatoid arthritis, osteoporosis and cancer. Rapid advances in plant and animal biotechnology combined with advances in medical science are enabling the production of these biopharmaceuticals proteins using transgenic plants, and animals. These production methods offer potential significant benefits such as overall cost reduction and increased production capacities for therapeutic biopharmaceuticals (Fischer et al. 1999). Advantages also include significant improvements in quality of the biopharmaceutical and reduced health risks (Giddings, et al. 2000). However, since genetic engineering is the enabling technology in these production methods, these products might evoke associated fears that might deter some of its users. It is likely that some of the resistance to biotechnology applications in agriculture may also affect the introduction and acceptance of therapeutic biopharmaceuticals (Stone 2000). The impact could be from grain industry groups that influence agencies to institute excessive restrictive regulations, or pharmaceutical companies that avoid the opportunity to utilize specific production methods to avoid regulatory and environmental risks. These actions could have a detrimental effect on the acceptance of these products. The systems mapping method identifies action that can be taken to improve the public understanding and acceptance of these products and involves the following steps: 1) Identification and analysis of the important stakeholders in the system 2) Development of a stakeholder map 3) Design and implementation of stakeholder analysis tools, and 4) Identification of actions that can improve the acceptance of the product. Stakeholder Analysis This first step seeks to understand the dynamics of the system, the scope of the system and the key players or "stakeholders" involved. An integral part of any real world problem situations are human activity systems (Blair and Whitston 1971), in which
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people engage in purposeful action, which is meaningful for them. These are the stakeholders in the system. Since solving system wide problems requires the inclusion and participation of all the relevant stakeholders (Freeman 1984), the initial effort is to identify them and gain a basic understanding of their inter-relationships. In this case, stakeholders are defined as individuals or groups that are involved in the decisions that affect the market acceptance of these products or could have a significant influence on the decisions. The decision makers include the pharmaceutical companies that develop and market the drug, doctors who prescribe it and finally patients who choose to consume the product. Figure 35.2 depicts one of the decision-making chains in the biopharmaceutical market, where "Pharma" represents the pharmaceutical firms.
Figure 35.2: Decision makers in the biopharmaceutical system. The pharmaceutical companies (Pharma) develop the drug and often outsource the manufacturing to contract manufacturing organizations. Thus, the pharmaceutical companies make the first decision in this chain by choosing the production method. Doctors are key decision makers in the system because they have the option of recommending alternate therapies. Likewise, patients could refuse to consume them due to their reservations about products developed through genetic engineering. In addition, there are stakeholders that can have a significant influence on the decision-makers, either positively or negatively. Table 35.1 shows a list of influencers and ways in which they could influence the acceptance of these drugs. Table 35.1: Influencers in the biopharmaceutical system Influencers Contract manufacturing organizations Biotechnology Support org. Consumer Activists Schools Governmental organizations HMO's Farmers Grains
Ways to Influence Information, funding of research studies and public relations Information, advertisements, public relations Information, demonstrations Information, education, research study reports Regulations, enforcement, funding for therapies Funding for therapies harvesting plants and animals and avoiding contamination Lobby regulators to avoid contamination of the food supply.
