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The learning organization paradigm and the concept of knowledge management have received substantial discussion in the literature since the publication of Senge’s (1990) seminal book The Learning Organization (Armstrong and Foley, 2003; Bierly et al., 2000; Cohen, 1998; Davis and Botkin, 1994; Drucker, 1997; Easterby-Smith and Araujo, 1999; Ellinger et al., 2002; Holt et al., 2000; Kim and Mauborgne, 1999; Jackson et al., 2003; Marquardt and Reynolds, 1994; Murray and Donegan, 2003; Nonaka, 1991; Quinn, 1992; Steward, 1997; Wang and Ahmed, 2003). The literature stresses that organizations can create a key source of competitive advantage, embrace innovation, and improve bottom-line results by developing capabilities for knowledge management and becoming a learning organization. Organizations that focus on knowledge management and learning, however, must use knowledge in a way that leads to action and change. In this regard, simply developing capability to acquire and share knowledge is not sufficient to become a knowledge-based, learning organization. Watkins and Marsick (1996) stress this perspective when stating:
Knowledge-based organizations: perspectives from San Francisco Bay area companies Michael Albert and Thierry Picq
The authors Michael Albert is Professor of Management at the College of Business, San Francisco State University, San Francisco, California, USA. Thierry Picq is Professor of Management at Ecole de Management, Lyon, France.
Keywords
A learning organization must capture, share, and use knowledge so its members can work together to change the way the organization responds to challenges. People must question the old, socially constructed and maintained ways of thinking. Learning must take place and be supported in teams and larger groups, where individuals can mutually create new knowledge. And the process must be continuous because becoming a learning organization is a never-ending journey (p. 4).
Knowledge management, Learning organizations, Innovation, United States of America
Abstract Recent literature discusses problems that organizations have had with the implementation of knowledge management programs and practices to support innovation. The article discusses findings from interviews with 50 human resource executives, staff, and consultants working for 20 San Francisco Bay area companies. A key finding was the importance of culture and other supportive infrastructure to successfully implement knowledge-based programs and practices. Additional results from the interview data are summarized. A summary of HewlettPackard Lab’s experience with knowledge-based change is discussed to amplify and provide perspective to the interview findings and the reviewed literature.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 169-177 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549865
Although many examples are provided in the literature of organizations that have successfully created a learning organization and of recommendations regarding actions and practices to create organizations that are knowledge-based (Argyris and Schon, 1996; Ellerman, 1999; Davenport and Prusak, 1998; Dowd, 2000; Dumaine, 1994; Garvin, 2000; Nonaka and Takeuchi, 1995; Senge et al., 1994; Smith, 2000; Watkins and Marsick, 1993; Watkins and Marsick, 1996; Vakola and Rezgui, 2000; West and Burnes, 2000), recent literature focuses on problems that organizations have experienced with implementing practices focused on turning knowledge into organizational action (Holton and Baldwin, 2003; Jackson et al., 2003; McDermott, 1999; Pfeffer and Sutton, 2000; Ruggles, 1998). For example, Ruggles (1998) discusses the results of a major survey by Ernst & Young, who asked executives in 431 firms to rate their organization on how well they were doing in various dimensions of knowledge management. Although executives believed that they were doing a good job in generating new knowledge, and in obtaining
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knowledge from the environment, they were not transferring knowledge within their organization well. Since transferring organizational knowledge into organizational action is a key to organizational innovation, it is critical for organizations to better understand their knowledge management process. Additional research is needed to provide managers and consultants with important perspectives to consider when implementing knowledge-based programs and practices in their organizations. The results from such research could also benefit academics by providing select factors to focus on in future studies. The purpose of this paper is to describe views and company experiences with the concepts of knowledge management and the learning organization from a sample of leading edge, San Francisco Bay Area companies.
researchers thought that key findings from a sample of 20 companies located in this geographic area could provide a strong foundation for researchers to conduct follow-up studies. The particular companies in the sample were selected based on accessibility for interviews due to a network of professional, university-based relationships that had been developed during the prior five years. A minimum of two people were interviewed from each of the 20 companies. Collecting interview data from at least two individuals would provide the researchers with a simple process to ensure validity, which is discussed shortly. When contacting the company, a letter describing the project, including the three broad interview questions, was sent to the vice-president of human resources (VP HR). This was done for two reasons. First, this person was a member of an association of human resource professionals, organized by the College of Business where one of the authors was a tenured professor. This group meet ten times a year to discuss contemporary HR issues and practices. It should be stressed that this HR professional network also provided the college with support for research projects. The second reason that the VP HR was targeted was that the researchers wanted to collect information from the most senior HR professional who was accessible in light of this individual’s detailed understanding of knowledge management issues and actions in their respective company. This was clarified and discussed with the VP HR during a follow-up phone conversation. If the VP
Methodology Sample Interviews were conducted with 50 professionals working in the human resources field for 20 companies located in the San Francisco Bay area. Companies that participated in the interviews included Levi Strauss, Charles Schwab, Genentech, Wells Fargo, Intel, Cisco Systems, HP, and Sun Microsystems (see Table I); 70 percent of the companies were located in Silicon Valley. This particular geographic sample was chosen in light of the area’s reputation for progressive management practices. In this regard, the Table I Companies and personnel interviewed Name
Description
Personnel interviewed
Adobe Systems Advanced Micro Devices Catholic Healthcare West Charles Schwab Cirrus Logic Cisco Systems Duty Free Store Genentech Hewlett Packard Intel Levi Strauss National Semiconductor Oracle Peoplesoft Quantum Silicon Graphics Solectron Sun Microsystems 3Com Wells Fargo
Software Microprocessors Health-care non-profit Broker, Financial services Signal circuits Networking Travel retailer Biotechnology Computer products Microprocessors Apparel manufacturer Microprocessors Software Software Disk drives Computer systems Electronic systems Computer systems Networking Banking
VP HR; two OD consultants VP HR; Training manager Corporate Director OD; Training manager VP HR; OD consultant Training manager; OD consultant VP HR; OD consultant VP HR; Staffing manager VP HR; two OD consultants VP HR; Manager HR Lab; Manager Strategic Change VP HR; Manager HR research Director OD; two OD consultants VP HR Man. Group; Manager HR; OD consultant HR manager; two OD consultants VP HR; two OD consultants VP HR; Director OD OD manager; two OD consultants HR manager; two OD consultants VP HR; OD consultant; Manager Workplace Efficiency VP HR; OD consultant VP HR; two OD consultants
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was not available for the interview, he/she assured that the individual(s) available were thoroughly familiar with company perspectives related to the three broad interview questions. A total of 14 of the people interviewed were senior VP HR; 14 were employed in managerial-based HR positions, such as training, OD, and staffing, or were the HR manager who reported to the VP HR; and 22 were either internal or external OD consultants working with the company on projects which focused on organizational development and change. Data collection: focus of the interviews Each interview was open-ended, lasted approximately one-hour, and focused on three broad-based issues: (1) What factors have been responsible for the emergence of the learning organization paradigm and knowledge management in your company? (2) What types of knowledge management or learning organization actions/projects can you identify in your company? (3) What types of infrastructure, other than information technology, has your company created to support the implementation of knowledge management and learning?
Since we compete on the basis of fast new product development, we look at developing learning organization capabilities as directly related to accelerating our capability for innovation. And – when you get right down to it – what our new product development people know from past projects – the successes and failures – is key input during new product development planning.
Compressed cycle time Compressed cycle time raises specific knowledge issues such as how to accelerate local best practices to other geographically dispersed areas; how to develop faster learning curves; and how to better link knowledge to action: We used to have eight months to get a new product developed and into the distribution chain; we now have six. The more we can enable different units of our organization to learn from and act on what seems to be working in other part of the organization, the better we can reduce cycle time and be perceived as an innovator in the marketplace.
The existing infrastructure of cutting edge information technology provides substantial leverage for knowledge sharing and learning: Whether it’s Lotus Notes or other IT software/ hardware, there are so many ways to use one’s IT platform to acquire, document, and enable easy retrieval of lessons from past projects.
Results from the interview data The interview data was content analyzed to develop key themes for each of the three questions. The following criterion was used for the content analysis. A theme had to appear in each of the three interview questions from both of the individuals interviewed. If a third person was interviewed, then the theme had to appear in all three sets of the interview data for each of the three questions. The theme had to appear in at least 25 percent of the companies interviewed. In other words, a particular theme had to emerge from a minimum of five of the 20 companies. A summary of the findings from each of the three questions follows along with select quotes or company examples from the interviews. Factors responsible for the emergence of the learning organization paradigm and knowledge management The factors that were seen as responsible for the emergence of the learning organization paradigm and knowledge management are summarized below. Shorter product cycles Shorter product cycles make people’s knowledge, creativity, and flexibility a critical and sustainable asset of the firm.
Knowledge management is seen as a main component of an emerging resource-based approach to business strategy In this regard, strategy is no longer only based on thinking about product lines and market targets. Strategy also involves thinking about the dynamics of the company’s core capabilities and the unique resources that can provide competitive advantage that will be difficult for other firms to imitate: The notion of intellectual capital is emerging as a key resource to manage and leverage. The essence of the learning organization is to capture and utilize this knowledge.
Knowledge management is seen as a key next step after the reengineering and downsizing wave In this regard, it has become clear to the sampled firms that the redesign of business processes to control cost is an insufficient solution to long-term success. After downsizing, companies must increase the value they receive from their downsized workforce. Value creation through knowledge management also was viewed as empowering employees to share what they have learned, and to develop actions based on the learning from their fellow employees: As you reduce your workforce to respond to cost/ efficiency concerns, it becomes increasingly imperative to use the knowledge inside your
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employees. Once you do this, you reap the benefits from empowerment; you also more fully utilize what employees know and what they have learned from the past.
Types of knowledge management or learning organization actions/projects The types of knowledge management or learning organization actions/projects that were identified in the companies sampled are summarized below. The creation of knowledge repositories More specifically, interactive software has been created, such as groupware, where knowledge repositories can be easily linked to dialogue and to question and answer systems that enable sense making. Another example is directories of experts, which are telephone book like directories of expertise, that provide contact information to the experts themselves. For example, Peoplesoft has developed more than 400 knowledge databases. One of the most popular is known simply as the “key stuff database”. It features information on all company projects: where the project is within the development process, what technical documentation is, and who are key people involved in the project. These databases enable any person in the company to peruse any project’s development status. Improve knowledge access and transfer throughout the organization In essence, it was thought that knowledge must be shared throughout the organization in order to develop and sustain innovation. The learning networks that have emerged rely on cutting-edge technology that quickly moves knowledge across time, space, and traditional organizational boundaries. For example, at National Semiconductor, software is used to identify clusters of individuals who would be interested in the content of a specific e-mail and automatically sends the e-mail to these individuals. Interviews revealed that these learning networks rely on an informal, collaborative, organic culture generally characteristic of high technology firms. These learning networks developed in response to the needs of personnel with common interests and expertise rather than emerging from a formal planning process. Open forums for dialogue, discussion, questions and answers These forums were created to encourage open discussion, continuous feedback, and timely communication exchange without the inherent constraints of hierarchy. These forums can be in the form of groupware, which facilitate collaboration without participants being physically
present, or in the form of actual meetings involving individuals with common interests. Other more traditional forums include best practices meetings and conferences. Learning from past successes or failures This type of action was used predominately at the project team level. It provides the project team with a lens to reflect on the implications of current or past experiences from a particular project to a future stage of that project, or to a future project. Some organizations, such as 3Com, catalogue the learnings – successes and failures – from a specific project to a comprehensive database of all company projects. This allows anyone working on a new project to embrace innovation through searching a database to learn about past project successes or failures that may be relevant to a current project. Get knowledge externally Various means to obtain knowledge externally include benchmarking, joint ventures, acquisitions, strategic alliances, and partnerships. For example, National Semiconductor acquired Cyrix in 1997 to learn new ways to integrate processors capable of powering a broad range of PCs and information appliances, and to reduce the cost of producing full-featured computers. Cisco Systems has often acquired companies to rapidly develop technology and strategic capability. Sometimes, companies persuade entrepreneurs to join their company, thereby getting access to the expertise and knowledge of key people and promising technology. Cisco Systems has been very successful in this regard. Supporting the implementation of knowledge management and learning The types of infrastructure, other than information technology, that the sampled companies have created to support the implementation of knowledge management and learning are summarized below. Senior management support Senior management support was communicated in various ways such as: formal communication in which the CEO stresses in speeches and company publications that knowledge management and organization learning were critical to the company’s success. The CEO and other members of senior management also conveyed support through their personal involvement in knowledge management activities, projects, meetings, etc. or through symbolic actions; senior management also provided funding and other resources to support the focus on knowledge management and learning. To a large extent, this support was seen as part of
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the wider culture supportive of learning and innovation. Interestingly, although some companies have created the title of Chief Learning Officer, most companies stated that they did not want to create a formal position to legitimize the focus on knowledge management. Rather, they believe that the support and commitment from senior management strengthened company norms and values for the emergence of a knowledge-based, learning organization from numerous functions and localities throughout the company. On the other hand, the emergence of corporate universities funded by senior management, for example at Sun Microsystems, Charles Schwab, and National Semiconductor, was seen as an important basis of support. Corporate universities, however, were seen as more like learning laboratories rather than training centers. In this regard, their mission is to experiment with new methods, to explore different ways to disseminate knowledge, to foster self-development tools, and to support a culture of learning, risk-taking, and innovation. Support from line management Support from line management was seen as important to the success of the knowledge/learning system. Since line managers send strong cultural messages about “what’s important around here” through their day-to-day behavior, they were viewed as playing a key role. In addition to communicating the need for employees to engage in knowledge management activities, practices, and projects during meetings, one-on-one interactions, through e-mails and other forms of written communication, a line manager’s influence was also communicated through providing recognition. Professional recognition was seen as a powerful source of motivation for knowledge workers. In this regard, line managers engaged in such practices as face-to-face encouragement with individuals or groups; creating a directory of subject matter experts after engaging in one-onone meetings with them; communicating authentic praise and verbal recognition to individuals for their contributions to knowledge management and learning during meetings; and recognizing individuals through providing time and resources to work on projects initiated by an individual or small group. Rewards With regard to monetary recognition and other types of material incentives, most companies do not provide rewards based solely on the ability to learn or to share knowledge. In this regard, performance is the central focus for rewards. To the extent that learning and knowledge sharing
enables personnel to achieve their objectives and projects cheaper, faster or better, they are rewarded through the more traditional performance-based incentive system. Informal channels of communication Informal channels of communication such as faceto-face interactions, spontaneous meetings, and the emergence of informal networks comprised of employees with common work-related issues and interests was seen as critical to establish a climate of trust and empower employees at the work unit and cross-functional level. Physical environment A physical environment modified to promote learning and the transfer of knowledge has been the focus of some companies. A comfortable physical setting was seen as providing an environment conducive to learning and knowledge sharing. For example, at Sun Microsystems, a workplace effectiveness group has been created to think about the best work environment that will optimize space, technology, and people factors. The eight-person corporate group is comprised of information engineers, architects, and HR or OD personnel.
Discussion Regarding the first interview question, the factors that were seen as responsible for the emergence of the learning organization paradigm and knowledge management were primarily strategic in nature. In essence, the sampled companies focused on creating knowledge-based, learning organizations in order to develop a source of competitive advantage. This strategic focus has been stressed in the literature cited earlier. These companies also see knowledge management as a means to add value to their human resource and technological assets by supporting organizational-wide innovation. A key finding that emerged from the second question – what types of knowledge management or learning-related actions/projects could you identify in your company – was that knowledge management projects often were supported by a collaborative, organic culture. Other characteristics of the culture supporting knowledge management were informality rather than formal planning and hierarchy. As stated earlier and discussed below, several recent studies raised concern that organizations which have implemented knowledge management practices have not done a good job of transferring existing knowledge into other parts of their organization. Moreover, a critical capability of
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successful knowledge-based organizations is their ability to transform knowledge into organizational action and innovation. A key finding from the interviews in the present study was that most of the companies sampled have created a culture to support knowledge management through a variety of infrastructure, namely, support from both senior and line management – through their dayto-day behavior – and through the use of informal communication channels. Companies in this sample were keenly aware of the leverage that a culture of trust would provide. They also focused on empowering employees informally through opportunities to initiate knowledge-based projects. In essence, the companies used their culture and their core values, e.g. teamwork, bias toward action, innovation, etc., to support practices and projects that focused on knowledge management and learning. In this regard, the support of all levels of management – through symbolic and dayto-day behavior – was a key component of the knowledge management infrastructure. An appropriate culture has been discussed in the literature as a key factor for organizations to turn knowledge into action (Armstrong and Foley, 2003; Bierly et al., 2000; Gilley and Hoekstra, 2003; Jones, 1996; McDermott, 1999; Pfeffer and Sutton, 2000; Tetrick and DA Silva, 2003; and Wang and Ahmed, 2003). In this regard, McDermott (1999) states:
Another recent study by Armstong and Foley (2003) identified organization learning mechanisms, which facilitate the development, improvement, and renewal of a learning organization. These authors conclude that without these mechanisms, a learning organization is unlikely to emerge. Discussing this perspective, they state:
Studies show that information technology usually reinforces an organization’s norms about documenting, sharing information, and using the ideas of others. . .The difficulty in most knowledge management effort lies in changing organizational culture and people’s work habits (p.104).
Pfeffer and Sutton (2000) also emphasize the importance of culture when stating: Formal systems can’t store knowledge that isn’t easily described and codified but is nevertheless essential for doing the work called tacit knowledge. So, while firms keep investing millions of dollars to set up knowledge management groups, most of the knowledge that is actually used and useful is transferred by the stories people tell to each other, by the trials and errors that occur as people develop knowledge and skill, by inexperienced people watching those more experienced, and by experienced people providing close and constant coaching to newcomers (p. 91).
Moreover, when discussing the difference they have found between firms that successfully implement knowledge management practices, they state: The difference is in the systems and the day-to-day management practices that create and embody a culture that values the building and transfer of knowledge and, most important, acting on that knowledge (p. 104).
. . . a learning organization has appropriate “cultural” factors (vision, values, assumptions, and behaviors) that support a learning environment; processes that foster people’s learning and development by identifying their learning needs and facilitating learning; and “structural facets” that enable learning activities to be supported and implemented in the workplace (p. 75).
The results from the sampled companies provide support to the notion that culture can have a powerful impact on the implementation of programs and practices focused on knowledge management. The interview findings support the view that before embracing knowledge management, companies should carefully conduct a culture audit to determine the extent to which the culture values collaboration, empowerment, action taking, and informality.