The contract manufacturing organizations develop the technologies for the production of these biopharmaceuticals. They can provide information through public relations that supports the benefits of these technologies and fund research studies that
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provide evidentiary support. The biotechnology support organizations provide sources of information that support the biotechnology products and processes. The consumer activist groups have negative opinions regarding these technologies and take action to prevent or at least delay the introduction of genetically modified products. Schools shape the perspectives of their students that impact the public perception on these products. They also educate the doctors that prescribe the medicine and the journalists that report on many of these activities and provide important communication links among the stakeholders. University researchers also generate much of the relevant research and publish their results. Governmental organizations make regulations, interpret and enforce the law, fund research, encourage activities that support economic development and fund some of the consumption of Pharmaceuticals through Medicare, Medicaid and the Veteran's Administration. Health Maintenance Organizations (HMO's) develop policies that can facilitate or restrict the acceptance of specific classes of medicine as part of their medical coverage. The farmers produce the crops, animals or other products that contain the drugs. They are influenced by other farmers that are concerned about contamination or look favorably to these technologies as new agricultural opportunities. Finally, the stakeholder identified as "grains" represents organizations from the food, feed and grain sectors, which might be concerned about contamination of the food supply within the physical distribution channels. The stakeholder analysis provides a systematic analysis of the key stakeholders and their relationships as preparation for the design of the stakeholder map. Stakeholder Map In the Soft Systems Methodology, models are devices whose purpose is to aid in the exploration of the problem. They are thus not models of anything but models that are relevant to debate about the situation perceived as problematical (Checkland and Scholes 1990). In the context of the case study, the stakeholder map is a conceptual model of the stakeholders in the system, their relationships and the information flows among them, as shown in Figure 35.3. The blocks represent the stakeholders and the arrows represent the relationships and key information flow among them. The model can then be used to explain which of the stakeholders is likely to become a limiting factor to the market acceptance and why. Therefore, the map becomes a vehicle for promoting rational dialogue based on the stakeholder analysis results. It can help identify what concerns are important to the stakeholders and what information flow might have an impact in the mitigation of these risks. Because the development of the map builds understanding about the situation through debate and the review of the literature, it impacts the stakeholder analysis, making these two steps interrelated and requiring that they should be performed iteratively. The map facilitates and structures
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this process, and is continuously modified as the perception of the relevant system becomes clearer.
Figure 35.3: The Stakeholder Map The complexity of the map is dependent on the number of stakeholders represented, and its value increases, as relevant stakeholders are included. However, the value decreases, as irrelevant stakeholders are included since it adds unnecessary complexity to the model without an appropriate increase in benefits. Therefore, the inclusion of a particular stakeholder in the map depends on the level of influence exerted by it. This balancing process determines the boundary of the system and the scope of the study. This implies that there are influencers other than those identified in Table 35.1, but only those that are expected to have a significant influence are included. For example, in the early stages of the analysis, media was included as a stakeholder. Much of the information about emerging technologies is transmitted through consumer and trade media. However, it was soon understood that the media merely collects, interprets, and transmits this information (Hoban 2000). It does not initiate most of the flow. As a result media is included in the system, but as part of the arrows between stakeholders. Similarly, the inclusion of a stakeholder could arise from new information or as a result of particular events. This can be illustrated with the grains stakeholder whose importance increased after the "Starlink" disaster. In this instance producers of this genetically modified corn, which was intended for animal feed, allowed it to enter the human food chain. This raised the concern of food, feed and grain distributors about contamination of existing channels by any genetically modified products. This powerful group can lobby government regulators to stymie the introduction of any food crop that is genetically modified for non-food applications even if they are life-saving therapies. The stakeholder map is based on the understanding gained through the stakeholder analysis and reflects the investigators' judgment. This judgment is based on the review of existing literature, internal dialogue, and discussions with
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knowledgeable individuals within the system. The next phase of the process is to validate these judgments and obtain the perspectives of the various stakeholders through analysis tools such as surveys, focus groups and interviews. Stakeholder Survey The primary objective of the survey process is to validate the stakeholder map. It should also help gain a clearer understanding of specific issues and stakeholder concerns. The information gathered through the stakeholder analysis is the basis for the survey questions. It identifies the important variables to measure which include: level of knowledge, level of concern about the technology, level of concern about the product, need for better understanding, and communications among the various stakeholders. To understand their perspective and capture their concerns, each stakeholder group is analyzed separately. The first phase of the study focuses on the two stakeholders that are familiar with these products and the technologies that are being developed to produce