Case study of transformation: HP Lab HP Lab’s experience becoming a knowledge-based organization provides a brief case study of an organization that successfully embraced knowledge management and successfully transformed into an innovative, learning organization. Processes used and actions taken will be discussed from the perspectives of the findings from this study. Background HP Lab is the central research lab for the HewlettPackard Company. The Lab’s primary role is finding, inventing, and transferring technologies to maintain HP’s competitiveness. The Labss 1,200 employees consist of 300 support people and 900 engineers; more than half have advanced degrees, and the majority of these have a PhD. The Lab is geographically dispersed with facilities in the USA, UK, and Japan. Although HP Lab had been performing well and was considered a productive organization, it functioned like most R&D technology centers. In this regard, the scientists and technical staff worked in their esoteric functional silos with little collaboration. Description of the transformation process 1.The implementation of a dialogue process The process began with the director of HP Lab, and senior VP of R&D for HP launching an
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organization-wide dialogue. Two key questions asked were: how far are we from being the world’s best industrial research lab, and what metrics do we need to evaluate ourselves? A variety of communications systems were used including surveys, groupware, and informal discussions with employees. In this regard, employees would be asked: what the world’s best industrial research lab precisely meant relative to their current job/ position? This focus of the dialogue process supports the notion of creating a knowledge-based, learning organization to cultivate an additional source of competitive advantage. In the case of HP Lab, the focus was on improving innovation in support of future new product and new process development. This focus was seen as having the potential to facilitate HP Lab’s capacity to manage shorter cycles and compressed cycle time. Launching an organization-wide dialogue provided open forums for discussion, questions, and answers. It established a foundation for creation of knowledge repositories, and also enabled learning from past successes and failures.
world’s best industrial research lab. One key finding from the interviews was that knowledge must be shared throughout the organization in order to develop and sustain innovation. The emergence of these communities of practice supports the theme of improving knowledge access and transfer throughout the organization. Some examples of the focus of these communities of practice follow. One group comprised of three secretaries asked: how can we improve the quality of our work lives and our contribution to HP Lab? They subsequently created the first site-wide secretary’s forum. Within one year the forum they rewrote the corporate shipping manual, reduced from 13 to one the forms needed to enroll a new employee in benefits, and launched an ongoing selfdevelopment seminar program for secretaries. Another program, Friday afternoon “Chalk Talks”, emerged from two engineers asking: why don’t engineers ever talk to each other? During the first two years of this program, 15 to 150 engineers attended this employee-sponsored event. Other engineers, who had asked, “how could we get mentored” developed the HP Lab mentoring program, which has helped create 30 pairs of engineer-managers during a three-year period. A final example of a program that emerged from an informal network of employees with common interests is a program focused on measuring the output of one of the labs. In this program, interested line and lab staff used data from customer interviews to create standards for quality and service. During the second year, these metrics were adopted across all HP lab facilities, thereby exemplifying the theme – improve knowledge access and transfer throughout the company.
2.The creation of a support function The HR manager of HP Lab was placed in a full time support role and given adequate financial resources to facilitate the transformation process. This individual also role-modeled specific behavior congruent with creating a learning organization culture. Some of these key behaviors included: listening and questioning to enable collective exploration between different suggestions and similar or different ideas among lab personnel; encouraging thinking-outside-thebox; and encouraging risk-taking and trying innovative ways of doing things. In essence, the behavior of the HR manager is an example of providing support from line management, which was found to be a recurring theme from the interviews. As stated earlier, line managers send strong cultural messages about “what’s important around here” through their dayto-day behavior. The three specific behaviors discussed above also provided an implicit cultural message regarding “how we should think and act”. In essence, this behavior communicated the emergence of new cultural values and norms at HP Lab. 3.The emergence of communities of practice: networks for action taking The dialogue process, coupled with the HR manager’s supportive behavior, provided a fertile climate for communities of practice to grow. During the first year, 36 informal groups emerged that collaborated on specific issues and projects focused on transforming HP Lab into being the
Sustaining change The emergence of communities of practice, described above, was a key factor in the emergence of new cultural norms that legitimized and empowered informal groups toward dialogue and action taking during the second year of the process. Of particular importance was that these informal networks emerged from the process of dialogue that the HP Lab Director initiated. Moreover, informal groups became self-organizing. As employees working at different HP Lab locations began to experience change based on programs that their peers created, a new mindset emerged regarding “the way we do work around here”. According to the VP HR for HP and the HR Lab Manager, there also was a growing atmosphere of excitement, trust and openness among HP Lab personnel that contributed to the changing
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cultural norms. The emergence of new cultural norms at HP Lab appears to be a key ingredient in the transformation of HP Lab into a knowledgebased, learning organization. As discussed earlier, recent literature points to the failure of companies to focus adequately on culture as a key factor contributing to less successful implementation of knowledge management projects and practices.
The impact of change During the four years that his process had been in place there have been five significant changes at HP Lab: (1) From little collaborative work, to work that is now rated as 30-40 percent collaboration across technical functions. (2) From primarily vertical communication, with little lateral exchange, to webs of communication in all directions. (3) From no consistent measures of output across the various labs, to robust measures that were adopted across the HP Lab organization. (4) From no quality program, to over 100 resultsoriented improvement programs. (5) From no vision for the labs, to a unifying vision for the HP Lab organization.
Concluding perspective The HP Lab case highlights the need for organizations to use a process of planned change when focusing on developing a knowledge-based organization. In this regard, the processes and interventions that were applied were those that often characterize successful programs of planned change and organization development, namely dialogue and discussion, data collection, participation, supportive leadership, and the implementation of actions based on the data collection stage. Although the findings at HP Lab suggest that creating a learning culture directly contributed to improved organizational performance, future research needs to focus rigorously on this connection. As stated by Wang and Ahmed (2003): . . . within the existing literature, there is a general restriction to validate the association between adoption of a learning culture and improvement of organizational performance. There is a need for larger-scale empirical research to understand the linkage and relationship (pp. 11-12).
As a final perspective, the authors wish to provide a wake-up call to organizations that aspire to develop a knowledge-based, learning organization - focus on the culture and the process of change!
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Smith, P.A.C. (2000), “Building a learning organization at a Canadian bank of commerce”, Human Resource Management International Digest, Vol. 8 No. 5, pp. 20-3. Steward, T.A. (1997), Intellectual Capital: The Wealth of Organizations, Doubleday, New York, NY. Tetrick, L.E. and DA Silva, A. (2003), “Assessing the culture and climate for learning transfer”, in Jackson, S.E., Hitt, M.A. and DeNisi, A. (Eds), Managing Knowledge for Sustained Competitive Advantage, Jossey-Bass, San Francisco, CA. Vakola, M. and Rezgui, Y. (2000), “Organizational learning and innovation in the construction industry”, The Learning Organization, Vol. 7 No. 3, pp. 174-86. Wang, C.L. and Ahmed, P.K. (2003), “Organization learning: a critical review”, The Learning Organization, Vol. 10 No. 1, pp. 8-17. Watkins, K.E. and Marsick, V.J. (1993), Sculpting the Learning Organization: Lessons in the Art and Science of Systematic Change, Jossey-Bass, San Francisco, CA. Watkins, K.E. and Marsick, V.J. (Eds) (1996), In Action: Creating the Learning Organization, American Society for Training and Development, Alexandria, VA. West, P. and Burnes, B. (2000), “Applying organizational learning: lessons from the automotive industry”, International Journal of Operations & Production Management, Vol. 20 No. 10, pp. 1236-42.
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Introduction
The role of trading partner relationships in determining innovation performance: an empirical examination Daniel I. Prajogo Damien J. Power and Amrik S. Sohal
The authors Daniel I. Prajogo is a Lecturer at Bowater School of Management and Marketing, Deakin University, Geelong, Australia. Damien J. Power is a Senior Lecturer in the Department of Management, University of Melbourne, Australia. Amrik S. Sohal is Associate Dean, Research, in the Department of Management, Monash University, Caulfield East, Australia.
Keywords Customer relations, Supplier relations, Innovation, Partnership, Australia
Abstract This paper examines the respective roles of trading partner relationships and innovation management practices in predicting product and process related innovation performance. The empirical data were drawn from 194 Australian managers. Data analysis using structural equation modelling indicates that supplier relationships and customer relationships have less impact on product and process innovation performance than do knowledge and creativity management. However, the results also indicate that trading partner relationships have a strong and positive association with innovation management practices, meaning that organisations commonly implement both in a synchronous manner.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 178-186 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549874
Innovation has received considerable attention as having a crucial role in securing sustainable competitive advantage. Tushman and Nadler (1986) affirm that to compete in an ever-changing environment, companies must create new products, services, and processes; to dominate they must adopt innovation as a way of life. The role of innovation in enhancing competitive advantage is central to the concept of differentiation strategy (Porter, 1985), and the impact of innovation on business performance has been demonstrated in a number of studies in this area (Deshpande et al., 1993; Subramanian and Nilakanta, 1996; Yamin et al., 1997). The issue underscored in these studies of innovation is then to identify the key factors that determine innovation performance, particularly the actual practices employed by organisations in managing innovation (Brown and Eisenhardt, 1995). The study reported in this paper examines the roles and contributions of certain managerial practices in enhancing innovation performance, internal innovation management and the management of trading partner relationships. This topic has important implications for organisations seeking to determine the relative importance of external parties and internal processes as effective sources of innovation as addressed in the past studies on innovation (Koen and Kohli, 1998; Nilsson et al., 2003; Veuglers and Cassiman, 1999). As such, managers are provided with some clear distinguishing characteristics enabling them to focus on activities likely to add more value to the quest for better and more timely innovations.
Literature review Trading partner relationships Customer relationships play a critical role in the value chain, since they affect both predevelopment and post-delivery processes. In the pre-development process, customer relationships are paramount in understanding customer needs before products can be designed and developed. At the post-delivery stage, they affect issues of customer satisfaction, customer service and complaints, and not less importantly obtaining feedback from customers. The association between customer relationships and innovation has also been highlighted by several scholars who The first author acknowledges the support received from Monash University through Postgraduate Publication Award (PPA) scheme in publishing this paper.
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
have suggested that the understanding of market needs is necessary for innovation success (Carnegie et al., 1993; Cooper and Kleinschmidt, 1987; Cooper and Kleinschmidt, 1993; Flores, 1993; Schewe, 1994; Slater and Narver, 1994). Several empirical works (Appiah-Adu and Singh, 1998; Han et al., 1998; Lukas and Ferrell, 2000) also substantiate the positive and significant relationship between customer orientation and organisational innovation. Similarly, literature on innovation has also identified the important role of suppliers in determining innovation performance. Among a number of key practices, supplier involvement in product development has attracted significant attention in the innovation literature (Bozdogan et al., 1998; Handfield et al., 1999; Ragatz et al., 1997). From a strategic point of view, this means an opportunity to develop strategic alliances with suppliers aimed at enhancing organisational competitiveness through innovation. An empirical study by McGinnis and Vallopra (1999) has also demonstrated the importance of supplier involvement in determining new product success, but at the same time it requires companies to implement supplier identification, selection, monitoring, and control.
companies into developing innovative products or processes, or even new businesses (Carneiro, 2000). In reality, however, because KM is a relatively new discipline, its potential has not been optimally used. Recent empirical studies (for example, Darroch and McNaughton (2002)), however, have begun to show the positive and significant relationship between knowledge management and innovation performance. As a newly emerging discipline, there has not been significant effort to define KM and its content. Wiig (1997) suggests that there are three notions in defining the scope of KM, namely, the management of explicit knowledge using technical approaches, the management of intellectual capital in the forms of structural capital and human capital in people, and the management of all relevant knowledge-related aspects that affect the enterprise’s viability and success. This study focuses on the third area of KM. This area is more strategic and focuses on several key practices for managing knowledge within a firm that have been identified from the literature. First, top managers should focus their attention on these situations because the intellectual capital of their companies and innovation infrastructure is a real sources of future competitiveness (Leonard-Barton, 1995). Second, organisations need to stimulate and improve knowledge of their human capital so as to prepare themselves to face rapid change (Nonaka and Takeuchi, 1995). Third, knowledge workers should have adequate means to communicate and share the information that is needed. However, in some organisations, information sharing should be stimulated, because it is one of the most important tools of creativity and, moreover, intellectual assets, unlike physical assets, increase in value with use (Carneiro, 2000). Finally, from a strategic point of view, firms need to develop an intellectual asset management strategy which focuses on enterprise-level management of specific intellectual assets, such as patents and technologies (Wiig, 1997). As mentioned earlier, whilst KM is important for enhancing capability and equipping people with necessary knowledge and skills to innovate, idea generation is dependent upon individual creativity, and organisations need to facilitate innovation by creating and maintaining an environment that supports innovation (Amabile et al., 1996; Barney and Griffin, 1992). This is because creativity will result in innovation only under such enabling conditions as opportunities, absence of constraints and availability of resources (Angle, 1988; Glynn, 1996). In addition, the literature on innovation also suggests the importance of combining different perspectives in the form of cross-functional teamwork. One of the
Knowledge management and creativity Among various factors which are considered as antecedents of innovation performance, the literature has stressed the importance of people, not technology, as the basic “ingredient” in any innovation (Claver et al., 1998; Kanter, 1983; Woodman et al., 1993). In terms of the role of people in innovation, knowledge and creativity have been highlighted, with the first being concerned with innovation capability, and the latter related to motivation for innovation. Knowledge management (KM) is emerging as an important concept and is also often cited as an antecedent of innovation (Nonaka and Takeuchi, 1995). It is important, however, to acknowledge that the concept of KM has been used long before the term was introduced. For example, Cohen and Levinthal (1990) used the term “absorptive capacity ” to define an organisation’s ability to recognise the value of new external information, and assimilate and apply it effectively. They argue that this capacity is a critical part of an organisation’s innovative capability. The emergence of KM has tightened the relationship between innovation and knowledge. This is because the innovative efforts are also the right consequence of the investment in knowledge and knowledge workers. Therefore, if KM is positively driven by strategic innovation, investment in the development of new knowledge may propel
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
reasons why cross-functional teamwork is instrumental for stimulating creativity is because, similar to the case of KM, it is one of the most effective channels of communication, and communication is recognised as a primary determinant of organisational innovation (Kanter, 1983; Nonaka and Takeuchi, 1995). Finally, innovation scholars suggest that rewards are needed for encouraging innovation although they also emphasise that tangible or external rewards (e.g. money) are not always the best form. Rather, recognition of achievement is a strong and important motivator (Angle, 1988; Barney and Griffin, 1992; Kanter, 1983; Roffe, 1999).
development of relationships leading to superior innovation capability, and, consequently, higher innovation performance. In this regard, Linder et al. (2003) suggest that despite the growing acceptance of external innovation, it has been found that many companies lack a sourcing strategy. Our study therefore aimed at examining the extent of integration between trading partner relationships as the external sources of innovation and innovation management practices. At the same time it examines how such an integration determines the innovation performance of organisations. In order to articulate these objectives, the primary questions of this study are as follows: . Research question 1. What is the nature of the interrelationship between innovation management practices and relationships with trading partners (i.e. suppliers and customers). . Research question 2. What is the contribution of these relationships to predicting innovation performance in terms of product and process?
Research framework and research questions The research model is a simple variance one, as illustrated in Figure 1, with an orientation toward predicting the variance of dependent variables. In this study, innovation performance – comprising product and process innovation – function as the dependent variables. The independent variables consist of: trading partner relationship comprising customer relationship and supplier relationship, whilst innovation management practices comprise knowledge management and creativity management. The rationale for this set of relationships lies in the premise that in managing innovation performance organisations need to appreciate the value of cross-functional interaction (Kahn, 1996). This study extends the nature of collaborative arrangements by involving trading partners in the assumption that such arrangements often lead to both direct and indirect sharing of knowledge and experience. Such process integration, if it is to be successful, requires the involved parties to share insights and experiences. Indeed, they encourage this process as the involved players are now beginning to recognise that they have shared objectives. However, in order for this knowledge to be translated into action, it needs to be assimilated, understood and leveraged; in other words, it needs to be managed. It is through this process that the model seeks to capture the Figure 1 Research framework
Data collection Source of empirical data Empirical data was obtained through a random survey of 1,000 managers, most of whom were senior managers, who had knowledge of past and present organisational practices relating to continuous improvement and innovation in Australian companies. The sample was selected randomly and encompassed various industry sectors, including both manufacturing and nonmanufacturing activities. The level of analysis of this study was limited to one site (or plant) per organisation. A total of 194 managers responded, whilst 150 questionnaires were returned to the researchers with return to sender (RTS ) messages, indicating that the addresses were no longer valid. By discounting the number of RTS mails, the final response rate accounted for 22.8 per cent. Research instrument The instrument developed in this study consists of five constructs of independent variables and two constructs of dependent variables. The five constructs comprising the independent variables consist of the following two constructs of innovation management practices – KM and creativity and two stakeholders relationship constructs – customer relationship and supplier relationship. The two dependent variable constructs measure organisational performance in terms of product innovation and process innovation (details can be found in the “Data reduction process section”). The instrument used
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
a five-point Likert scale, representing a range of attitudes as follows: strongly disagree, disagree, neutral, agree, and strongly agree. Independent variable measures Since the importance of customer relationships and supplier relationships began to develop alongside the emergence of total quality management (TQM) principles, we defined the content of both scales by deriving from those used in the previous TQM empirical studies. The construct used by Samson and Terziovski (1999) was adopted for the scale representing customer relationship, since it captured a comprehensive range of practices from pre-development of the product (i.e. searching and identifying customer needs) to post-delivery processes (i.e. mechanism for handling complaints). For supplier relationship, the content was derived from the construct used by Dow et al. (1999) and Forza and Filippini (1998) with one additional element concerning the importance of building long-term partnerships with suppliers, as strongly suggested by Deming (1986). The use of TQM-based scales for measuring trading partner relationships also provides an opportunity to examine the applicability of TQM principles in innovation management. The scale for KM was developed based on the key elements of KM practices as discussed in the literature review section. These practices can be summarised into the following areas emphasising systematic knowledge management including facilitating knowledge-related activities such as creation or assimilation of knowledge, transferring knowledge across the organisation, maintaining the knowledge infrastructure, and leveraging knowledge assets to realise their value (LeonardBarton, 1995). In particular, the KM scale was derived from selected items in the inventory of organisational innovativeness (IOI) model developed by Tang (1999). We found that our content shared similarities with that used in the study by Darroch and McNaughton (2002). The measurement items for creativity and idea management were also primarily derived from Tang’s (1999) IOI model with a cross-reference to the other established measures in the area, such as Amabile and Grykiewicz (1989), and Pallister and Foxall (1998). Innovation performance measures A review of past research on organisational innovation also indicates that there have been variations in measuring innovation performance in organisations. For the purpose of comprehensively capturing these aspects of innovation performance, the authors developed their own
construct for measuring product and process innovation on the basis of several criteria which have been conceptualised and used in previous empirical studies of innovation such as Cohn (1980), Miller and Friesen (1982), Deshpande et al. (1993), Karagozoglu and Brown (1988), Avlonitis et al. (1994), Subramanian and Nilakanta (1996), Hollenstein (1996), and Kleinschmidt and Cooper (1991). These criteria are the number of innovations, the speed of innovation, the level of innovativeness (novelty or newness of the technological aspect), and being the “first” in the market. These four characteristics of innovation were applied in two major areas of innovation, namely product innovation and process innovation. Perceptual data were used in which respondents were asked to evaluate the company’s innovation performance against the major competitor in the industry to minimise industry effects. The advantages of this approach were discussed in detail in the study by Kraft (1990).
Data analysis Data reduction process The data reduction process was conducted in order to bring the six constructs – each consisting of four to five items – employed in this study into their composite scores. These seven constructs were subjected to validity and reliability tests before a single composite score could be calculated to represent each construct. Confirmatory factor analysis (CFA) using LISREL 8.52 was employed for examining the construct validity of each scale by assessing how well the individual item measured the scale. During this process, only one item in the customer focus scale was deleted due to poor loading on its latent variable. The goodness of fit indices (GFI) of the nine constructs exceeded the 0.9 criterion suggested by Kelloway (1998), establishing construct validity. The reliability analysis was conducted by calculating Cronbach’s alpha for each scale. The result shows that the Cronbach’s alpha measure for five of the six constructs exceeded the threshold point of 0.7 suggested by Nunnally (1978). The exception was the supplier relationship construct, although it still passed the recommended critical point of 0.6 for an exploratory study (Hair et al., 1998). Culling of any variable in this construct did not produce any improvement. The final results of construct validity and reliability tests for the six constructs are reported in Table I. Discriminant validity is aimed at examining if each item only estimates one construct, in other words, every construct should be distinct.
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
Table I Construct validity and reliability Construct Customer relationship Supplier relationship Knowledge management Creativity and idea generation Product innovation Process innovation
No. of items
Goodness of fit index
Cronbach’s alpha
Mean
Standard deviation
5 4 4 4 5 4
0.992 0.983 0.988 0.978 0.983 0.953
0.7853 0.6255 0.7586 0.8293 0.8684 0.8909
3.918 3.767 3.556 3.318 3.377 3.533
0.684 0.715 0.748 0.848 0.697 0.676
As suggested by Venkatraman (1989), discriminant validity was examined by running confirmatory factor analysis (CFA) on each pair of the constructs in this study. For each pair, CFA was run twice where the first allowed the correlation between the two constructs to be estimated and the second fixed the correlation between the two constructs into one. This would result in two values of chi-square. The first chisquare is coded as chia and the second as chib. The difference between chia and chib is coded as chia-b with a degree of freedom of 1. The value of chib-a (df ¼ 1) at p , 0.01 is 6.64. Therefore, if the value of chib-a is greater than 6.64, the discriminant validity between the paired-constructs can be established. The first discriminant validity test was conducted among the four constructs of the independent variable and the two constructs of the dependent variables. This required CFA to be run on seven pairs of constructs to demonstrate that the two constructs in each pair are distinct. The results of discriminant validity (not reported here) indicate that all of the seven pairs of variables yield a chi-square difference that is statistically significant at p , 0.01. Having met the requirement of construct validity and reliability, the composite measure of each construct can be measured by calculating their mean values (Hair et al., 1998). The results are also presented in Table I.
Analysis of relationships between variables Bivariate correlations Table II shows the bi-variate correlations between the six constructs in this study. The results suggest that the four independent variables are strongly correlated, indicating that the two elements of innovation management practices exist in harmony with trading partner relationships. Therefore in response to question 1, the result supports the positive relationship between trading partner and innovation management, meaning that commonly organisations have been able to
integrate external and internal sources of innovation. The correlation between the four independent variables with the two dependent variables also indicate strong relationships, but, interestingly, the strengths of the correlations are higher for product innovation than process innovation in most cases (the exception being the Customer relationship scale). However, a conclusion cannot be drawn here before a more rigorous method (presented in the next section) is applied to examine the relationships between the independent and the dependent variables. It is also important to note that product and process innovation are also strongly correlated with each other, further indicating that companies pursuing one area of innovation could also enhance performance in the other area.
Structural equation modelling The structural equation modelling (SEM) technique was used because it allows the researchers to examine the relationships between the four independent variables (customer relationship/cust, supplier relationship/supp, KM/ know, and creativity and idea management/crea), and the two dependent variables (product innovation/pdin and process innovation/pcin) simultaneously. For the purpose of parsimony, we compounded both product innovation and process innovation into one latent variable. The use of latent variables has been supported by the results of bivariate correlation indicating that product and process innovation are strongly correlated. The diagram of the SEM is illustrated in Figure 2. The overall goodness-of-fit indices indicate that the model is acceptable. The SRMR is well below 0.05, and the three fitness indices (NFI, GFI and AGFI) surpass the recommended values of 0.9. The fit of the model is further supported since the model does not exhibit any offending estimate in terms of negative error variances, excessive standardised coefficients, and excessive standard errors (Hair et al., 1998). In particular, the measurement model of innovation performance also indicates a good fit as the two observed variables (pdin and pcin) are strongly loaded
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
Table II Correlation analysis
Customer relationship Supplier relationship Knowledge management Creativity and idea generation Product innovation Process innovation
V1
V2
V4
V5
V6
V7
1.000 0.486 0.527 0.485 0.258 0.303
1.000 0.434 0.326 0.334 0.272
1.000 0.587 0.437 0.416
1.000 0.405 0.363
1.000 0.547
1.000
Note: All correlations are significant at p , 0.01, two-tailed
Figure 2 Structural equation modeling
(at p , 0.01) to the latent variable (INNO) and none of them exhibits excessive error variance. The paths representing the relationship between the four independent variables and the dependent latent variable are significant and positive, except for customer relationship. Knowledge management appears to be the strongest predictor ( p , 0.01), followed by creativity and idea management ( p , 0.01) whilst supplier relationship only exhibits a significance level below 0.05. Therefore, in response to question 2, the findings indicate that (internal) innovation management practices have a stronger effect on innovation performance than do (external) trading partner relationships.
Discussion The overall findings presented in the previous section indicate that trading partner relationships have a strong association with innovation management practices (question 1), however, their impact on innovation performance is less than that of innovation management practices, particularly concerning customer relationship (question 2). The first insight drawn here is that internal
management practices concerning innovation play a significant role in determining innovation performance. This role is an important one for managers to grasp, as it is apparent that just being involved in closer relationships with trading partners will not automatically lead to higher levels of innovation. What closer relationships will do is open channels for better management of knowledge, and for more creative idea generation. The results therefore point to a notion that organisations wishing to become innovative product and process developers will need to focus on their internal innovative capabilities as the first point of leverage. It is important to note here that the findings also provide a further explanation on the role of external and internal sources of innovation. This is because given the strong relationship between trading partner relationships and innovation management practices, we believe that the relationship between trading partner relationships and innovation performance would have been found to be significant had it been tested in isolation. Such findings could be misleading in a sense that one can infer that trading partner relationships have a significant impact on innovation performance. Therefore, by inclusively testing the impact of these two groups of variables,
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
a better insight could be revealed in understanding the true impact of trading partner relationships on innovation performance. The evidence from this study suggests that in order to fully leverage innovation outcomes, effort is required that directs and integrates the external sources of innovation with the internal process of managing innovation. Given the above findings, what can we say about the insignificant relationship found for the trading partner construct? Two major implications are drawn here. First, the insignificant (direct) relationship between trading partner relationships and innovation performance could suggest that regardless of the sources of innovation (external or internal), innovation can only be realised through internal processes which require sound (internal) innovation management practices. This result concurs with those identified in the past studies (see for example, Kessler et al. (2000)) in which greater reliance on external sources of innovation could undermine innovation performance in terms of speed, cost, and competitive success. On the other hand, we cannot simply ignore the fact that trading partner relationships are strongly associated with innovation management practices which significantly determine innovation performance. The plausible implication is that we could postulate a relationship between trading partner relationships and innovation performance which is mediated by innovation management practices. In a more particular case, the bivariate correlation indicates that customer relationship strongly correlates with knowledge management, the strongest predictor of innovation performance. Understanding the mediating role of innovation management is important because, in practical terms, managers could identify the flow and stages of innovation development over time. Second, the limited impact of trading partner relationships on innovation performance could be plausibly caused by the fact that this study built the content of customer and supplier relationship based on the TQM philosophy which emphasises quality rather than an innovation mindset. Whilst the practices of supplier relationship incorporated in this study have been shown as having significant impact on quality performance (in terms of conformance), previous studies (Ahire et al., 1996; Flynn et al., 1995; Forza and Filippini, 1998), have failed to demonstrate a similar result in its relationship with innovation performance. Similarly, customer relationship has been identified as one of the key elements in determining quality performance in past studies (Ahire et al., 1996; Dow et al., 1999; Grandzol and Gershon, 1997; Samson and Terziovski, 1999) whereas this is not the case with innovation. A number of arguments and studies have indicated
that the underlying philosophy of customer relationship could be detrimental to product innovation (Atuahene-Gima, 1996; Wind and Mahajan, 1997). This is particularly true when a customer focused philosophy is implemented in a reactive fashion leading managers to see the market only through their current customers’ eyes and, therefore, ignoring potential needs which could be served through new products or processes (Slater and Narver, 1998). The implication drawn here is that trading partner relationships - defined in this study – could have different roles from innovation management practices in determining different types of performance. This, however, warrants another study adding quality performance as an independent variable. The purpose would be to examine whether trading partner relationships and innovation management practices would exhibit a different type of relationship against different types of performance, in this case, quality and innovation. If this is true, a further implication could be drawn that organisations today need to compete in multiple competitive dimensions and therefore need to integrate different resources for pursuing sources of advantage.
Conclusion The overall finding of this study suggests that trading partner relationships are of only marginal value in directly enhancing innovation performance. In order for such relationships to be an important factor in promoting product and process innovation, managers need to be focused on developing the capability to develop and leverage knowledge management and creativity within their organisations. It is also shown that companies wishing to improve performance of their trading partner relationships will be better served by addressing the need for innovation management first before focusing on developing relationships with trading partners. These relationships, if developed in isolation, will have little impact on internal processes. There may be some improvement in the operation of current processes, but without an innovative ldquo;mindsetrdquo;, the potential for developing innovative processes through such relationships appears to be severely limited. Further research could advance this study by employing additional dependent variables, such as quality or delivery performance. This additional variable would demonstrate the contrasting roles of trading partner relationships and innovation management in determining different types of performance, and therefore help managers
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Trading partner relationships in determining innovation performance
European Journal of Innovation Management
Daniel I. Prajogo, Damian J. Power and Amrik S. Sohal
Volume 7 · Number 3 · 2004 · 178-186
appreciate the unique role of different functions within organisations. This is also relevant to the fact that has been pointed out in the discussion section where the variables used to measure the trading partner were TQM-biased which could be more appropriate to predict quality than innovation performance. In conjunction with this, it is also worthwhile to broaden the content of customer relationship and supplier relationship as defined in other studies such as Ritter and Walter (2003) and Petersen et al. (2003). This will further reveal the unique role of each of the two functions in determining different types of operational performance.
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Kelloway, E.K. (1998), Using LISREL for Structural Equation Modelling: A Researcher’s Guide, Sage, Thousand Oaks, CA. Kessler, E.H., Bierly, P.E. and Gopalakrishnan, S. (2000), “Internal vs external learning in new product development: effects of speed, costs and competitive advantage”, R&D Management, Vol. 30 No. 3, pp. 213-23. Kleinschmidt, E.J. and Cooper, R.G. (1991), “The Impact of product innovativeness on performance”, Journal of Product Innovation Management, Vol. 8 No. 4, pp. 240-51. Koen, P.A. and Kohli, P. (1998), “Idea generation: who has the most profitable ideas?”, Engineering Management Journal, Vol. 10 No. 4, pp. 35-40. Kraft, K. (1990), “Are product- and process-innovations independent of each other?”, Applied Economics, Vol. 22 No. 8, pp. 1029-38. Leonard-Barton, D. (1995), Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation, Harvard Business School Press, Boston, MA. Linder, J.C., Jarvenpaa, S. and Davenport, T.H. (2003), “Toward an innovation sourcing strategy”, Sloan Management Review, Vol. 44 No. 4, p. 43. Lukas, B.A. and Ferrell, O.C. (2000), “The effect of market orientation on product innovation”, Journal of the Academy of Marketing Science, Vol. 28 No. 2, pp. 239-47. McGinnis, M.A. and Vallopra, R.M. (1999), “Purchasing and supplier involvement: issues and insights regarding new products success”, Journal of Supply Chain Management, Vol. 35 No. 3, pp. 4-15. Miller, D. and Friesen, P.H. (1982), “Innovation in conservative and entrepreneurial firms: two models of strategic momentum”, Strategic Management Journal., Vol. 1, pp. 1-25. Nilsson, L., Elg, M. and Bergman, B. (2003), “Managing ideas for the development of new products”, International Journal of Technology Management, Vol. 24 No. 5/6, p. 498. Nonaka, I. and Takeuchi, H. (1995), The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation, Oxford University Press, Oxford. Nunnally, J. (1978), Psychometric Theory, McGraw-Hill, New York, NY. Pallister, J.G. and Foxall, G.R. (1998), “Psychometric properties of the Hurt-Joseph-Cook scales for the measurement of innovativeness”, Technovation, Vol. 18 No. 11, pp. 663-75. Petersen, K.J., Handfield, R.B. and Ragatz, G.L. (2003), “A model of supplier integration into new product development”, Journal of Product Innovation Management, Vol. 20 No. 4, pp. 284-99. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York, NY. Ragatz, G.L., Handfield, R.B. and Scannell, T.V. (1997), “Success factors for integrating suppliers into new product development”, The Journal of Product Innovation Management, Vol. 14 No. 3, pp. 190-202.
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Personality, attitude, and leader influences on divergent thinking and creativity in organizations Scott David Williams The author Scott David Williams is an Asssistant Professor in the Department of Management at Raj Soin College of Business, Wright State University, Dayton, Ohio, USA.
Keywords Creative thinking, Attitudes, Personality, Leadership
Abstract Divergent thinking is an integral process in creativity. This study presents and tests an interactionist, divergent-thinking based model of individual creativity in organizations. Openness to experience is a personality trait that relates to divergent thinking and, therefore, is hypothesized to be related to creative performance in organizations. The effects of openness to experience are likely to be partially mediated by an individual’s attitude toward divergent thinking (ATDT). Some individuals do not care to engage in divergent thinking, and researchers have asserted that negative ATDT is an impediment to individual creativity in organizations. However, the empirical link between one’s ATDT and one’s creative performance has yet to be demonstrated. Contextual factors also influence creative attitudes and behavior. ATDT is also likely to be influenced by one’s supervisor’s attitude. The amount of structure that supervisors initiate for their subordinates is likely to have a direct, negative effect on subordinates’ divergent thinking, and may also affect divergent thinking indirectly by influencing subordinates’ ATDT. Results generally support the model. Openness to experience and ATDT are positively associated with employees’ creative performance. In addition, some support is provided for a negative relationship between initiating structure and subordinates’ ATDT.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 187-204 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549883
Perhaps more than ever, organizations are pressured to innovate and adapt. External forces such as increasing international competition and advances in information technology have escalated demands on organizations to be innovative. Organizational creativity is an important element of organizational innovation and change (Woodman et al., 1993). In addition, even organizations in relatively stable and predictable environments that do not require change for immediate survival can benefit from creative ideas that improve quality, productivity, safety, or employee satisfaction (Eisenberger et al., 1990). All creative ideas originate from human minds (Ford, 1996), and individual creativity is a crucial component of organizational creativity (Woodman et al., 1993). Thus, the study of individual creativity in organizations is simply the study of creativity at its origin (Woodman et al., 1993). Factors relating to individual creativity include – but are by no means limited to – personality, attitudes, ability, cognition, and motivation (e.g., Oldham and Cummings, 1996; Redmond et al., 1993; Woodman et al., 1993; Zhou, 1998). Divergent thinking, the process of generating many and differing ideas, is an important aspect of individual creativity in organizations. Effective creative problem solving requires the generation of varied and diverging potential solutions (Ford, 1996), and divergent thinking helps individuals identify interesting problems and creative ways to implement solutions (Basadur, 1994). Woodman et al. (1993, p. 298) noted, divergent thinking “has long been considered the cognitive key to creativity and has continued to be a major consideration in creativity research”. Studying the factors that influence divergent thinking is fundamental to understanding organizational creativity. Recognizing the critical role of divergent thinking in creative processes, this study examines some of the personal and situational factors that affect divergent thinking and creative performance. First, the role of divergent thinking in creativity and the control of divergent thinking in organizations are considered. Then, an interactional model of personality, attitude, and leader influences on divergent thinking and individual creative performance is hypothesized and tested. This study is based on the author’s dissertation conducted in the Department of Management at Texas A&M University, USA. He gratefully acknowledges the assistance of Jennifer George, Dick Woodman, Jing Zhou, Wendy Wood, Todd Dewett, Matt Semadeni, and Lucinda Lawson. An earlier version of this paper was presented at the Academy of Management meeting, August 2001, in Washington, DC, USA.
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Divergent thinking and individual creativity in organizations Divergent thinking and creativity Divergent thinking is essential to creative performance in organizations. Individuals’ creative performances are the extent to which their ideas communicated, work methods used, and work outputs produced are novel and useful. Divergent thinking also distinguishes creative problem solving from other kinds of problem solving. In the absence of the unusual ideas produced during a divergent thinking stage of a problem solving processes, the solution chosen would not be novel and therefore would not be creative. Divergent thinking is so fundamental to creativity, the terms “divergent thinking” and “creativity” are often used synonymously in psychology literature (e.g., McCrae, 1987; Paulus, 2000). However, the definition of creativity normally used in the management literature requires both divergence (i.e., novelty, originality) and usefulness in a given context (Amabile, 1983), and that definition is used here. Nonetheless, divergent thinking and creativity are inextricably linked. In the context of problem solving, diverging ideas affect the originality of the problems identified, and the variety of the solutions proposed (Basadur, 1994; Ford, 1996). Within the classical, rational decision-making process (Simon, 1976) the steps involving identification of alternatives and examination of the consequences of each require divergent thinking. Many approaches to creative problem-solving training focus on increasing divergent thinking (e.g., Basadur et al., 1982; Gordon, 1961; Parnes, 1967). While critical evaluation of the ideas produced (a convergent thinking process) is also an important part of creativity, people seem to need less help with critical evaluation. In fact, organizations and their individual members’ proficiency with critical evaluation is believed to interfere with creativity (Basadur, 1994).