them. These stakeholders are the Pharmaceuticals firms (Pharma) and the contract manufacturing organizations (CMOs). A survey process is developed to capture the perspectives of these two stakeholder groups. The process is discussed in (Yelma and Nystrom 2002) Representatives are chosen from each group to participate in the survey. Since this is an exploratory study, the sampled groups are relatively small, but sufficient to capture the major issues. The surveys are mailed to these contacts so that they can either do the survey on their own, or wait for a phone call from the research team so that the researchers can assist in the completion of the survey. Most of questions in the survey are common for both stakeholders so that system wide results can be generated. However, the survey also has stakeholder specific questions, which would give an insight into issues and concerns that are be unique to that particular stakeholder group. The survey provides the information that validates or questions the conceptual model and facilitates the comparison with the real world scenario. This can also result in the modification of the stakeholder map to a more realistic depiction of the problem situation. The map can then be used to support dialogue and organizational learning to develop strategic action that can address the concerns and opportunities identified. Formulating Strategy The final phase of the process is to devise strategies that help direct actions that can make improvements in the system. The final map, which is closest to the real world situation, is used to support the dialogue. The survey results help identify stakeholders that are likely to become bottlenecks or champions to product introduction and their
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key concerns. Traditionally, the strategic planning process is carried out by few experienced individuals. However, in uncharted waters like this, it is very useful to include a broad range of participants to interpret the results, identify alternative actions and estimate their impact on the system. Broad participation in this phase can be very educational to the participants, and facilitate the implementation of these actions, since they participated in the strategic assessment. This phase enables the product developers to consider ways to mitigate the identified risks. The product or the production process can be modified to minimize the risks. For example, if the main concern is determined to be the contamination of neighboring crop fields by pollen from plants producing pharmaceuticals, methods can be developed to ensure that the plots are isolated and dispersal of pollen is minimized. This way once the product is introduced the issues that could cause concern have already been mitigated, and an adverse market reaction can be avoided. Further targeted communication and education programs can be used to support rational market behavior. Status of the Project The identification of the key stakeholders has been completed as well as the development of the stakeholder map. Representatives from the first two stakeholder groups, the pharmaceutical firms and the contract manufacturing organizations have been surveyed. These are the stakeholders that best understand the associated technologies. Based on the preliminary analysis of their responses, a number of preliminary results can be observed. These respondents are confident that science and technology contribute to the well-being of humanity and that the application of these technologies is beneficial, particularly for the productions of drugs. These respondents do not have major concerns regarding biopharmaceutical technologies. However, the concerns they have deal primarily with production capacity and government regulation, particularly with respect to transgenics. The respondents are concerned about the production capacity for transgenics and the high capital cost required to produce them. Excessive government regulation is seen as a major problem particularly associated with animal and plant transgenics as methods of production. Because of "excessive" regulation these production methods are perceived as having lower probability of gaining timely FDA approval. The respondents feel that even though strict regulations are useful to generate confidence within this stakeholder system, current regulations are too strict and restrict their beneficial results. From their perspective, there are a number of stakeholders that can limit the market acceptance of therapeutic biopharmaceutical products. These CMOs and Pharmas feel that consumer activist groups are the most likely to limit market
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acceptance, and is mentioned by almost two thirds of the respondents. Government organizations are also highlighted as a likely limiting factor by more than half of the respondents. Slow and excessive regulations are seen as significant factors limiting market acceptance. In both of these cases, education and communication are seen as the best way to address these limiting factors. The next two stakeholder groups: "doctors" and "the public" are being analyzed through interviews, focus groups and surveys, and this phase should be completed by June 2004. The doctors' perspective will help identify the concerns they might have in prescribing these products. The public perspective will help to understand how they might be affected by activist information, their perception of risk regarding this type of drugs, and how the risk perception might become exaggerated through social communication. This analysis can help identify action on the part of the producers, manufacturers and pharmaceutical firms that mitigate the areas of concern by these important stakeholders, and provide additional justification to address them. In addition, this analysis can lead to the development of effective communication strategies that clarify the value they provide so that it can balance the risks that cannot be effectively mitigated.
SUMMARY This paper has presented a method to address the acceptance of products that have high associated risks, or can be perceived as risky. It provides a process to better understand the market forces that will influence market acceptance and an opportunity to plan proactive action before the product is commercialized. This method is applicable to many technologies raging from nuclear energy to nanotechnology. Strategically, it adds value to the product development process by proactively assessing and managing specific risk concerns years ahead of formal product introduction.