Some of these problems, heuristic problems, require problem solvers to think divergently; other problems, algorithmic problems, do not (Amabile, 1983). Algorithmic problems can be solved by recalling a known solution from memory and applying it. On the other hand, heuristic problems are complex and ill defined. For heuristic problems, there are no known solutions. Failing to think divergently when solving a heuristic problem is tantamount to failing to solve it. Even for jobs where algorithmic problems predominate, individuals can often think divergently and perform the work creatively. Unless the existing work routines are optimal, better routines could be identified through divergent thinking. As March and Simon (1958) note, organization members are more likely to satisfice than optimize when solving problems. Optimal, rational decision making necessitates a complete and divergent search for possible solutions, which is impractical given the resource constraints on decision makers. Consequently, people commonly engage in satisficing, which only involves searching for possible solutions until an adequate solution is found. Compared to the classical decision-making approach, satisficing tends to produce quicker but inferior solutions. When inclined and permitted to do so, individuals with routine jobs can think beyond established approaches and think divergently about new methods and outputs, and this creative activity can lead to valuable innovations. In fact, the continuous improvement goal of total quality management requires even those performing the most routine kinds of tasks to “challenge the status quo” and generate new ways to improve quality and productivity. In manufacturing organizations – where the tasks performed tend to be among the most routine (Perrow, 1977) – employees produce creative ideas for improvements (Eisenberger et al., 1990; Hatcher et al., 1989). This study controls for differences among jobs and examines how personalities, attitudes and managerial styles affect creativity.
Divergent thinking, problem solving and work in organizations Problem solving of various types in organizations is ubiquitous, which provides ample opportunity for creativity. Simon and others (e.g., March and Simon, 1958; Perrow, 1977; Simon, 1976) have conceptually modeled organizational activities as a collection of problems requiring decisions. Examples of such problems include obtaining inputs, performing transformations, disposing of outputs, responding to outside stakeholders, allocating compensation, and so on.
Managerial and individual influences on divergent thinking For the sake of control, managers often influence their subordinates’ behaviors in ways that reduce divergent thinking and creativity. Managers and other organizational members often reflexively resist divergent ideas (Basadur et al., 1982). In deed, the strain toward uniformity and conformity of behavioral patterns has been called one of the most significant psychological tendencies in organizations (Nemeth and Staw, 1989). Some degree of conformity and predictability is normally required for integration of organizational
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members’ efforts. Organizations are structured systems that employ a division of labor. Managers are responsible for ensuring that their subordinates’ roles are sufficiently clear and that role relationships are appropriately structured. This is not to say that all managers do (or should) rigidly define and structure roles for their subordinates. On the contrary, managers need to recognize the important tradeoffs between control and creativity (Nemeth and Staw, 1989). Finally, individual differences also affect divergent thinking in organizations. Individuals who like divergent thinking and who have cognitive styles prone to divergent thinking tend to be more creative. The nature of the work performed is only one of several determinants of individual divergent thinking and creativity. As this study hypothesizes, individuals’ personalities and attitudes, and their managers’ styles interact to influence their divergent thinking and creativity.
ideas expressed, work methods used, and work outputs produced. As stated above, the creativity of one’s job performance is both its novelty and usefulness, so there is a part-whole relationship of novelty to creativity. As Figure 1 indicates, an individual’s openness to experience, attitude toward divergent thinking, and the amount of structure their supervisor initiates for them affect their creative performance – particularly the novelty aspect.
Hypotheses In view of divergent thinking’s centrality to creative processes, personal and situational factors that affect divergent thinking are likely to affect creative performance in organizations. Figure 1 presents a model of personality, attitude, and leader influences on divergent thinking and creativity in organizations. Cognitive processes are intrapsychic activities that are practically unobservable in large sample field research[1]. The manifestations of such cognitive processes, on the other hand, can more easily be measured. Divergent thinking is manifested primarily in the novelty of individuals’
Openness to experience Openness to experience is a personality trait associated with individual creative performance in organizations (George and Zhou, 2001; Woodman et al., 1993). Openness to experience – along with extraversion, neuroticism, agreeableness, and conscientiousness – is part of the Big 5 model of personality. Openness is the propensity to be imaginative, original, unconventional, and independent (McCrae and Costa, 1997). “Open” individuals tend to seek out new and varied experiences. Alternatively, more “closed” individuals tend to be more conventional, conservative, and uncomfortable with complexities. Terms used to describe patterns in open individuals’ cognition include divergent, flexible, fluent, curious, and imaginative (McCrae, 1987; McCrae and Costa, 1997). Motivational aspects of openness include need for variety, need for cognition, and tolerance of ambiguity, which are each associated with creativity and innovation in organizations (King, 1990). Open individuals actively seek out new and varied experience, and are inclined to be reflective and thoughtful about the ideas encountered (McCrae and Costa, 1997). McCrae (1987) empirically demonstrated a
Figure 1 A model of personality, attitude, and leader influences on divergent thinking and creativity in organizations
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connection between openness to experience and divergent thinking on a creativity exercise. For these reasons, the following is hypothesized: H1. Openness to experience is positively related to creative performance.
Attitude toward divergent thinking One’s attitude toward divergent thinking (ATDT) is also believed to be related to creative performance in organizations (Basadur et al., 1982). While personality traits relate to more general cognitive, affective, and behavioral tendencies, attitudes are predispositions toward specific targets (Eagly and Chaiken, 1993). Accordingly, ATDT relates specifically to individuals’ thoughts, feelings, and behavioral intentions regarding divergent thinking. An individual with a favorable ATDT enjoys generating and building on unusual ideas, and is willing to communicate and consider others’ unusual ideas before judging them. The seminal research on ATDT found, using a relatively crude measure, that changes in ATDT accompanied performance improvements in creative problem-solving in training (Basadur et al., 1982). Subsequent research refined the conceptual and operational definitions of ATDT. Factor analyses identified two facets that account for most of the variance; preference for ideation (divergent production of ideas) and the preference for premature evaluation (Basadur and Finkbeiner, 1985). Preference for ideation is how much an individual likes hearing, generating, considering, and building on unusual ideas. People high in preference for ideation prefer new ideas to conventional ideas. The preference for premature evaluation relates to whether or not an individual prefers to judge ideas for their quality before reflecting on, elaborating on, or communicating them. People who favor premature evaluation tend to critique ideas before they are fully considered, revised, and combined with other ideas. As the name of the facet implies, the preference for premature evaluation inhibits divergent thinking. Scholars have suggested that social systems such as schools and other organizations value and cultivate critical evaluation skills almost to the exclusion of divergent thinking skills (Basadur, 1994; de Bono, 1991; Osborn, 1963). Consequently, many people may be more comfortable with critical, convergent thinking than divergent thinking (Basadur, 1994). Studies have demonstrated that creativity training can lead to more favorable ATDT (Basadur et al., 1986; Basadur et al., 1990). Although it appears that ATDT should relate to creativity in organizations, the link has not yet been established. Woodman et al. (1993 p. 299) note that if ATDT “can be convincingly linked to
creative outcomes, this connection will have important implications for organizations”. Accordingly, this study examines the following hypothesis: H2. Attitude toward divergent thinking is positively related to creative performance.
Openness to experience and ATDT Despite the effects of education and training, one’s openness to experience is likely to also be an important determinant of one’s ATDT. Open and closed individuals differ on several attitude and attitude-related dimensions (McCrae and Costa, 1997). For instance, open individuals differ from more closed individuals in social attitudes, and attitudes toward accepted values and assumptions. Attitudes of individuals high in openness to experience have been described as tolerant and nontraditional (McCrae and Costa, 1997; Neuberg et al., 1997). Importantly, open individuals display a preference for variety, they enjoy grasping new ideas, and they have an intrinsic interest in and appreciation for novelty (McCrae and Costa, 1997). For these reasons, openness to experience is expected to also be associated with ATDT: H3. Openness to experience is positively related to attitude toward divergent thinking. Though related, ATDT and openness to experience are also likely to have some separate effects on divergent thinking. Each of the Big 5 personality traits is actually a relatively general category of several more narrowly defined predispositons that factor analyses have shown to be highly related (John, 1990). McCrae and Costa (1997), for instance, describe numerous manifestations of openness that have little to do with ATDT. In addition to the relationship between openness and attitudes, openness relates to patterns in cognition and motivation. Attitudes, on the other hand, are individuals’ evaluations of particular “entities” (Ajzen, 1988; Eagly and Chaiken, 1993), and divergent thinking is a very specific entity. While openness to experience can predict individuals’ thoughts, feelings, and behaviors toward many objects, ATDT probably has little predictive utility beyond thoughts, feelings, and behaviors relating to divergent thinking. For these reasons, the model (see Figure 1) indicates ATDT partially mediates the relationship between openness to experience and creative performance. Accordingly, the following is hypothesized: H4. The relationship between openness to experience and creative performance is partially mediated by one’s attitude toward divergent thinking.
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Initiating structure A number of studies indicate leaders can affect their subordinates’ creative performance. Some studies indicate supportive and participative leadership is conducive to creativity (Oldham and Cummings, 1996). Leaders who critically evaluate their subordinates’ creativity may reduce creativity (Zhou, 1998), and leaders who boost their subordinates’ self-confidence can enhance creative performance (Redmond et al., 1993). With regard to divergent thinking processes, the amount of structure leaders initiate for their subordinates might be the most appropriate leadership factor to consider because it will tend to decrease divergent thinking. Initiating structure includes defining and structuring subordinates’ roles, asking subordinates to follow standard procedures, and maintaining definite standards of performance (Yukl, 1989). The amount of structure supervisors impose on their subordinates’ work is likely to be negatively associated with subordinates’ creativity because it tends to create convergence of thoughts. Structure initiated by supervisors influences subordinates’ knowledge (i.e., schemata, scripts, beliefs, etc.; see Drazin et al., 1999; Ford, 1996; March and Simon, 1958). Subordinates’ knowledge, in turn, influences their subsequent information processing inasmuch as attention tends to be directed toward information associated with and confirming the prior knowledge. Such cognitive consistency is antithetical to divergent thinking. Shalley (1991) used similar reasoning in explaining why productivity goals reduced creativity. Goals affect performances, in part, by directing attention toward the goals and away from other information. The common frames of reference created by supervisors initiating structure tend to focus attention and narrow the range of thoughts and behaviors (Ford, 1996). To date, no research has directly addressed the relationship between initiating structure and subordinate creativity, but a few related studies are informative. Oldham and Cummings (1996) looked at the effects of a factor they termed “noncontrolling” leadership on subordinates’ creativity. The authors’ conceptual and operational definitions of noncontrolling leadership overlap considerably with definitions of initiating structure. Results indicated subordinates who rated their supervisors as less controlling tended to be the more creative subordinates. However, it is not known how much of this observed effect should be attributed to leaders’ styles (leader characteristics) rather than dyadic factors. Coincidentally, Scott and Bruce (1994) found that leader-member exchange (LMX) quality may be associated with subordinates’
creativity. Subordinates who report having highquality LMX relationships, which give subordinates more latitude and less structure, tended to receive higher supervisor ratings of their innovative behavior (very similar to a supervisor rating of creativity). As Figure 1 depicts, this study differs from prior research by focusing on leaders’ characteristics rather than dyad-specific factors or subordinates’ perceptions of leaders’’ behaviors. Leaders’ attitudes and leadership styles can affect their subordinates’ divergent thinking and creativity aside from any dyad-specific processes. Early leadership research found that leaders’ attitudes relating to initiating structure were reflected in their leadership styles (Fleishman, 1953), and the fifth hypothesis pertains to leaders’ styles as they affect subordinates’ creativity[2]. The more that leaders prefer to initiate structure for their subordinates, the less their subordinates’ thoughts will diverge, and thus the less creative they will tend to be: H5. Supervisors’ preferences for initiating structure are negatively related to subordinates’ creative performance.
Supervisor-subordinate attitude similarity As managers and subordinates frequently have attitudes that are somewhat similar, their ATDT may be related too. Homogeneity in values and attitudes is both expected and rewarded (Burkhardt, 1994). Supervisor-subordinate value congruence eliminates some of the potential for conflict and is associated with subordinates’ job satisfaction and commitment (Meglino et al., 1989). Moreover, supervisors tend to be attracted to, and evaluate more favorably, subordinates with whom they have similar attitudes (Schlenker, 1980). Managers tend to reproduce themselves, using similarity in attitudes and demographic characteristics as a means of reducing uncertainty in the hiring process (Nemeth and Staw, 1989). Several models of social influence processes in organizations indicate that supervisors can influence subordinates’ attitudes by influencing attitude antecedents (e.g., Fisher, 1986; Hackman, 1992; Van Maanen, 1976). If subordinates publicly speak and act as if they share values and attitudes with their supervisors, they may internalize an attitude change over time (Van Maanen, 1976). First, supervisors obtain “compliance” from their subordinates by communicating their expectations, crediting subordinates for satisfying the expectations, or sanctioning subordinates for deviating (Fisher, 1986). When subordinates are new to their roles, complying with others’ expectations also has an anxiety reducing effect. Then, “identification”
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with a particular individual such as a supervisor may emerge as subordinates’ motive for complying with expectations. Finally, “internalization” can become the dominant motive for exhibiting the expected behaviors, as subordinates learn to value the same things that their supervisors value, and their attitudes become somewhat similar. Hence, the following is hypothesized: H6. Supervisors’ attitudes toward divergent thinking are positively related to their subordinates’ attitudes toward divergent thinking.
work should be done. Third, individuals’ past behaviors are an important source of influence on attitudes. When assessing their attitudes, individuals recollect their relevant past behaviors to a certain degree and use them as indicators of what their preferences must be. Consequently, when subordinates comply with their supervisors’ instructions to follow set procedures, the absence of creative behaviors may tend to reduce the likelihood that subordinates will develop selfperceptions that incorporate favorable ATDT. These possibilities suggest the following hypothesis: H8. Supervisors’ preferences for initiating structure are negatively related to subordinates’ attitudes toward divergent thinking.
Preference for initiating structure and ATDT Supervisors ATDT may influence how much structure they think they should initiate for their subordinates, and initiating structure may in turn affect their subordinates’ ATDT. This is not to say that only ATDT determines preferences for initiating structure, but there are apparent linkages between ATDT and preference for initiating structure. For instance, supervisors who do not like divergent thinking may be more rigid and more likely to prefer to “encourage the use of uniform procedures” (Schriesheim and Kerr, 1974, p. 757). Conversely, supervisors who have favorable ATDT enjoy hearing others’ new ideas and building on them. Such supervisors would be more likely to prefer new ideas to conventional ones, and would generally tend to be more interested in their subordinates’ new ideas regarding work methods and ways to improve work products. Research shows that preference for structure is correlated with being closed-minded in the sense of not considering others’ opinions and disliking questions that could be answered in many different ways (Neuberg et al., 1997). For this reason, the following is hypothesized: H7. Supervisors’ attitudes toward divergent thinking are negatively related to their preferences for initiating structure. Hackman (1992) presents a social influence model that explains how initiating structure may also influence the antecedents of subordinates’ ATDT (beliefs, affect, and behaviors relating to divergent thinking) and thereby influence their ATDT. First, in terms of beliefs, when supervisors ask their subordinates to perform their roles in a specified way, they encourage subordinates to believe that divergent thinking is not necessary or not helpful. Second, when supervisors give instructions to subordinates regarding how work should be done, subordinates may anticipate (or actually experience) their supervisors’ dissatisfaction with deviations from the instructions. Thus, ATDT can be influenced by negative affect being associated with novel, nonconformist ideas regarding how
Additionally, since preference for initiating structure is probably just one of several mechanisms through which supervisors can influence their subordinates’ attitudes, preference for initiating structure may only partially mediate the relationship between supervisors’ ATDT and their subordinates’ ATDT. For this reason, the following is hypothesized: H9. The relationship between supervisors’ attitudes toward divergent thinking and their subordinates’ attitudes toward divergent thinking is partially mediated by supervisors’ preferences for initiating structure.
Methods Sample and procedures The hypothesized model was tested using data from employees of nonacademic functions of a large university in the south-western USA. Of the 208 focal subjects in the final data set, 64 percent were female, with an average age of 38, and having an average of 4.5 years of experience in their current positions. Participants worked in finance, human resources, financial aid, recreational sports, the physical plant, food services, a research foundation and an athletic foundation. Of the 387 employees who were qualified and requested to participate, 261 attempted to participate. Of the 261. 53 were excluded either because they omitted portions of their survey (21), did not have a co-worker provide a creativity rating for them (4), or their supervisors did not participate (17) or omitted portions of the supervisors’ survey (11). Consequently, only 208 employees are included as focal subjects in the study. One hundred twenty-two supervisors were asked to participate in the study, and 101 provided
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usable data for the study. To reduce the number of focal subjects dropped from the study due to nonresponse by their co-workers, multiple coworkers were asked to rate each subject (307 in total). Consequently, although 98 of the subjects’ co-workers did not provide usable responses, only four subjects were dropped from the study due to nonresponse by their co-workers. Data was collected in two rounds of confidential surveys. The first-round survey contained a request that employees list their suggestions that they would like to have anonymously submitted to management, and also included survey scales to measure some of the independent variables. The scales measured personality variables, attitudes toward divergent thinking, leadership styles, and leader substitutes. Second-round surveys were given to necessary participants, and the content of each survey depended on the data needed from the participant. The co-workers of the focal subjects that were simply required to provide a creativity rating of one or more of their colleagues received an evaluation sheet for each colleague that they were asked to evaluate. In addition to evaluations of their subordinates, supervisors were asked to complete survey questions relating to their own personality, attitudes, leadership style, and demographic data.
were asked to indicate on a seven-point scale the extent to which they liked each item, for instance, “Trying to come up with new solutions to problems”; “Discussing ways helpful changes could be made at work”; and “Producing original ideas” (a ¼ 0:93). Factor analyses of the three scales did not support combining them.