REFERENCES Blair, R. N., and C. W. Whitston (1971). Elements of Industrial Systems Engineering. Prentice Hall, Englewood Cliffs, NJ. Checkland, P. (1983). OR and the Systems Movement. Journal of Operational Research Society, 34, 661-675. Checkland, P. (1999). Soft Systems Methodology: Chichester: John Wiley & Sons.
a 30-year
Retrospective.
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Checkland, P. and J. Scholes (1990). Soft Systems Methodology in Action. Chichester: John Wiley & Sons. Enriquez, J. and R. Goldberg (2000). Transforming Life, Transforming Business: The Life Science Revolution. Harvard Business Review, March-April, pp. 95104. Fisher et al. (1999). Towards molecular farming in the future: moving from diagnostic protein and antibody production in microbes to plants. Biotechnol. Appl. Biochem, 30, 101-108. Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach, Pitman. Giddings et al. (2000). Transgenic plants as factories for biopharmaceuticals, Nature Biotechnlogy, 18. pp. 1151-1155. Hoban, T. (1999). Public Perceptions and Understanding of Agricultural Biotechnology. Economic Perspectives, 4/4. Hoban, T. (2000). Social Controversy and Consumer Acceptance of Agricultural Biotechnology. Journal ofBiolaw and Business, pp. 38-46. Kienholz, A. (1999). Systems Rethinking: An inquiring Systems Approach to the Art and Practice of the Learning Organization: Foundation of Information Systems. Mohr, J. (2001). Marketing of High-Technology Products and Innovations. Prentice Hall, Upper Saddle River, NJ. Nystrom, H. and J. Srinivasan (2001). Market Acceptance of High Risk Technologies. Proceedings of the American Society of Engineering Management, 2001 Conference, Huntsville, Alabama, pp. 491-496. Stone, P. (2000). The Gene Team. National Journal, April 15, 2000, p. 1222. Yelma, S. and H. Nystrom (2002). Stakeholder Survey Method for Analysis of New Product Introduction in Unstructured Markets. Proceedings of the 2002 ASEMNational Conf, Tampa, FL, pp. 308-313.
Management of Technology. Internet Economy: Opportunities and Challenges for Developed and Developing Regions of the World Y. A. Hosni and T.M. Khalil (Editors) ©2004 Elsevier Ltd. All rights reserved
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ANALYSIS OF SUSTAINING GROWTH IN A CORPORATION USING SYSTEM DYNAMICS MODELING
Luis Rabelo, University of Central Florida, Orlando, FL Thomas Speller, Massachusetts Institute of Technology, Cambridge, MA** Chris Burns, Delphi Packard Electric Systems, Warren, OH Phillip Meade, Xodus Business & Technology Solutions, Inc., Orlando, FL*"*
INTRODUCTION Growth is an important concern for the modern enterprise. Therefore, industry is talking more about solutions and not just about products. There are several reasons for this strategy: 1.
Macro economic trends are apparent: a. Globalization of the world economy. A global company is different from an international company. A global company has valueadded activities in different regions of the planet. Globalization is leading to increasing interdependence of markets and industries. Therefore, a company to be global it has to provide services to adapt products to different geographical segments.
Dr. Luis Rabelo is an Associate Professor in the University of Central Florida, Orlando, Florida. Email:
[email protected]. Mr. Thomas Speller is a Ph.D. Student in the Massachusetts Institute of Technology, Cambridge, Massachusetts, and the fomer CEO of Gemcor Systems Corporation. Email: t. speller @ comcast.net. Mr. Chris Burns is an Engineering Group Manager at Delphi Packard Electric Systems in Warren, Ohio. Email:
[email protected]. Dr. Phillip Meade is the President of Xodus Business & Technology Solutions, Inc., a management-consulting firm for high-tech companies. Email:
[email protected].