Measures Openness to experience Openness to experience was measured using a 15-item openness subscale of the Revised Interpersonal Adjective Scale for the Big 5 personality traits (IASR-B5; Trapnell and Wiggins, 1990). The scale was included on both the subordinates’ and supervisors’ surveys, and each individual provided a self-report. Subjects were asked to rate the self-descriptive accuracy of adjectives such as “imaginative” and “original” on an eight-point scale ranging from “extremely inaccurate” to “extremely accurate” (a ¼ 0:82). Attitude toward divergent thinking This study measured ATDT with three scales; the preference for ideation and preference for premature evaluation subscales from Basadur and Finkbeiner (1985), and a new ATDT scale. Preference for ideation is measured with a six-item scale and a five-point Likert-type response format ða ¼ 0:75Þ. Preference for premature evaluation is measured with an eight-item scale ða ¼ 0:82Þ. Preference for premature evaluation was reverse coded so that the higher a subject’s score on this facet, the less he or she prefers premature evaluation, and the more favorable the subject’s ATDT is. A new, 11-item ATDT scale was written for this study (available from the author). Subjects
Preference for initiating structure As suggested by Schriesheim and Kerr (1974), preference for initiating structure was measured with the Leader Behavior Description Questionnaire (LBDQ XII) scale using the response format from the Leader Opinion Questionnaire (LOQ). The LOQ (Fleishman, 1953) uses a five-point response format in which supervisors rate how often they think they should perform specific leader behaviors. However, since the content validity of Fleishman’s LOQ scale is lacking, the behaviors listed in Stogdill’s (1963) LBDQ XII were used instead of the original LOQ items (a ¼ 0:75). All participants in the study who were supervisors were asked to self-report their preference for initiating structure. Creative performance ratings Prior field research has identified supervisor ratings and ratings of employees’ suggestions as effective measures of individual creative performance (e.g. Eisenberger et al., 1990; Oldham and Cummings, 1996), and both operationalizations were used in this study. To avoid common method variance, dependent measures were obtained from three separate sources; supervisors’ ratings of the subordinates’ creativity, co-workers’ rating of the subjects’ creativity, and the rated creativity of the suggestions that subjects submitted. Furthermore, two different rating scales were used for both the co-workers’ and supervisors’ ratings of the focal subjects’ creativity. One of the scales used was Oldham and Cummings’s (1996) creativity rating scale. It is a three-item measure that asks how “original and practical”, “adaptive and practical”, and “creative” the focal subjects’ work is (a ¼ 0:89). A new creativity rating scale was also included (available from the author). These items were intended to measure two separate dimensions of employee creativity; novelty and usefulness. Divergent thinking is probably more strongly associated with the novelty aspect of creativity than the usefulness aspect, so an attempt was made to measure the two components separately. Factor analyses demonstrated that the data fit a two-factor structure. Reliabilities for the five-item novelty subscale (a = 0.78), the three-item usefulness subscale (a ¼ 0:89), and the full eight-item scale (a = 0.80) were all acceptable. Co-worker ratings of creativity also loaded on two factors. For the
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Volume 7 · Number 3 · 2004 · 187-204
co-workers’ ratings, subscale reliabilities for novelty (a ¼ 0:75) and usefulness (a ¼ 0:85), and the full scale (a ¼ 0:81) were acceptable as well.
Control variables Effects due to differences in functional area, and factors that can substitute, neutralize, or enhance supervisors’ effectiveness were controlled. Six dummy variables were used to control for differences attributable to functions. A “0” was entered in all the dummy variables for the data obtained from employees of the finance function. The leader substitutes, neutralizers, and enhancers controlled were the extent to which subordinates can get performance feedback from the work itself (“Feedback”), subordinates’ autonomy (“Autonomy”), the routineness of the work (reverse coded to serve as “Nonroutineness”), the three way interaction of “Feedback * Autonomy * Nonroutineness”, and the extent to which supervisors control rewards for their subordinates (“Reward power”)[3]. Hackman and Oldham’s (1976) three-item scale measured autonomy. The other leader substitutes, neutralizers, and enhancers were measured with the Revised and Reduced Substitutes for Leadership Scales (Podsakoff and McKenzie, 1994).
Creativity of suggestions Another source of creativity data was the rated creativity of suggestions subjects submitted. Prior research has effectively used employees’ suggestions as an indicator of creativity (e.g., Eisenberger et al., 1990; Hatcher et al., 1989; Oldham and Cummings, 1996). Surveys given to focal subjects in this study included two blank pages, with a request for “any suggestions you have for ways this organization can make improvements”. Four judges rated the suggestions using Amabile’s consensual technique for assessing creativity (e.g., Amabile, 1982; Shalley, 1991; Zhou, 1998). Each judge had experience working in nonacademic functions of major universities and graduate education in management. Two judges also had experience with employee suggestions from their employment in management consulting. Ratings were obtained on a scale from 1 to 11 on two aspects of creativity; novelty and usefulness. Following Amabile’s (1982) guidelines, raters were not trained and did not collaborate, and the order of the suggestions and the order of the dimensions rated were random. Ratings on the novelty dimensions showed sufficient agreement (x2 ð1Þ ¼ 1159:5, p , 0.0001) (Lawlis and Lu, 1972) and reliability (r ðICCÞ ¼ 0:71) (Tinsley and Weiss, 1975). Ratings on the usefulness scale showed sufficient agreement (x2 ð1Þ ¼ 541:9, p , 0.0001) (Lawlis and Lu, 1972), but reliability was low (r ðICCÞ ¼ :59). It was only slightly improved (r ðICCÞ ¼ :61) by excluding the ratings from one of the raters. However, the reliability of the four ratings of novelty in combination with the three best ratings of usefulness was adequate (r ðICCÞ ¼ :78), so the novelty and usefulness dimensions could be combined as a reliable measure of creativity. Novelty ratings across all four judges were averaged for each suggestion. Similarly, an average usefulness rating was calculated for each suggestion. Creativity for each suggestion was then calculated by averaging the novelty and usefulness ratings for each suggestion. A total of 127 of the 208 subjects in the final sample submitted at least one suggestion. For subjects who submitted multiple suggestions, the sum of their suggestions’ novelty and the sum of their suggestions’ creativity was computed. Each are used as dependent variables in analyses.
Method of analysis Hypotheses were tested using multiple regression/ correlation analyses[4]. To prevent multicolinearity problems in the multiple regression analyses, the continuous independent variables were centered and standardized, which kept variance inflation factor (VIF) values below 2. Furthermore, the suggestion ratings variables (novelty and creativity) were transformed before being used as dependent variables in regression analyses. They had more of a Poisson-type distribution than a normal distribution (skewed to the right and leptokurtotic). Therefore, the log of the novelty ratings and creativity ratings were used.
Results Table I reports the means, standard deviations, and correlations among the variables in the study. Reliability coefficients are listed on the diagonal. H1 predicted a positive relationship between openness to experience and creative performance. Table II presents the hierarchical regression results to test H1. In the first step of the hierarchical regression analysis, the dependent variable was regressed on the control variables. Then, the dependent variable was regressed on the control variables and openness to experience. This was done for all eight operationalizations of the creativity construct. While ratings of creative performance tended to support H1, the novelty and creativity of the suggestions were not related to openness to experience. Openness to experience
194
195
Variables Openness to experience Attitude toward divergent thinking; new measure Preference for ideation Preference for premature evaluation Feedback Autonomy Non-routineness Supervisors’ control over rewards Supervisors’ attitude toward divergent thinking; new measure Supervisors’ preference for ideation Supervisors’ preference for premature evaluation Supervisors’ preference for initiating structure Novelty: supervisors’ ratings Creativity: supervisors’ ratings Oldham and Cummings Scale: supervisors’ ratings Novelty: co-workers’ ratings Creativity: co-workers’ ratings Oldham and Cummings Scale: co-workers’ ratings Novelty: suggestion ratings Creativity: suggestion ratings Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources
1.38
5.01
9.70 0.07 0.07 0.17 0.05 0.05 0.07
9.83
5.25
6.24
5.37
5.15
6.16
5.22
3.98
2.90
3.67
8.28 0.26 0.26 0.38 0.22 0.22 0.26
8.74
1.15
1.22
1.38
1.10
1.12
1.35
0.45
0.79
0.68
0.78
0.75 1.35 1.13 1.65
2.74 4.79 5.41 4.15
6.15
0.88 0.68
0.82
SD
5.83 3.58
5.85
Mean
1
0.12 0.18* 0.08 0.00 0.00 2 0.01 2 0.02
0.12
0.11
0.17*
0.26**
0.23**
0.27**
0.33**
2 0.01
0.14*
0.08
0.11
0.06
0.19** 2 0.03 0.15* 0.18*
0.49** 0.13
(0.83)
0.23** 0.16* 0.16* 2 0.02 0.02 2 0.11 2 0.13
0.22*
0.15*
0.19**
0.24**
0.19**
0.26**
0.29**
0.05
0.10
0.09
0.09
0.02
0.15* 0.03 0.07 0.18*
(0.93) 0.30**
2
0.03 0.06 0.07 0.01 2 0.14* 2 0.01 2 0.02
0.03
2 0.03
0.02
0.10
0.05
0.09
0.08
2 0.10
0.01
0.06
0.14*
0.08
0.38** 0.15 0.02 2 0.01
(0.75)
3
0.22* 0.20** 2 0.02 0.09 2 0.00 2 0.03 2 0.03
0.23**
0.12
0.13
0.17*
0.09
0.13
0.23**
2 0.17*
0.13
0.02
0.10
0.04
(0.82) 2 0.11 0.01 0.18*
4
2 0.03 2 0.02 2 0.04 2 0.07 0.01 0.09 2 0.01
2 0.04
2 0.03
2 0.06
2 0.14*
2 0.07
0.00
2 0.09
0.12
2 0.09
0.04
2 0.04
0.03
(0.84) 0.19** 2 0.23**
5
2 0.11 2 0.10 0.02 0.17* 0.03 0.14* 2 0.01
2 0.13
0.12
0.07
0.07
0.17*
0.14*
0.17*
2 0.09
0.07
0.13
2 0.07
0.23**
(0.66) 0.26**
6
0.07 0.17* 0.06 0.07 0.00 2 0.09 0.08
0.05
0.12
0.15*
0.17*
0.13
0.18*
0.25**
2 0.27**
0.28**
0.12
0.23**
0.23**
(0.92)
7
0.13 2 0.08 2 0.08 0.20** 2 0.03 0.04 0.15*
0.12
0.04
0.03
0.02
0.16*
0.16*
0.11
2 0.14*
0.21**
0.15*
0.05
(0.81)
8
0.17 0.17 0.12 2 0.39** 2 0.06 0.07 0.08
0.17
0.12
0.09
0.13
0.11
0.30**
0.21**
0.05
0.26**
0.21**
(0.93)
9
0.05 0.24** 0.03 2 0.12 2 0.13 0.02 0.20**
0.04
2 0.05
0.01
2 0.01
0.11
0.12
0.11
0.18*
0.43**
(0.75)
10
20.01 0.33** 20.09 0.12 0.10 0.06 0.18**
20.02
0.07
0.12
0.13
0.07
0.12
0.13
20.17*
(0.82)
11
0.13 20.05 20.04 20.15* 20.18 0.13 0.05
0.12
20.06
20.13
20.13
0.06
20.04
20.09
(0.75)
12
0.09 0.01 0.09 0.04 0.02 0.03 0.02
0.08
0.24**
0.24**
0.32**
0.67**
0.81**
(0.78)
13
0.06 2 0.03 0.05 0.02 0.05 2 0.07 0.02
0.06
0.20**
0.22**
0.24**
0.77**
(0.80)
14
0.10 2 0.09 0.09 0.16* 0.02 0.00 2 0.02
0.10
0.18*
0.16*
0.24**
(0.89)
15
0.07 0.09 0.12 0.11 0.01 2 0.16* 2 0.12
0.07
0.73**
0.85**
(0.75)
16
Notes: n = 208 for variables 1-19; n = 127 for variables 19/20; scale reliabilities are along the diagonal; correlations among pairs of dummy variables (variables 21-26) are meaningless and, therefore, omitted in the interest of brevity; * p , 0.05; **p , 0.01
21. 22. 23. 24. 25. 26.
20.
19.
18.
17.
16.
15.
14.
13.
12.
11.
10.
9.
5. 6. 7. 8.
3. 4.
2.
1.
Table I Means, standard deviations, and correlations of all variables
0.08 0.09 0.02 0.09 0.05 2 0.21 2 0.08
0.08
0.79**
(0.81)
17
0.15 0.01 0.09 0.08 20.03 20.10 20.08
0.14
(0.89)
18
0.99** 0.14 0.19* 20.07 20.15 20.07 20.04
(0.71)
19
(0.78) 0.12 0.19* 20.09 20.15 20.06 20.04
20
Personality, attitude, and leader influences on divergent thinking European Journal of Innovation Management
Scott David Williams Volume 7 · Number 3 · 2004 · 187-204
196
20.05 0.04 20.03 0.04 20.08 20.02 0.03 0.07 0.14**** 20.02 0.13**** 0.07 0.26*** 0.06***
0.30*** 0.08***
0.22*** 0.04**
2 0.07 0.10 0.11 0.03 0.01 2 0.02 2 0.06 0.11 0.06 2 0.01 0.11 0.09****
Supervisor ratings Creativity Oldham and Cummings
0.01 0.09 0.02 0.03 0.05 0.01 20.06 0.11 0.19* 20.03 0.04 0.09****
Novelty
0.21** 0.04**
0.08 0.12 0.08 0.02 20.13**** 20.11 20.11 0.08 0.08 0.05 0.00 0.10*
Novelty
0.13**** 0.02****
0.06 0.01 0.04 0.04 20.20** 20.09 20.04 0.08 0.09 0.05 0.01 0.09****
0.07 0.00
0.00 0.07 0.03 20.04 20.10 20.09 20.03 0.12 0.07 0.05 0.01 0.05
Co-worker ratings Creativity Oldham and Cummings
0.08 0.01
0.06 0.14 20.09 20.18* 20.09 20.05 0.03 20.11 0.04 0.15 0.10 0.14****
0.09 0.01
0.03 0.12 2 0.12 2 0.18* 2 0.05 2 0.05 0.05 2 0.10 0.07 0.14 0.11 0.12
Suggestions ratingsa Novelty Creativity
Notes: n = 208 for supervisor and co-worker ratings; n = 127 for suggestions ratings; R2-statistics are in italics; standardized beta coefficients are not in italics; a a log transformation was performed on the suggestions ratings scores; b the continuous independent variables were centered and standardized; *p , 0.05; **p , 0.01; ***p , 0.001; ****p , 0.10
Step 1 Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources Feedback Autonomy Non-routineness Feedback 3 Autonomy 3 Non-routineness Control over awards R2 Step 2 Openness to experience DR2
Independent variablesb
Table II Results of hierarchical regression analysis for H1
Personality, attitude, and leader influences on divergent thinking European Journal of Innovation Management
Scott David Williams Volume 7 · Number 3 · 2004 · 187-204
Personality, attitude, and leader influences on divergent thinking
European Journal of Innovation Management
Scott David Williams
Volume 7 · Number 3 · 2004 · 187-204
had a relatively strong relationship with the novelty ratings. It was significant for both supervisors’ ratings of the focal subjects’ novelty (incremental R2 ¼ 0:08, p , 0.001) and co-workers’ ratings of the focal subjects’ novelty (incremental R2 ¼ 0:04, p , 0.01). In addition, openness to experience was related to the supervisors’ and co-workers’ ratings of creativity (calculated as the average of the novelty and usefulness subscales). The relationship was clearly significant with supervisors’ ratings (incremental R2 ¼ 0:06, p , 0.001), and marginally significant for co-workers’ ratings (incremental R2 ¼ 0:02, p , 0.10). Finally, the relationship between openness and supervisors’ ratings of creativity on the scale published by Oldham and Cummings (1996) was significant (incremental R2 ¼ 0:04, p , 0.01), but nonsignificant for the co-workers’ ratings using the same scale (incremental R2 ¼ 0:004). H2 asserts that one’s ATDT is positively related to their creative performance. Table III presents the results of hierarchical regressions used to test H2. Hierarchical regression analyses provide fairly consistent support for a positive relationship between the new ATDT scale scores and the various measures of creativity. The incremental variance explained by the set of three facets was statistically significant in most cases at better than the conventional level of p , 0.05, and marginally significant ( p , 0.10) for the co-workers’ ratings of creative performance using the Oldham and Cummings scale. However, in examining the individual beta coefficients, it is apparent that the new ATDT scale is more strongly related to creative performance than the other two facets. The new ATDT scale is significant at better than the conventional level for six of the eight operationalizations of creative performance, and marginally significant for the other two. On the other hand, the preference for ideation facet is not significantly related to creative performance in the predicted way for any of the eight operationalizations of creative performance. Findings for the preference for premature evaluation scale are mixed. It reaches statistical significance in the predicted direction for about half of the operationalizations of creative performance. H3 contends openness to experience is positively related to ATDT. As the correlation matrix (Table I) shows, openness is significantly related to two of the three ATDT facets. The new ATDT scale and preference for premature evaluation are positively and significantly related to openness (r ¼ 0:49, p , 0.001, and r ¼ 0:19 p , 0.01, respectively). The relationship to preference for ideation is just below the
conventional significance level (r ¼ 0:13, p ¼ 0.06). H4 states that ATDT partially mediates the relationship between openness to experience and creative performance. Table III also reports the hierarchical regression results for openness to experience after controlling for ATDT. For three of the eight operationalizations of creative performance, the relationship between openness and creative performance after controlling for ATDT are significant at better than the p ¼ 0:05 level, and significant at p ¼ 0:052 for a fourth operationalization (co-workers’ ratings of “novelty”). H4 is partially supported. H5 states that supervisors’ preferences for initiating structure are negatively related to their subordinates’ creative performance. The fourth and fifth steps in the hierarchical regression analyses reported in Table IV test H5. The fourth step tested H5 the way it was stated a priori. The results were nonsignificant. However, post hoc analyses in which supervisors’ control over rewards for their subordinates (reward power) was entered as a moderator did find a significant relationship. A lack of reward power can neutralize the influence of supervisors on their subordinates (Podsakoff and McKenzie, 1994), and the significant results for step five (see Table III) show that reward power is an important moderator of the relationship between supervisors’ preference for initiating structure and their subordinates’ creative performance. While there is no significant main effect for supervisors’ preferences for initiating structure, the interaction with reward power is significant for three of the eight operationalizations of creative performance. Therefore, in this sample the relationship described in H5 is only supported for supervisors’ with greater control over rewards for their subordinates. H6 posits that supervisors’ ATDT are positively related to their subordinates’ ATDT. As mentioned above, supervisors that do not control rewards received by their subordinates are less able to influence their subordinates. For this reason, hierarchical moderated multiple regression is used to test for the relationship between supervisors’ attitudes and their subordinates’ attitudes given that supervisors’ control over rewards may moderate the relationship. In addition, it is possible that differences between the nonacademic functions in the study could lead to similarity in supervisors’ and subordinates’ attitudes, so the dummy variables for the various functions need to be entered as control variables (see Table V). H6 is partially supported. No significant relationships were found for the new ATDT scale or preference for ideation. However, supervisors’ preferences for premature evaluation are related to their
197
198
2 0.05 0.04 2 0.03 0.04 2 0.08 2 0.02 0.03 0.07 0.14**** 2 0.02 0.13**** 0.07
0.25*** 2 0.04 0.12 0.06** 0.18* 0.02*
0.01 0.09 0.02 0.03 0.05 0.01 20.06 0.11 0.19* 20.03 0.04 0.09****
0.27*** 20.08 0.21** 0.10*** 0.21** 0.03
Novelty
0.16* 0.02*
0.08 0.04*
0.19** 2 0.04
2 0.07 0.10 0.11 0.03 0.01 2 0.02 2 0.06 0.11 0.06 2 0.01 0.11 0.09****
Supervisor ratings Creativity Oldham and Cummings
0.15**** 0.02****
0.09 0.04
0.17* 0.02
0.08 0.12 0.08 0.02 20.13**** 20.11 20.11 0.08 0.08 0.05 0.00 0.10*
Novelty
0.08 0.00
0.10 0.02
0.14**** 2 0.06
0.06 0.01 0.04 0.04 2 0.20** 2 0.09 2 0.04 0.08 0.09 0.05 0.01 0.09****
0.01 0.00
2 0.14**** 0.03****
0.13**** 2 0.14****
0.00 0.07 0.03 2 0.04 2 0.10 2 0.09 2 0.03 0.12 0.07 0.05 0.01 0.05
Co-worker ratings Creativity Oldham and Cummings
20.02 0.00
0.24* 0.07*
0.18*** 20.13
0.06 0.14 20.09 20.18* 20.09 20.05 0.03 20.11 0.04 0.15 0.10 0.14****
2 0.02 0.00
0.24* 0.07
0.20* 2 0.14
0.03 0.12 2 0.12 2 0.18* 2 0.05 2 0.05 0.05 2 0.10 0.07 0.14 0.11 0.12
Suggestions ratingsa Novelty Creativity
Notes: n = 208 for supervisor and co-worker ratings; n = 127 for suggestions ratings; R2-statistics are in italics; standardized beta coefficients are not in italics; a a log transformation was performed on the suggestions ratings scores; b the continuous independent variables were centered and standardized; *p , 0.05; **p , 0.01; ***p , 0.001; ****p , 0.10
Step 1 Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources Feedback Autonomy Non-routineness Feedback 3 Autonomy 3 Non-routineness Control over awards (reward power) R2 Step 2 Attitude toward divergent thinking: new scale (new ATDT scale) Preference for ideation (ideation) Preference for premature evaluation (premature evaluation) DR2 Step 3 Openness to experience (openness) DR2