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Luis Rabelo et al. b. The move to dynamic supply chains, modularization of business processes, and the trend towards ever changing networks of buyer/supplier relationships. For instance, global companies such as GE and Honeywell are present in more than 145 countries. Each continent has different growth rates and cost of capital structures. It makes sense to group in geographical units to respond to competitors very rapidly, using all of the resources of that region (products and services - regional economies of scale). At the same time, expertise in each product and services is needed. 2. There are several kinds of differentiated selling models employed globally. The sales proposition is currently built more on the advanced software and solutions approach. That means the marketing folks have to put together packages and sales aids that demonstrate to customers a different class of business benefits: products and services. 3. Some of the biggest customers (i.e., very profitable corporate accounts) have become more global than they were before. They operate in many countries and they operate an organization that was basically centralized but going de-centralized. However, they use common processes throughout the world. 1. Another important role of this hybrid product/service scheme is to help in understanding where the opportunities are — which markets are growing, what competitors are doing in that specific marketplace, how they react to what one does, and what kinds of challenges they pose.
DESCRIPTION OF THE MODEL'S DEVELOPMENT In addition to organization structure, using system dynamics modeling techniques (Senge, 1994 and Sterman, 2000), the larger enterprise issue of sustaining corporate growth is of vital importance. The theme of the model is to study the dynamics of creating corporate growth with a positive EVA in perpetuity. So far, no company has overcome the forces limiting corporate growth and making it vulnerable to ultimate merger, acquisition or failure. The model incorporates product development as the means to fuel a diversification strategy with an increasing portfolio of products to create sustainability. The key feedback loops are the systems producing organization, the services and spares parts business and the marketplace. Interwoven in the systems
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producing organization is the product line order fulfilment and the product development scheme to continuously replenish the company's portfolio of products and grow the enterprise. The project started by investigating and modeling two loops of an organization that has two strategic business units (SBU): SBU1 and SBU2. SBU1 and SBU2 are synergistically joined at the center by the necessity for successful order fulfilment. Additionally the word of mouth (WOM) model was connected to represent the market introduction of new products and their life expectancy. In the context of venture business investment, risk is the finite probability of failure, across a spectrum of possibilities from underperformance to outright bankruptcy, weighted with a factor indicating the significance of the occurring event. A similar definition applies to risk in the context of the traditional corporate R&D department across a spectrum of possibilities from the unsatisfactory pace of development progress to the complete failure to reach a proof of concept.
Fig. 36.1: Order growth
ofSBUl.
The first loop depicted in Figure 36.1 starts with an order received by the separate business unit (SBU1) which requires order fulfilment leading to a level of customer satisfaction and with higher customer satisfaction, greater requests for proposals (RFP's) are received and more orders are processed. This loop can be either spiralling upward or fall over time to zero. On the other hand, SBU2 is a different business but has a similar pattern shown in Figure 36.2. Orders received must be successfully fulfilled with a sufficiently high customer satisfaction in order to maintain or preferably increase the number of RFP's to create a virtuous upward spiral, otherwise the business volume over time goes to zero.
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Fig. 36.2: Order growth ofSBU2. The causal loop diagram (Figure 36.3) depicts the two separate business units that are strategically and synergistically attached and exist within a larger enterprise organization. SBU1 produces complex, large-scale automation systems for various markets and especially aerospace. Its parent has investigated the acquisition market for growth and has decided instead to create growth, using its custom design and project oriented core competencies by developing product lines in each market segment within the industry of assembly automation. The purpose of this modeling effort is to discover the important variables for increasing economic value added for the companies, increase the product development creation rate of product lines, and increase the order win rate. The order win rate refers to the number of orders received by the SBUs compared to the total number of bids as a percentage of requests. The goal is to win > 90 percent of all bids. It is the intention that these two SBUs in this model and other SBUs in the organizational system grow at as fast rate as possible while exceeding the required cost of capital, creating a positive EVA composed of the portfolio of companies and their respective portfolio of product lines. "Successful order fulfillment" and "customer satisfaction" are important factors in driving successful virtuous upward spirals of requested proposals, unit sales, and the breadth of products offered by product development. Order fulfilment to be successful must satisfy the customers' and company stakeholders' requirements to create this virtuous spiral. Likewise, unsuccessful order fulfilment causes a downward spiral, which cannot go below zero. Orders must be successfully landed with customers pleased at their decision placing orders with us. The SBUs must perform in compliance to the technical and contractual requirements as well as meet or perform better than the budgets and schedules of the orders.