Independent variables
b
Table III Results of hierarchical regression analysis for H2 and H4
Personality, attitude, and leader influences on divergent thinking European Journal of Innovation Management
Scott David Williams Volume 7 · Number 3 · 2004 · 187-204
199 0.14 0.02****
0.01 0.00 2 0.16* 0.02*
20.03 0.00 20.13* 0.02*
2 0.17* 0.03*
0.06 0.01
0.10 0.03
0.19* 0.05*
0.12 2 0.03
0.22*** 0.04**
2 0.07 0.10 0.11 0.03 0.01 2 0.02 2 0.06 0.11 0.06 2 0.01 0.11 0.09****
0.17* 2 0.03
0.26*** 0.06***
2 0.05 0.04 2 0.03 0.04 2 0.08 2 0.02 0.03 0.07 0.14**** 2 0.02 0.13**** 0.07
0.18* 20.07
0.30*** 0.08***
0.01 0.09 0.02 0.03 0.05 0.01 20.06 0.11 0.19* 20.03 0.04 0.09****
Novelty
Supervisor ratings Creativity Oldham and Cummings
0.09 0.01
20.06 0.00
0.07 0.02
0.10 0.03
0.21** 0.04**
0.08 0.12 0.08 0.02 20.13**** 20.11 20.11 0.08 0.08 0.05 0.00 0.10*
Novelty
0.10 0.01
2 0.07 0.00
0.09 0.01
0.10 2 0.06
0.13 0.02****
0.06 0.01 0.04 0.04 2 0.20** 2 0.09 2 0.04 0.08 0.09 0.05 0.01 0.09****
0.06 0.00
2 0.02 0.00
0.14**** 0.03
0.13 2 0.14****
0.07 0.00
0.00 0.07 0.03 2 0.04 2 0.10 2 0.09 2 0.03 0.12 0.07 0.05 0.01 0.05
Co-worker ratings Creativity Oldham and Cummings
20.04 0.00
0.17**** 0.02****
0.25* 0.06*
0.19**** 20.13
0.08 0.01
0.06 0.14 20.09 20.18* 20.09 20.05 0.03 20.11 0.04 0.15 0.10 0.14****
2 0.02 0.00
0.16 0.02
0.25* 0.07*
0.21* 2 0.15
0.09 0.01
0.03 0.12 2 0.12 2 0.18* 2 0.05 2 0.05 0.05 2 0.10 0.07 0.14 0.11 0.12
Suggestions ratingsa Novelty Creativity
Notes: n = 208 for supervisor and co-worker ratings; n = 127 for suggestions ratings; R2-statistics are in italics; standardized beta coefficients are not in italics; a a log transformation was performed on the suggestions ratings scores; b the continuous independent variables were centered and standardized; *p , 0.05; **p , 0.01; ***p , 0.001; ****p , 0.10
Step 1 Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources Feedback Autonomy Non-routineness Feedback 3 Autonomy 3 Non-routineness Control over awards R2 Step 2 Openness to experience DR2 Step 3 Attitude toward divergent thinking: new scale (new ATDT scale) Preference for ideation (ideation) Preference for premature evaluation (premature evaluation) DR2 Step 4 Preference for initiating structure (structure) R2 Step 5 Reward power 3 structure DR2
Independent variables
b
Table IV Results of hierarchical regression analysis for H5
Personality, attitude, and leader influences on divergent thinking European Journal of Innovation Management
Scott David Williams Volume 7 · Number 3 · 2004 · 187-204
Personality, attitude, and leader influences on divergent thinking
European Journal of Innovation Management
Scott David Williams
Volume 7 · Number 3 · 2004 · 187-204
Table V Results of hierarchical regression analyses for H6-H9 Independent variablesa
New scale
Test of H6 Step 1 Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources Control over awards (reward power) R2 Step 2 Supervisors’ attitudes New ATDT scale Preference for ideation (ideation) Preference for premature evaluation (premature evaluation) DR2 Step 3 Reward power 3 new ATDT scale Reward power 3 ideation Reward power 3 premature evaluation DR2 Test of H8 Step1 (same as H6) Step 2 Supervisors’ preference for initiating structure (structure) R2 Step 3 Reward power 3 structure R2 Test for H9 Step 1 Food services Physical plant Recreational sports Athletic foundation Research foundation Human resources Control over awards (reward power) Supervisors’ preference for initiating structure (structure) Reward power 3 structure R2 Step 2 Supervisors’ preference for premature evaluation (SPE) Reward power 3 SPE DR2
0.15* 0.16* 2 0.1 0.03 2 0.10 2 0.12**** 0.06
0.08*
Subordinates’ ATDT Ideation Premature evaluation 0.05 0.07 20.01 20.14**** 20.2 20.03 0.09
0.04
0.22** 0.01 0.12 0.03 0.00 0.01 0.02
0.06
0.07 0.02 0.05
0.00
0.00
0.00
2 0.1 0.03 0.21** 0.04**
0.00
0.00
0.10 0.01
20.10 0.01
0.14* 0.02*
2 0.02 0.00
0.00 0.00
0.02 0.02*
0.21** 0.01 0.09 0.02 0.03 0.02 0.01 20.15* 20.14* 0.09* 0.04 0.18* 0.03*
Notes: n = 208; R22 statistics are in italics; standardized beta coefficients are not in italics; a the continuous independent variables were centered and standardized; *p , 0.05 **p , 0.01; ***p , 0.001; p ****p , 0.10
subordinates’ attitudes among those supervisors who have more control over their subordinates’ rewards (incremental R2 ¼ 0:04, p , 0.01). H7 contends that supervisors’ attitudes toward divergent thinking are negatively related to their preferences for initiating structure. Results were mixed (see Table VI). The new ATDT scale was not related to preference for initiating structure,
preference for ideation was positively related to preference for initiating structure, and only preference for premature evaluation is negatively related to preference for initiating structure. H8 predicts that supervisors’ preferences for initiating structure are negatively related to their subordinates’ attitudes toward divergent thinking. As it was with H5 and H6, supervisors’ control
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Table VI Results of regression analyses for H7 Independent variables
a
Preference for initiating structure
Attitude toward divergent thinking; new scale Preference for ideation Preference for premature evaluation R2
0.05 0.23* 2 0.30** 0.10**
Notes: n = 128; the Table reports R2 and standardized beta coefficients; a the independent variables were centered and standardized; *p , 0.05; **p , 0.01
over rewards is an important moderator (see Table V). Differences between functions were also controlled. Results support H8, but only for preference for premature evaluation. The main effect was significant (incremental R2 ¼ 0:02, p , 0.05), and the moderating effect of supervisors’ reward power was also significant (incremental R2 ¼ 0:02, p , 0.05). There were no significant relationships between preference for initiating structure and the other two ATDT facets. H9 states that preference for initiating structure partially mediates the relationship between supervisors’ ATDT and subordinates’ ATDT. However, given that subordinates’ preference for premature evaluation is the only facet of subordinates’ ATDT related to supervisors’ preference for initiating structure, the analysis is only appropriate for this facet, and H9 can only be partially supported. To examine this hypothesis, subordinates’ preferences for premature evaluation were regressed first on the control variables and their supervisors’ preferences for initiating structure, and then on their supervisors’ preference for premature evaluation as a main effect and in interaction with control over organizational rewards. As Table V indicates, the interaction of supervisors’ preferences for premature evaluation and their control over rewards is able to explain significantly more variance in their subordinates’ attitudes (incremental R2 = 0.03, p , 0.05). Thus, supervisors’ preferences for initiating structure only partially mediate the relationship between supervisors’ preferences for premature evaluation and their subordinates’ preferences for premature evaluation. H9 is partially supported.
Discussion and conclusions The purpose of this study was to examine individuals’ personalities and attitudes, and their supervisors’ personalities and attitudes as they relate to divergent thinking and creativity in organizations. Although divergent thinking may be
difficult or even impossible to directly observe, it is an essential part of creative processes and is manifested in employees’ creative performance. With attention to the key role of divergent thinking in creative processes, a model that linked the personalities, attitudes, and behaviors of supervisors and their subordinates was presented. Each of the hypotheses in the model received at least partial support. Most of the hypothesis tests relating to openness to experience, the preference for premature evaluation facet of ATDT, supervisors’ preferences for initiating structure, and supervisors’ ratings of subjects’ creative performance were supported. Failure to support the hypotheses tended to be in one of two areas; operationalizations of employee creative performance other than supervisors’ ratings and the preference for ideation scale. First, perusal of the regression results, especially Table IV, reveals that the most valid measures of employee creativity were probably the ratings given by their supervisors. Weaker predictors of employee creativity tended not to reach significance with the co-worker ratings and the creativity of the suggestions submitted. Only a small sample of suggestions was available for each focal subject, and the reliabilities for the ratings were marginal, so it is little surprise that weaker associations were not detectable with the employees’ suggestions. The co-workers’ ratings of creativity may have been more valid than the ratings of employees’ suggestions, but not much more. Second, the preference for ideation scale usually did not behave as hypothesized. Reliability for this subscale was somewhat low, but it exceeded the conventional level of a ¼ 0:7. Future research needs to reexamine the reliability and validity of this measure. The study accomplished its objectives. Many relationships between employees’ creative performance, their attitudes and personalities, and their supervisors’ personalities, attitudes, and leadership styles were demonstrated. Some variables performed better than others, and some potential measurement problems were apparent, but the study certainly has substantive value. Measurement issues Findings of this study suggest that further refinement of the ATDT and creative performance measures is in order. ATDT certainly appears to be related to employee creativity as has been previously assumed. However, reliability, validity, and factor structures need to be reexamined. Two subscales of ATDT have been published and used in previous research; preference for ideation and preference for premature evaluation. The preference for premature evaluation subscale fairly
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consistently performed as hypothesized in this study, but the preference for ideation scale did not. That result could be due to some idiosyncrasy of this study’s sample. Nevertheless, these findings suggest additional investigation is warranted. In addition, this study presents an apparently valid measure of employees’ creative performance that separates the novelty component from the usefulness component. Ratings on the new scale of creative performance are related to ratings on Oldham and Cummings’s (1996) scale, and they also tend to be more strongly associated with the independent variables than ratings on Oldham and Cummings’s scale are. However, much more research on this scale and others is needed in order to fully establish their validity.
from a divergent thinking-based perspective can be done. For instance, it would be informative to establish how employees’ job scope relates to the diversity of their knowledge bases and, in turn, their creativity. Diversity of knowledge should be positively related to divergent thinking and therefore positively related to creativity. However, the studies that have reported a positive association between job scope and creativity attribute the relationship to intrinsic motivation (see Oldham and Cummings, 1996). It might be helpful to isolate the relative contributions of knowledge breadth and intrinsic motivation to employee creativity. In addition to further study from a divergent thinking-based perspective, this field of research could be enhanced by research that merges and contrasts different theoretical viewpoints. To date, most employee creativity research has attempted to identify determinants of employee creativity. In these studies, the dependent variables are assessments of the creativity of the subjects’ performances. Differences among raters in how they tend to rate subjects’ performances are treated as inconsequential measurement error. However, future research should identify the factors that affect individuals’ evaluations of others’ novel ideas. Future research may find that an individual’s evaluations of employee suggestions are influenced by a number of personal (e.g. personality and attitude) and situational (e.g. evaluation procedure) factors. Finally, the explanatory variables addressed here are worth future consideration, but future research is needed to refine the measures. In particular, future research should address the concerns this study identified with the ATDT scales and the various operationalizations of employees’ creative performance. As with prior research that used multiple operationalizations of employee creative performance (Oldham and Cummings, 1996), the various manifestations of creative performance were not highly correlated (see Table I). Future research and theory are needed to explain the diverse facets of employee creativity. The most notable implications for practice are the findings that ATDT are related to employee creativity. Prior research on ATDT has included efforts to change employees’ attitudes through creativity training in order to increase the likelihood that the training would transfer to the work setting (Basadur et al., 1986). Training employees in how to be more creative may not be of value if, as some have suggested, negative ATDT lead trainees to not use the skills they develop during training once they return to the workplace. The training described by Basadur and
Limitations As a cross-sectional study, one limitation is that the independent variables were not experimentally manipulated. It is assumed that relatively enduring personality traits affect the more malleable factors – attitudes and behavior. Although this appears to be the most likely explanation for the observed relationships, in the absence of an experimental design, it can always be argued that the purported independent variables are actually affected by the purported dependent variables, or that both were affected by an unmeasured variable. Additionally, although all hypotheses received at least partial support, it is possible that the relationships could have been larger and more consistent if another sample had been used. Nonacademic functions of universities might not require as much creativity as other businesses do, such as advertising firms or research and development units. However, the managers who permitted access to their employees for this study described how they regularly face uncertainties, and they expressed an interest in new technologies and opportunities for continuous improvement. In fact, some administrators of the departments participating in the study were interested in participating because they wanted to promote employee creativity, to obtain the suggestions for improvements collected, or both. Nevertheless, the relationships might have been stronger in an organization with a culture that more strongly stimulates creativity (Martins and Terblanche, 2003). Implications for theory and practice Perhaps the most significant implication of this study for theory relating to employee creativity is that it demonstrates the value of examining employee creativity from multiple perspectives. This study developed a divergent thinking-based model of employee creativity. Much more research
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colleagues has been shown to have a positive effect on employees’ ATDT. This study might be the first to show that ATDT actually relate to employees’ creative performance. However, future research will be needed to determine how stable the change in ATDT resulting from training is. This study also shows that ATDT is partly a function of one’s openness to experience and that supervisors’ ATDT and preference for initiating structure seem to affect their subordinates’ ATDT. In conclusion, this study has provided empirical support for a divergent thinking-based model of employee creativity. Employees’ divergent thinking and creative performance appear to be related to their openness to experience, ATDT, and to their supervisors’ preferences for initiating structure. Managers may be able to foster employee creativity through creativity training that cultivates positive ATDT. However, additional research in this area is needed.
Basadur, M.S. (1994), “Managing the creative process in organizations”, in Runco, M.A. (Ed.), Problem Finding, Problem Solving, and Creativity, Ablex Publishing, Norwood, NJ. Basadur, M.S. and Finkbeiner, C.T. (1985), “Measuring preference for ideation in creative problem-solving training”, Journal of Applied Behavioral Science, Vol. 21 No. 1, pp. 37-49. Basadur, M.S., Graen, G.B. and Green, S.G. (1982), “Training in creative problem solving: effects of ideation and problem finding in an applied research organization”, Organizational Behavior and Human Performance, Vol. 30, pp. 41-70. Basadur, M.S., Graen, G.B. and Scandura, T.A. (1986), “Training effects on attitudes toward divergent thinking among manufacturing engineers”, Journal of Applied Psychology, Vol. 71, pp. 612-17. Basadur, M.S., Wakabayashi, M. and Graen, G.B. (1990), “Individual problem-solving styles and attitudes toward divergent thinking before and after training”, Creativity Research Journal, Vol. 3 No. 1, pp. 22-32. Burkhardt, M.E. (1994), “Social interaction effects following a technological change: a longitudinal investigation”, Academy of Management Journal, Vol. 37 No. 4, pp. 869-98. de Bono, E. (1991), “Lateral and vertical thinking”, in Henry, J. (Ed.), Creative Management, Sage, Newbury Park, CA. Drazin, R., Glynn, M.A. and Kazajian, R.K. (1999), “Multilevel theorizing about creativity in organizations: a sense-making perspective”, Academy of Management Review, Vol. 24 No. 2, pp. 286-307. Eagly, A.H. and Chaiken, S. (1993), The Psychology of Attitudes, Harcourt Brace Jovanovich, New York, NY. Eisenberger, R., Fasolo, P. and Davis-LaMastro, V. (1990), “Perceived organizational support and employee diligence, commitment, and innovation”, Journal of Applied Psychology, Vol. 75 No. 1, pp. 51-9. Fisher, C.D. (1986), “Organizational socialization: an integrative review”, in Rowland, K.M. and Ferris, G.R. (Eds), Research in Personnel and Human Resources Management, JAI Press, Greenwich, CT. Fleishman, E.A. (1953), “The measurement of leadership attitudes in industry”, Journal of Applied Psychology, Vol. 37 No. 3, pp. 153-8. Ford, C.M. (1996), “A theory of individual creative action in multiple social domains”, Academy of Management Review, Vol. 21 No. 4, pp. 1112-42. George, J.M. and Zhou, J. (2001), “When openness to experience and conscientiousness are related to creative behavior: an interactional approach”, Journal of Applied Psychology, Vol. 86 No. 3, pp. 513-24. Gordon, W.J.J. (1961), Synectics, Harper, New York, NY. Hackman, J.R. (1992), “Group influences on individuals in organizations”, in Dunette, M. and Hough, L.M. (Eds), Handbook of Industrial and Organizational Psychology, 2nd ed., Vol. 3, Consulting Psychologists Press, Palo Alto, CA, pp. 199-267. Hackman, J. and Oldham, G.R. (1976), “Motivation through the design of work: test of a theory”, Organizational Behavior and Human Decision Processes, Vol. 16 No. 2, pp. 250-79. Hatcher, L., Ross, T.L. and Collins, D. (1989), “Prosocial behavior, job complexity, and suggestion contribution under gain-sharing plans”, Journal of Applied Behavioral Science, Vol. 25 No. 3, pp. 231-48. John, O.P. (1990), “The ‘Big Five’ factor taxonomy: dimensions of personality in the natural language and in questionnaires”, in Pervin, L.A. (Ed.), Handbook of
Notes 1 Cognitive dissonance and intrinsic motivation are examples of other intrapsychic factors that are not directly observable. 2 This study uses the Leader Opinion Questionnaire (LOQ). Researchers have called the LOQ a measure of leaders’ attitudes (Fleishman, 1953; Yukl, 1989), and leaders’ attitudes can affect their leadership styles (Rice, 1978). However, examination of the LOQ instructions reveals that it is at best an indirect measure attitudes. Attitudes are object evaluations, and although there are many valid ways to measure attitudes, the most direct means is to ask subjects for their evaluations of the favorability of attitude objects (Eagly and Chaiken, 1993). The LOQ, on the other hand, asks subjects how often they think they should perform certain behaviors, which might reflect leaders’ cognitive scripts in addition to attitudinal information. 3 Prior theory and research support controlling for the threeway interaction (see Oldham and Cummings, 1996). 4 Structural equations modeling could not be used to test the model. The combination of interaction terms, a relatively small sample size for the suggestions data, and correlated measurement errors in several of the scales led to the conclusion that structural equations modeling would be inappropriate.