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Fig. 36.3: SBU1 and SBU2 Synergism via Successful Order Fulfillment. It is the intent to develop new product lines for different market segments, all of which match the core competencies of a single SBU or the collection of SBUs, as quickly as possible. A purpose of this systems dynamics modeling effort is to create a template or methodology for enhancing the quantity and quality of new product lines. It is the desire in constructing and simulating this model to show management and their associates the importance of the SBUs, products and services, working very closely together to generate requests for proposals (RFP) at a high rate, increasing the rate of new product launches and corporate growth. The expectation prior to running the simulation is that the virtuous spiral loops will rise exponentially without limit. Although no oscillations are expected in a perfectly running system, it is anticipated because of lags or delays in different steps in the system that oscillatory behavior will occur. It is expected that as the portfolio of SBUs increase and as the portfolio of their product lines increase, the oscillations will dampen. This behavior is analogous to the diversified stock portfolio finance theory which states that as the stock portfolio becomes more diversified it exhibits less volatility in its total value. Delays have been introduced in the time to go from high quality proposals to actual unit sales, and separately in the time it takes to generate new products from product development efforts. The depiction of the causal feedback loops diagram is an excellent tool in team management meetings for developing corporate strategy. Much of the strategy development occurs by the process of building the model itself.
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MODEL-DERIVED POLICY DEVELOPMENT The equilibrium quantities in the model shown in Figure 36.4 hereinafter referred to, as 'the model' are the inflection points where variation would cause a spiral. Any oscillations in the model are quickly overcome by the strength of the two main positive reinforcing loops. Each variable in the model must have a policy or set of policies aimed at preventing precipitous downward spirals. This discussion on policies will cover the main variables. The policies are designed to address these inflection points (Grove, 1996). Critical Balances and Rates of Change Rate imbalances are sources of limits to growth or decline. An interesting question is whether the enterprise management can rely on the invisible hand to keep the balance of growth between the two SBUs or does it have to closely monitor the balance and exert controls to assure the balance. For instance, a situation can occur where there are inadequate service personnel or infrastructure to assure SBUl's products are properly serviced; as a consequence SBU1 might grow faster than SBU2 can adjust to close the gap between the symbiotic rates of growth. An imbalance is dangerous since the satisfaction level will be reduced, and at some critical point the vicious spiral downward will start. The danger of downward spiral generates the need to maintain metrics for enterprise and SBU management as well as worker visibility to keep key controllable variables on the right track. These key balances are cash availability, SBU land SBU2 growth rates, customer satisfaction, infrastructure growth rate, risk aversion, order win rate, and diversified portfolio theory adherence. Cash As is typical in growth scenarios, cash is required to keep up with the pace of growth. The rate of positive net cash flow generation must equal or exceed the rate of cash needed for new product development and other organizational needs. If cash becomes the constraint, then growth will be slowed. Management can choose to obtain more cash by stock offering, but this has a dilutionary effect on current shareholders and can be used only if the result is that the discounted future stream of earnings per share will be higher. Another option is to use debt. The cost of debt has two issues, the interest rate and the risk of not having enough cash later to pay the interest and principle. These issues make debt a poor choice to fund corporate growth for a company, which will need increasing amounts of cash in the future to fund the growth. A lack of cash crisis can significantly limit growth and potentially start a downward spiral.
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Fig. 36.4. A More Simplified Model.
Growth Rate of SBUl vis-a-vis SBU2 The rate of SBUl growth must be equal to or slightly less than SBU2 as measured by products with service compared to products without service (SBUl Available Products w/ Service > SBUl Available Products w/o Service). Because of the time to develop SBU2 services and product transition rate, SBU2 must keep metrics indicating the rate of product development, with time allowed to assure services are available ideally just before the product/market requires the services. This is because SBUl must have services to test and install their products, and SBU2 must at the same time maintain the installed base of systems to keep order fulfillment on time and the customer satisfaction level high.