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Personality: Theory and Research, Guilford Press, New York, NY. King, N. (1990), “Innovation at work: the research literature”, in West, M.A. and Farr, J.L. (Eds), Innovation and Creativity at Work, Wiley, Chichester, pp. 15-59. Lawlis, G.F. and Lu, E. (1972), “Judgment of counseling process: reliability, agreement, and error”, Psychological Bulletin, Vol. 78, pp. 17-20. McCrae, R.R. (1987), “Creativity, divergent thinking, and openness to experience”, Journal of Personality and Social Psychology, Vol. 52 No. 6, pp. 1258-65. McCrae, R.R. and Costa, P.T. (1997), “Conceptions and correlates of openness to experience”, in Hogan, R., Johnson, J.A. and Briggs, S.R. (Eds), Handbook of Personality Psychology, Academic Press, San Diego, CA, pp. 825-47. March, J.G. and Simon, H.A. (1958), Organizations, Wiley, New York, NY. Martins, E.C. and Terblanche, F. (2003), “Building organizational culture that stimulates creativity and innovation”, European Journal of Innovation Management, Vol. 6 No. 1, pp. 64-74. Meglino, B.M., Ravlin, E.C. and Adkins, C.L. (1989), “A work values approach to corporate culture: a field test of the value congruence process and its relationship to individual outcomes”, Journal of Applied Psychology, Vol. 74, pp. 424-32. Nemeth, C.J. and Staw, B.M. (1989), “The trade-offs of social control and innovation in groups and organizations”, in Berkowitz, L. (Ed.), Advances in Experimental Social Psychology, Vol. 22, Academic Press, San Diego, CA, pp. 175-210. Neuberg, S.L., Judice, T.N. and West, S.G. (1997), “What the need for closure scale measures and what it does not: toward differentiating among related epistemic motives”, Journal of Personality and Social Psychology, Vol. 72 No. 6, pp. 1396-412. Oldham, G.R. and Cummings, A. (1996), “Employee creativity: personal and contextual factors”, Academy of Management Journal, Vol. 39 No. 3, pp. 607-34. Osborn, A.F. (1963), Applied Imagination, Charles Scribner’s Sons, New York, NY. Parnes, S.J. (1967), Creative Behavior Guidebook, Scribner, New York, NY. Paulus, P.B. (2000), “Groups, teams, and creativity: the creative potential of idea-generating groups”, Applied Psychology: An International Review, Vol. 49 No. 2, pp. 237-62. Perrow, C. (1977), “Bureaucracy, structure, and technology”, in Pugh, D. (Ed.), Organization Theory, Penguin, London. Podsakoff, P.M. and MacKenzie, S.B. (1994), “An examination of the psychometric properties and nomological validity of
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Introduction
Process performance in product development: measures and impacts Ahmad Syamil William J. Doll and Charles H. Apigian The authors Ahmad Syamil is Assistant Professor of Decision Sciences at Arkansas State University, Jonesboro, Arkansas, USA. William J. Doll is Professor of Management at the University of Toledo, Toledo, Ohio, USA. Charles H. Apigian is Assistant Professor of Information Systems at Middle Tennessee State University, Murfreesboro, Tennessee, USA.
Keywords Process efficiency, Process planning, Product development, Automotive industry, Germany, United States of America
Abstract The key to successful project management is knowing how well the process is performing to prevent problems rather than fix them after they occur. Success measurement in product development has emphasized end-result measures of overall project performance or economic value. The product development literature has largely ignored process performance (i.e., the measurement of how effectively the product development process is actually working). Process performance may be an early warning signal of downstream problems in a project’s quality, time, or productivity. This paper proposes a model of process performance at the project level during product and process engineering. The model suggests that process performance mediates the influence of concurrent engineering (process choice) on overall project development performance. This process performance model is tested in the automobile industry using a sample of 406 product development projects in Germany and the USA. The theoretical and practical implications of the findings are discussed.
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European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 205-217 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549892
For firms heavily involved in the development of new products, the development process is their business. How well the product development process is conducted determines the end-results of their new product development activities. Most measures of product development performance are based on end-result outcomes that characterize overall project performance such as customer satisfaction, time-to-market, development cost, or product quality (Clark and Fujimoto, 1991; Pawar and Driva, 1999; Rusinko, 1999). With the timeto-market for many products continuing to decrease, measuring product development performance after the fact may be too late or too expensive to correct. At the project level of product development, there is a need to distinguish between process performance and end-result outcomes that characterize overall project performance. Process performance on a development project is a behavioral measure of how effectively the development team is working on the project. It indicates how well the team is currently working rather than overall end-result development performance of the project or its commercial success. There are several behavioral indicators of process performance. First, individual team members must be collaborating effectively towards the common goal (Pinto et al., 1993; Moffat, 1998). Second, the team must be getting work done with available resources, i.e. operate productively (Rabino and Moskowitz, 1980; Ettlie, 1997). Engineering changes consume resources and are inevitable (Clark and Fujimoto, 1991). Thus, a third indicator of an effective process is whether the team is completing engineering changes on schedule (Reidelbach, 1991; Lutz, 1994). If a project’s process performance is monitored, problems can be identified and corrected before they affect the commercial success of a product. Process performance measures may provide an early warning signal of later disappointing project performance or commercial failure. Measuring process performance is essential to process management (Harter et al., 2000; Mackenzie, 2000; Krishnan and Ulrich, 2001). Process management involves identifying and implementing the correct process choices and making sure that these processes are functioning effectively. The key to success in process management is knowing how well the process is performing to prevent problems rather than fixing them after they occur. Process management is an inherent part of business process reengineering techniques (Harrington, 1991; Davenport, 1993; Hammer and Champy, 1993; Johansson et al.,
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1993) and Six Sigma quality systems (Pzydek, 1999; Harry and Schroeder, 2000) that focus on measuring process performance as well as end results. Process management is widely used in a number of industries and application areas. While the product development literature devotes considerable attention to choosing and implementing correct processes such as concurrent engineering (Swink, 1998) or stagegate reviews (Cooper and Kleinschmidt, 1990), behavioral measures of process performance are not commonly measured in product development. Few firms have developed a formal method for monitoring process performance (Balachandra et al., 1996). Cooper (1990) defined the use of stage-gate systems as a way of improving the instrumentality (i.e., control) of product development activities by evaluating the outcomes of a specific stage before beginning the next stage. Stage-gate reviews focus on whether the expected outcomes of each stage have been achieved. They do not provide a measure of how well the process is operating. Thus, stage-gate reviews have limited inherent diagnostic value for identifying what is wrong with an on-going process. The product development literature has focused on the relationship between process and outcomes (Koufteros et al., 1998; Terwiesch and Loch, 1999), but not on process performance. Process performance is a key missing link. This paper examines this missing link in the product development literature and proposes and validates a measurement model for process performance in the context of a structural model of antecedent process choices and subsequent implications for overall project performance.
process choices, process performance, and overall project performance are key intermediate linking pins in this causal chain. This product concept to economic value chain is not a chain of activities like Cooper’s product development process model (Cooper, 1983). Rather, it reflects assumed causal relationships between categories of variables. The product concept, along with its product strategy, and the firm’s business situation is assumed to affect the choice of development processes such as concurrent engineering (Pawar and Riedel, 1994), customer involvement (Souder et al., 1997), supplier involvement (Cusumano and Takeishi, 1991), heavyweight manager (Clark and Fujimoto, 1990), senior management support (Cooper and Kleinschmidt, 1987), and stage-gate reviews (Cooper and Kleinschmidt, 1990). These process choices may affect overall project performance directly, or indirectly, through process performance. The product development literature has emphasized the process drivers of performance and the overall measures of success (Brown and Eisenhardt, 1995), but this literature has largely ignored behavioral measures of how well the process itself is functioning. Thus, the product development literature implicitly assumes only a direct path from process choices to overall project performance. Is the use of a process going to always lead to optimal product development outcomes, regardless of the performance of the process? The researchers suggest that how effectively the development team is working on the project mediates the impact of process choices on overall project performance. Susman and Dean (1992) hypothesize that process performance mediates the relationship between integrative mechanisms and project outcomes. Susman and Ray (1999) later tested this mediating hypothesis using attitudinal measures of process performance, but results did not support their hypothesis. In explaining their inability to support this mediating hypothesis, they argue that measures of process performance should be behavioral rather than attitudinal. Finally, overall project performance indicators such as customer satisfaction, time-to-market, development cost, and manufacturing cost reductions are assumed to affect a project’s
From product concept to economic value At the project level, product development constructs can be arranged in a causal chain starting with variables related to the product concept and ending with economic value, i.e. financial measures such as revenue, profit, and market share (see Figure 1). Product development Figure 1 Product concept to economic value chain
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economic value as measured by revenue, profits, and market share. Thus, each link in this product concept to economic value chain is pivotal to the economic value of the project. If any one should fail, the entire product development project may fail. This paper describes existing product development success measures in the literature, the mediating role of process performance, and the process choices essential to achieving a project’s potential economic value.
more with the R&D process (Katz and Allen, 1985) for creating on-the-shelf technology rather than the application of that technology to the development of a specific product.
Product development success measures The concept of product development success has many dimensions and each may be measured in a variety of ways. Brown and Eisenhardt (1995) describe three research streams – communication web, disciplined problem solving, and rational plan – that seek to explain phenomena that correspond, to some degree, with the three downstream consequences of product development process choices – process performance, overall project performance, and economic value, respectively. The rational plan stream uses product development success measures that are based on financial success such as revenue, profits, and market share (Marquis, 1969; Cooper, 1979; Cooper and Kleinschmidt, 1987; Zirger and Maidique, 1990). Thus, this stream clearly seeks to explain what Figure 1 identifies as the economic value of a project. Disciplined problem-solving research stream (Clark and Fujimoto, 1991) focuses on explaining performance measures that relate to the project itself. They characterize the performance of a project. They include design productivity or cost (total project engineering man hours), project lead-time (from concept through ramp-up), quality (customer satisfaction), product cost (reducing the number or complexity of parts), and manufacturing cost (making the product less expensive to manufacture). This stream of research clearly seeks to explain what Figure 1 identifies as overall project performance. The communication webs stream (Allen, 1971, 1977) assumes that the more effective the communication among team members and between the team and outsiders, the better the team performance (Keller, 1986). Studies emphasize internal and external communication patterns and their impact on various perceptual performance measures (e g., conflicts, budget, schedule, overall team performance, etc.). Because this stream focuses on soft or perceptual measures that are close to teamwork and team productivity, we feel they focus on phenomena that are similar to the process performance link in Figure 1. However, this stream of research typically deals
Process performance Process performance has been identified in the literature as a driver of product development outcomes (Cooper, 1990). However, process performance is often measured in terms of process choice rather than team behavior. Process performance often pertains to the entire organization as opposed to a specific project (Loch et al., 1996), or to the research and development activity within an organization (Marquis, 1969; Balachandra and Raelin, 1984; Balachandra and Friar, 1997; Zirger, 1997). Some of the R&D literature indicates the importance of process performance (Balachandra, 1996). However, most of these measures relate directly to organizational goals and not to the product development outcomes at the project level (Brown and Gobeli, 1992). This paper identifies three component dimensions of effective process performance – teamwork, team productivity, and engineering change time – that characterize how effectively product development processes at the project level are functioning. They are based on process management theory that suggests that one must know how well a process is performing before taking corrective action. They do not characterize overall project performance, but how the product development process choices are functioning in terms of team behavior. Below we describe each dimension of process performance and its rationale. Teamwork In concurrent engineering, individuals from different functions are thrust together to work toward common goals and objectives as a cohesive team. The ability for these group members to work, as a team, will have an impact on how efficient and fast the development work progresses (Moffat, 1998; Sethi and Nicholson, 2001). Teamwork is important for the group members to communicate effectively, resolve design conflicts on time, and coordinate design activities effectively. Teamwork is essential because it may reduce time, reduce costs due to integrated designs, and, in the end, improve the quality of the product. Team productivity Team productivity is how effectively and efficiently the team works. Team productivity focuses on the quality and volume of work that is accomplished, how well the talents of each member complement
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others in the team to improve the product, and how quickly they work together (Rabino and Moskowitz, 1980). Lack of team productivity will lead to longer product development lead-time and increased development costs (total man hours).
between stages and functions (Terwiesch and Loch, 1999), stage-gate review process (Cooper, 1990), and concurrent engineering (Willaert, de Graaf, and Minderhoud, 1998). Not all these process choices are mutually exclusive. The basic elements of concurrent engineering include early involvement of all participants (including suppliers and customers), a crossfunctional team approach, and a concurrent work on product design and process design (Koufteros et al., 1998). Thus, concurrent engineering, sometimes referred to as concurrent development, is a broad construct that includes several of the development practices recommended above. Concurrent engineering is widely used in a number of industries (Swink, 1998), especially the automotive industry. Concurrent engineering has a positive relationship to overall project performance (Moffat, 1998). Concurrent engineering has been associated with time-tomarket (Terwiesch and Loch, 1999); product innovation, quality, and premium pricing (Koufteros et al., 1998); as well as cost reduction and flexibility (Pawar and Driva, 1999). Next, we propose a structural model of process performance and several hypotheses concerning the determinants and consequences of process performance.
Engineering change time Engineering change time is whether the team completes engineering change orders on time (schedule). Although cross-functional teams would like to avoid engineering changes in a product development project, some engineering changes are inevitable. It is hard, regardless of initial planning, to avoid mid-stream changes when designing a complex product (Reidelbach, 1991). Engineering changes or “re-do loops” will lead to increased time and costs (Lutz, 1994). Therefore, effectively resolving engineering changes on time will lead to a reduction in time and costs (Moffat, 1998) and help insure product quality. The three preceding factors define process performance during product development (e.g., product design, process design, ramp-up). The product concept stage involves a creative dimension that may require slightly different process performance measures. Also, engineering change time is not appropriate for the product concept stage where the design has not been approved, let alone changed. In- process performance is affected by process choices. One of the key process choices is concurrent engineering. Product development process: concurrent engineering The process of product development is a driver of overall product development performance (Cooper and Kleinschmidt, 1995). Clark and Fujimoto (1991) indicate that the success of product development is dependent on the ability to create linkages or integration between stages of product development and the functional departments. In order to establish such linkage, a project must be able to build channels of communication, attitudes of cooperation, and the skills of engineers. Different types of processes are used to achieve this integration. The product development literature has identified a number of key product development process choices. The list includes senior management commitment and accountability, entrepreneurial climate, strategic focus and synergy (Cooper and Kleinschmidt, 1995), customer involvement (Souder et al., 1997), supplier involvement (Cusumano and Takeishi, 1991), heavyweight manager (Clark and Fujimoto, 1990), cross-functional teams (Lutz, 1994), integrated design (Ettlie, 1997), overlapping
A model of process performance A model of the relationships between product development process, process performance, and overall project performance is depicted in Figure 2. In this model, the relationship between concurrent engineering (a process choice) and overall project performance (customer satisfaction, time-tomarket, product cost, and manufacturing cost) is mediated by process performance. Process performance has a direct relationship to customer satisfaction, time-to-market, product cost, and manufacturing cost. It also has an indirect relationship to customer satisfaction through timeto-market and an indirect relationship to manufacturing cost reduction through product cost reduction. Concurrent engineering is one of the most widely used process choices and, as discussed above, is often thought to have a direct rather than the indirect relationship to the overall project performance dimensions depicted in Figure 2 (Moffat, 1998). Process management suggests that a process is not going to produce the right results unless it is functioning properly. Thus, we suggest that concurrent engineering’s relationship to project performance is indirect, through process performance.
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Process performance in product development: measures and impacts
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Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
Figure 2 A model of process performance
Product development time is defined as the time required from product concept through ramp-up. Team productivity and teamwork will lead to a more efficient and effective process, which will reduce time. Also, if engineering changes are resolved on schedule, the lead-time will not be delayed. Therefore, we argue: H3. Process performance has a positive relationship with product development time.
Despite the occasional problems in getting teams to work well together, one might expect teamwork to improve when people are expected to work together as a cross-functional team. The crossfunctional nature of the concurrent engineering team and their early involvement in design issues should enhance communication and teamwork, especially when dealing with complex product development problems that require different perspectives (Susman and Dean, 1992; Emmanuelides, 1993; Moffat, 1998). Concurrent workflow should also enhance team productivity because process design engineers can begin work before product design engineers complete their design. Early involvement of constituents such as manufacturing personnel means that manufacturing issues and complexities are brought up early. This also improves team productivity by avoiding costly redesigns of products or production processes that do not match. Concurrent work on engineering changes can also shorten engineering change time because design and process engineers work simultaneously, providing immediate feedback to each other. Therefore, we suggest: H1. Concurrent engineering has a positive relationship with process performance. Customer satisfaction is defined as a purchaser’s affective response to the product. Effective and productive teamwork should help insure that customer desired attributes are carried through from product concept, through product design and process design, and into manufacturing. When engineering changes are necessary, timely completion of these changes should keep the project on schedule without sacrificing customer value. The better the process is operating, the more likely the customer will be satisfied. Therefore, we suggest: H2. Process performance has a positive relationship with customer satisfaction.