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Customer Satisfaction The faster product development and production bring products to market in a high quality manner, the better. Operational Effectiveness of Equipment is a current terminology being used to emphasize uptime utilization of equipment. The greater the uptime the better, especially in bottleneck zones which determine the rate of throughput. There is clear evidence in the model that the time to develop products has a dramatic effect on the business. A policy must be targeted to reduce time-to-market. The time also has an almost 1:1 correlation with cost although not modeled here. So, cost will likewise be reduced if the time-to-market is quicker. The Average Product per RFP is highly elastic with the SBU stocks as expected - the greater the ability to produce products from RFPs, the better it is. The RFP per Customer Factor is very important to the behavior of the SBU stocks. Naturally, companies want to increase the number of proposals submitted to the customers and increase the winning percentage to create a thriving enterprise. The "SBU2 Successful Orders Fulfilled %" is highly related to quality. Frankly, lateness on orders cannot be tolerated due to the onerous effects on increasing costs (not modeled) and degradation in the business. For project management, if delays arise in a schedule, they must be diligently time recovered back to plan, using techniques such as explained by Goldratt (1997). Customer satisfaction is an important dimension to take into consideration for the success of the modern enterprise. It is essential to consolidate, analyze, and establish policies to guarantee customer satisfaction. This policy making process occurs throughout the marketing, sales, and service stages. Improved sociability will increase customer satisfaction, which can be accomplished by direct contacts, newsletters, advertising, newsgroups, and "chat" rooms related to the products and services. If sociability is low, then even high order fulfillment will not increase the satisfaction level. The model indicates that customer satisfaction should be approximately 95% to sustain upward virtuous spiral. Even a 90% rate will not significantly raise the positive loops. Infrastructure Another potential source of imbalance is the rate of infrastructural development to assure successful order fulfillment. Infrastructure development can be quite complex. Talent can be difficult to recruit and retain in the competitive market. Training takes time and is expensive. Support process systems and tools take time to design, debug, train and become accepted in use. Infrastructure is also a process to control the
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organization and prevent downward spirals. Providing the process improvements for the organizational structure to support and encourage further growth is a difficult management challenge. In addition, synchronization of the supply chain infrastructure to the needs of the organization in the form of timing, quantity, quality, logistics, and price is vital for successful order fulfillment and customer satisfaction. Human Resources Talents can be difficult to recruit and be retained in the competitive market. Training takes time and is expensive. •
Having a good ratio of "Services Staff/Customer" usually means good customer service. This has increased the number of customers ("word of mouth").
•
More investments in the service organization (SBU2) cause more investments in service staff and more development of services. Investments in service staff increase the recruitment and training of the service force. Training takes time. Professional development of an employee is very important. Recruitment and training of the service force takes more resources than the development of services.
•
More services, more customers, and more products increase the sales and therefore profit in the organization. The attrition of employees with "early" retirement packages usually affects the professional development of the new "recruited" employees.
• •
It is important to invest in the services and product organizations. However, it is essential to keep a balance. Services are very dependent on "good" products.
Supply Chain Infrastructure The infrastructure and the organization strategy to synchronize the supply chain is very important. The enterprise needs the required resources from suppliers (i.e., right time, right quantity, right quality, right place, and right cost) and to deliver products/services to customers (i.e., right time, right quantity, right quality, right place, and right price). Risk and Change Aversion Growth limitation and potential decline is well described by Christiansen (1997), which is the failure of the organization to adjust to and accept change both from the outside and within the organization. This reluctance to leave the comfort zone of the organization and put on blinders to possible technological substitution is a serious problem frustrating the sustainability of the firm. The model deals with this problem
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by emphasizing product development, which is change. However, will the products be merely incremental or will they be truly breakthrough? A possible policy could be to engage in a product development that has at least a 50% cost and TTM improvement, as well as features superior by a 50% margin over the competition. This could be called the 50% rule. If the new product development candidate is 50% lower cost (at least to build; one could sell at a higher market price if possible), faster TTM, and better, then the project will be undertaken. Products must also be diversified into different market segments. The organizational structure must foster this product/market approach. Risk aversion is captured in the model by the variables "SBU1 Response Rate to Customer Requests" and "Average Product per RFP". If SBU1 is overly averse to risk, it will respond to only those few customer quotes that the SBU is confident it has a good chance of winning. The response rate would be lower for risk adverse firms versus risk taking firms. The firm's reputation (word of mouth among customers) is modeled as a function of the "Relative Wining Proposals," which includes those RFP's that the firm is asked to quote but refuses to quote. Therefore the model penalizes firms that are adverse to risk. At the same time the firm needs to be able to deliver on the quotations that it accepts by winning a good percentage of those quotes. For firm's that are risk takers, they should be able to develop new products (and new markets/customers) by developing a larger number of products for each RFP that they win. Finally, the firm must be able to come through on these products in terms of both quality and delivery. These factors are shown in the model as contributors toward the customer satisfaction variables. In the future the model could be expanded to tie some of these variables together, by modeling and capturing the optimum level of risk (i.e., a good balance between a high number of quotations accepted, a high number of new products per RFP, and acceptable quality and delivery for these riskier projects.) Order Win Rate The model is very sensitive to winning percentage. A slight change sends it spiraling upward or downward very quickly since most of the loops are positive. Customers in reality can be very sensitive and not place orders if they are dissatisfied, or for a host of other reasons, this sensitivity should not be ignored. Customers can be either very cold and unforgiving, or they can be very tolerant depending a great deal on how they are treated, and they must be responded to accordingly. Adherence to Diversified Portfolio Theory SBU1 must prioritize not only to pursue growth from the current product families but create new product families in new market segments as well. Typical behavior is that
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people like to stay in their zone of comfort. Even in a product development area, people tend to improve on the known past in the form of incrementalism rather than take the risks of going into new breakthrough territory. Usually the incentive systems in corporations inhibit or penalize those who take a daring risk and lose. The sanctions imposed serve witness to others in the organization to not take these risks. However, the model requires that SBU1 diversifies into new market segments as well as grows new products within existing market segments. A risk and reward system must be modeled which demonstrates the desired behavior of multi market segment penetration with new product families. Top management must emphatically lead the way in funding system architectural teams in the different market segments. It seems that the biggest gamble lies in accurately understanding the wants of the perceived new market segment. An outsider to a market has the disadvantage of not intimately knowing the customer drivers without a thorough market research investigation. On the other hand, the outsider might be able to bring into the market space fresh new ideas unencumbered by past paradigms. A policy for entering into the new market space must account for the added risk, therefore requiring again that the new product line be at least 50% lower cost to build, 50% better in features, and 50% faster in time-to-market, with an equal or preferably enhanced quality compared to existing competition. EVA Measurement and Incentive System Rather than profitability, EVA has been chosen as the financial theoretical basis for measurement of the firm's successful contribution to society. The contribution margin policy must be able to sustain a positive EVA along with a positive revenue growth. CONCLUSIONS Many processes and the attentiveness of skilled workers to the processes underlie the success or not of the interrelationship of SBU1 and SBU2. The model being a high level of abstraction cannot cover every aspect of the operation of the enterprise but is emphatically pointing out the sensitivity of successful order fulfillment in products provided and necessary services support to the customer. Any deviation from the equilibrium points affects customer satisfaction and the positive reinforcing loops. On the one hand the model demonstrates in an alarming manner the precipitous downward spiral, which is exhibited too often in the life of an enterprise. On the other hand the model shows the virtuous spiral of growth that is sustainable forever if the inflection points are not crossed. Borrowing from sports, the term momentum can be used to describe the upward spiral. The model expresses the optimism toward the future a company or enterprise of SBUs can possess by managing above the inflection point thresholds of the model. The model is truly
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pointing the way toward continued corporate sustainability and enrichment of its shareholders, customers served and other stakeholders.
BIBLIOGRAPHY Christensen, C. (1997): The Innovator's Dilemma. Harvard Business School Press. Goldrat, E. (1997): Critical Chain. North River Press Publishing Corporation. Grove, A. (1996): Only the Paranoid Survive. Bantam Doubleday Dell. Senge, P. (1994): The Fifth Discipline. Currency Doubleday. Sterman, J. (2000): Business Dynamics. McGraw-Hill.