Product cost is defined as the design team’s accomplishments in reducing costs based on simpler product and part designs, the selection of lower cost materials in design, and fewer parts. If the product development team is productive, works together well, and resolves disputes effectively, the team may find ways simplify the design and reduce the number or the complexity of parts. Thus, we suggest: H4. Process performance has a positive relationship with product cost (reduction). Manufacturing cost is defined as the design team’s accomplishments in reducing costs associated with tooling and manufacturing. Manufacturing costs include machinery, tooling, material costs, and labor considerations. If all areas are taken into consideration during the design stages of product development, these costs may be reduced. However, if the team does not work together well and productively, listening to members from manufacturing in particular, it would be hard reduce these types of costs: Therefore, we argue: H5. Process performance has a positive relationship to manufacturing costs (reduction). The quicker a product arrives in the marketplace, the higher the innovation and the more satisfied the customer (Adams et al., 1998; Rusinko, 1999; Terwiesch and Loch, 1999). Thus, we maintain: H6. Product development time has a positive relationship with customer satisfaction. The simpler the product design and the fewer and less complex the parts, the less expensive a product should be to manufacture. Efforts to reduce product costs by simplifying design, reducing the number of parts, and using less expensive materials should also reduce manufacturing costs. Thus, we suggest: H7. Product cost reduction has a positive relationship with manufacturing cost (reduction).
Methodology The research design was guided by several objectives. First, we sought to test the above model
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Process performance in product development: measures and impacts
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Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
of process performance using a large sample of project managers who were responsible for specific projects in the automotive industry. The automotive industry was selected because it uses concurrent engineering extensively, has comparatively long development times, and a complex product where cost, customer satisfaction and product development time (lead time) are important to a firm’s competitive advantage. It is a setting where a model of process performance, if validated, might have practical application as an early warning signal of potential overall project performance problems. It is also a large multinational industry, enabling a large single industry sample. Second, we wanted to develop and test an explicit measurement model for process performance to guide and inform other scholars or practitioners who may want information on its psychometric properties. Third, we wanted to use structural equation modeling (Joreskog and Sorbom, 1986) to provide a rigorous test of the causal relationships depicted in Figure 2.
professor in German literature checked the translation. Of the 2,912 surveys that were mailed in the USA, 296 responses were collected for a 10.2 percent response rate. Of the 975 surveys mailed in Germany, 145 responses were received (a 14.8 percent response rate). The total sample collected was 441, with 35 responses not used due to an incomplete questionnaire or industries that were not part of our desired sample, such as R&D firms or heavy-truck suppliers. Therefore, 406 responses were usable for a combined response rate of 10.4 percent. The sample of 406 consists of 267 responses from USA and 139 responses from Germany. Of the US responses, 75 were from original equipment manufacturers and 192 were from firsttier auto suppliers. Of the German responses, 40 were from original equipment manufacturers and 99 were from first-tier auto suppliers.
The sample The unit of analysis was the project team. A professional engineering association provided a mailing list consisting of engineers with the job title of program manager, program director, project manager, director of engineering, engineering team leader, manager of product development, engineering manager, vice-president of engineering, director of Research & Development, chief project engineer, or director of product development. The respondents were asked to identify a recently completed project that they were responsible for and to answer the survey questions with respect to the project team working on that project. The survey was administered via mail to 2,912 product development professional in the USA auto industry and 975 product development professionals in German auto industry. The same professional association provided the mailing list for each country using the same title designations to draw the sample. Each sample was made up of individuals from auto manufacturers and first-tier auto suppliers. The surveys were mailed twice in both the USA and Germany with three weeks separating each mailing. The US survey was in English, whereas the German survey was in German. A German native speaker with a Master’s degree in business who works in the automotive industry translated the English survey into German. An American graduate student, who used to live in Germany, conducted the translation back to English. Revision was performed if necessary. Finally, a
Measures The items were generated based on a comprehensive literature review and personal interviews with product development managers at General Motors, Delphi Automotive, 3M Automotive, Visteon Corporation, Dana Corporation, Ford Motor Company, Alcoa, and Meritor Automotive to assess the brevity, understanding, and content validity of the items generated (Kerlinger, 1973). The items were modified, deleted, and added as suggested by the interviews. Based on insights from the interviews, new items were generated. Then, a second round of company interviews were conducted. This process was used to generate items for measuring process performance, customer satisfaction, product development time, product design cost, and manufacturing cost. The concurrent engineering items were borrowed from Koufteros et al. (2001). A pilot study was conducted to test these measures. Using a mailing list from a professional association and selecting the job titles described above, 300 professionals in the automotive industry were surveyed. A total of 33 responses were received for an 11 percent response rate. The data was analyzed using reliability analysis (Cronbach’s alpha) and exploratory factor analysis and for each variable. Based on this analysis, items were dropped or modified for clarification. The final instruments are described below. (Bagozzi and Heatherton, 1994) suggest the use of partially aggregated measurement models (i.e., where composites based on subscales are used as indicators of latent variables) when the number of items in a model gets close to 30. Partially aggregated models are used widely in education
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Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
and psychology. They reduce measurement error and enhance model-data fit, enabling researchers to focus on substantive relationships. Since the model in Figure 2 would have over 30 items (34 items) without partial aggregation, partially aggregated scales were used for concurrent engineering, customer satisfaction, product cost, and manufacturing cost reduction (see Table I).
Measures of concurrent engineering Concurrent engineering is defined as the practice of using cross-functional teams, with early with early involvement from all constituencies, to simultaneously plan product and process activities (Koufteros et al., 2001). Koufteros et al. (2001) validated an instrument consisting of six items (see Table I). A five-point scale was
Table I Measurement items Aggregate items
Product development process Concurrent engineering CE1_2 CE3_5
CE6_7
Items
CE1 CE2 CE3 CE5 CE6 CE7
Process performance Teamwork TW
Team productivity TP
Engineering change time EC
Overall project performance Customer satisfaction CS1_2 CS3_4 CS_6
TW1 TW2 TW3 TP1 TP2 TP3 EC1 EC2 EC3
CS1 CS2 CS3 CS4 CS5 CS6
Product development time PT1 PT2 PT3
Product cost PC1_2 PC3_4
Manufacturing cost reduction MC1_2 MC3_4
PC1 PC2 PC3 PC4 MC1 MC2 MC3 MC4 MC5
Much of process design is done concurrently with product design Product development group members represent a variety of disciplines Various disciplines are involved in product development from the early stages Manufacturing engineers are involved from the early stages of product development Product and process designs are developed concurrently by a group of employees from various disciplines Product development group members share information
Our product development team: Communicates effectively Resolves design conflicts on time Coordinates design activities effectively Our product development team: Is productive Completes works quickly Works on product improvements successfully Our product development team: Finishes engineering change orders on time Delivers engineering change notices on time Meets engineering change deadlines regularly
Compared with the average in the industry, our products: Satisfy customers better Fit target customers better Have more loyal customers Generate more new customers Are more highly valued by customers Are more successful in the marketplace Compared with the average in the industry, our product development team: Launches products to the market faster Enables our company to start volume production faster Brings products to the market before our competitors Our product development team: Simplifies the design successfully Reduces product costs successfully Reduces material costs successfully Reduces the number of parts successfully Our product development team: Successfully reduces assembly cost Reduces equipment costs successfully Reduces manufacturing costs successfully Reduces production tooling cost successfully Reduces the number of manufacturing steps effectively
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Process performance in product development: measures and impacts
European Journal of Innovation Management
Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
used ranging from 1 ¼ “notatall” to 5 ¼ “agreatdeal”. Measures of process performance The interviews with product development executives during item generation suggested that process performance was a multi-faceted construct with three dimensions - teamwork, team productivity, and engineering change time. Yet, the interviews suggested that the dimensions had similar influences on overall project performance dimensions. Therefore, the researchers conceptualized process performance as a secondorder model (see Figure 3). Thus, process performance is measured by its three components with three items measuring each component (see Table I). A five-point scale was used ranging from 1 ¼ “strongly disagree” to 5 ¼ “strongly agree”. For testing the model of process performance (Figure 2), the items were partially aggregated as illustrated in Table I. Measures of overall project performance The four dimensions of overall product performance – customer satisfaction, product development time, product cost, and manufacturing cost – were all measured using a five-point scale ranging from 1 ¼ “strongly disagree” to 5 ¼ “strongly agree”. Six items were used to measure customer satisfaction. For the structural model analysis, the six items were partially aggregated (in pairs) to form three aggregate items. See Table I for a description of the items and how they were aggregated. Three items were used to measure product development time, four items were used to measure product cost, and five items were used to measure manufacturing cost. For the structural model analysis, the product cost items and the manufacturing cost items were also partially aggregated as illustrated in Table I.
Results The results, based on the 406 responses, were analyzed in two phases. Phase one’s focus is on measurement assessment. It includes assessing the measures of each dimension for reliability and validity and testing the hypothesized second-order measurement model of process performance. The second phase focuses on assessing the structural model Figure 2 for model-data fit and testing each of the structural hypotheses. Phase 1. Measurement assessment For each of the six variables in the model of process performance, Table II provides descriptive
statistics, the correlation matrix, reliability (alpha on the diagonal), and the chi-square value and p-value of a test of discriminant validity (df ¼ 1) for each pair of variables (Bagozzi and Phillips, 1982). In this sample, the six variables in Table II have reliabilities ranging from 0.83 for process performance to 0.91 for customer satisfaction. The chi-square test of discriminant validity for each pair of constructs fixes the correlation between the constructs first at 1, and then frees the correlation. The chi-square value is the difference in chi-square between the fixed and free solutions for one degree of freedom. All pairs of constructs demonstrated discriminant validity at p , 0.001. In this sample, teamwork, team productivity, and engineering change time have reliabilities (alpha) of 0.90, 0.87, and 0.85, respectively. The three constructs have moderately high correlations between each other. Teamwork has a correlation of 0.69 with team productivity and a correlation of 0.60 with engineering change time. Team productivity’s correlation with engineering change time is 0.58. The chi-square values for a test of discriminant validity between the three pairs of constructs (i.e., teamwork-engineering change time, teamwork-team productivity, and engineering change time-team productivity) are 307.36, 146.47, and 399.71, respectively. Each of these chi-square tests of discriminant validity is significant at p , 0.001. The hypothesized second-order measurement model for process performance (see Figure 3) was tested. The results for the standardized solution are depicted in Figure 4. All nine items have high (. 0.70) standardized loadings on their first-order factors (t ¼ valuesgreaterthan16), indicating convergent validity. The structural coefficients are uniformly high, i.e. 0.91 (t ¼ 14:11), 0.87 (t ¼ 15:83), and 0.75 (t ¼ 14:43). The secondorder model with three first-order factors has adequate model-data fit with a chi-square of 70.83 for 24 degrees of freedom, p value ¼ 0:00000, RMSEA ¼ 0:069, NNFI ¼ 0:97, and CFI ¼ 0:98. An alternative model of a single first-order factor with nine items was also tested. This single first-order factor model was rejected as having unacceptable model-data fit with a chi-square of 657.12 for 27 degrees of freedom, p value ¼ 0:00000, RMSEA ¼ 0:240, NNFI ¼ 0:72, and CFI ¼ 0:79. Phase 2. Assessing the structural model and testing hypotheses Figure 5 shows the standardized solution for the combined measurement and structural model for process performance. The fit indices reflect a good model-data fit: x2 ¼ 166:81, df ¼ 112,
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Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
Table II Correlation matrix, reliability, and discriminant validity
Concurrent engineering Process performance
Customer satisfaction
Product development time
Product cost
Manufacturing cost
Mean Standard deviation
Concurrent engineering
Process performance
Customer satisfaction
Product development time
Product cost
Manufacturing cost
[0.84]a 0.533 x2 ¼ 288.45b p , 0.001 0.328 x2 ¼ 453.27b p , 0.001 0.322 x2 ¼ 444.46b p , 0.001 0.428 x2 ¼ 239.98b p , 0.001 0.470 x2 ¼ 385.30b p , 0.001 21.4992 4.4471
[0.83]a 0.414 x2 ¼ 400.46b p , 0.001 0.449 x2 ¼ 376.51b p , 0.001 0.631 x2 ¼ 190.84b p , 0.001 0.593 x2 ¼ 269.12b p , 0.001 31.7151 6.1411
[0.91]a 0.540 x2 ¼ 370.73b p , 0.001 0.258 x2 ¼ 254.34b p , 0.001 0.336 x2 ¼ 699.10b p , 0.001 22.4106 4.1857
[0.85]a 0.332 x2 ¼ 245.04b p , 0.001 0.402 x2 ¼ 660.37b p , 0.001 9.9270 2.5330
[0.89]a 0.608 x2 ¼ 195.36b p , 0.001 13.9230 3.1777
[0.87]a 16.4941 3.7569
Note: a ¼ Reliabilities (Cronbach’s alpha) are on the diagonal; b ¼ Difference in chi-square (fixed and free correlation) along with p-value
Figure 3 Second-order measurement model of process performance
Figure 4 Process performance measurement model (standardized solution)
p value ¼ 0:00061, RMSEA ¼ 0:035, NNFI ¼ 0:98, and CFI ¼ 0:99. For the six latent factors, all item-factor loadings are above 0.60 (t-values . 14), suggesting good convergent validity (Bagozzi and Yi, 1988). The structural model had no suggested modifications, indicating that there is no evidence of a direct path from concurrent engineering to any of the overall project performance variables. This suggests that the relationship between concurrent engineering and project performance variables is indirect, rather than the direct relationship normally assumed in the literature. This finding is consistent with process management theory. The standardized structural coefficient for the path between concurrent engineering and process performance is 0.67 (t value ¼ 11:12). This provides strong support for H1. The more concurrent the development process, the higher the process performance (e.g., higher teamwork and team productivity and shorter engineering change times). This confirms other studies that
have shown the importance of concurrent engineering. The standardized structural coefficients for the paths between process performance and customer satisfaction (0:22; t value ¼ 3:85), product development time (0:55; t value ¼ 10:30), product cost (0:73; t value ¼ 13:57), and manufacturing cost reduction (0.42, t-value ¼ 5.95) are all significant. Thus, the hypotheses that process performance has a direct relationship to customer satisfaction (H2), product development time (H3), product cost (H4), and manufacturing cost (H5) are supported. The results suggest that, in the automobile industry, the strongest relationships are between process
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Process performance in product development: measures and impacts
European Journal of Innovation Management
Ahmad Syamil, William J. Doll and Charles H. Apigian
Volume 7 · Number 3 · 2004 · 205-217
Figure 5 Structural model for process performance (standardized solutions)
performance and time & cost aspects of project performance. H6 of a direct relationship between product development time and customer satisfaction was also supported (standardizedstructuralcoefficient ¼ 0:47, t value ¼ 7:76). In the automobile industry, this may reflect the influence of product innovation on customer satisfaction (Adams et al., 1998; Rusinko, 1999; Terwiesch and Loch, 1999) or customer satisfaction with firms who meet the schedule for model year introductions. H7 of a direct relationship between product cost and manufacturing cost was also supported (standardizedstructuralcoefficient ¼ 0:38, t value ¼ 5:40). This suggests that product cost accomplishments in design (simpler product and part designs, the selection of lower cost materials, and fewer parts) can have a significant influence on costs associated with manufacturing such as equipment, tooling, setup, assembly hours, etc.
Discussion This study has some limitations. The process performance model has been developed and tested for the automobile industry, which is characterized by complex products, relatively long development times, frequent and costly engineering changes, and great emphasis on cost reduction. A measure of process performance validated for the automobile industry may be less appropriate or
provide less value in other industries with shorter development times, less complex products, or infrequent engineering changes. The process model was validated using responses from project managers for completed projects. This provides no assurance that process performance feedback can actually be used successfully in an intervention program to improve end-result outcomes. A product concept to economic value chain (Figure 1) that depicts three categories of product development success measures (economic value, overall project performance, and process performance) has been presented. The researchers have associated these three categories of success measures with three streams of product development research identified by Brown and Eisenhardt (1995) – rational plan, disciplined problem solving, and communication web, respectively. Process measures of product development performance appropriate for the product and process design stages are identified as a critical missing link in the product concept to economic value chain. The communication web stream of research focuses on how well internal processes of communication and coordination are functioning during upstream research and development activities. However, these measures were not designed to assess how well processes were functioning during crucial downstream development activities (product and process design). This paper has developed and validated a multidimensional instrument for measuring process
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performance during the product and process design stages of product development. The growing trend towards integrating product and process design suggests that monitoring process performance may provide an early warning signal of later problems in overall project performance or financial results. The delivery of an outcome for a stage-gate review does not necessarily insure it reflects the best thinking of the entire team. The nine-item instrument is short and easy to use for frequent process monitoring and feedback during development. By focusing on how well the process is operating, it should complement rather than replace outcome oriented stage-gate reviews. It should be particularly useful in monitoring teamwork, team productivity, and engineering change time for large platform projects. These projects often have many teams and engineers. It may be difficult, at times, for the platform manager to know exactly how well things are going early enough to take corrective action. While the disciplined problem-solving stream of research often assumes a direct relationship between process choices and overall project performance success (Koufteros et al., 1998; Moffat, 1998; Swink, 1998; Terwiesch and Loch, 1999), this study finds that concurrent engineering’s relationship to overall project performance is mediated by process performance. This suggests that a product development manager cannot assume success when a cross functional team is assembled based on concurrent engineering principles. To achieve the full potential economic value inherent in a product concept, a firm must not only choose the correct product development process, it must also monitor process performance to assess how the process choice influences the behavior of team members. Further research is needed to assess whether process performance also mediates the relationship between other process choices and overall project performance. While this indirect relationship between process choice and overall project performance is important in the case of concurrent engineering, it is perhaps an even more critical consideration in other process choices that have not been so consistently associated with favorable project outcomes. For example, because of the inter-organizational nature of the relationship, it may be more difficult to effectively implement supplier involvement in design. Supplier involvement has the potential to enhance teamwork, team productivity, and engineering change time, but if it is implemented poorly, these process indicators may actually signal deterioration rather than improvement. Further research is needed to determine whether process performance mediates the
relationship between a product concept’s potential value and the actual economic value achieved. Previous research has emphasized the importance of developing a product concept with high value to customers (Cooper, 1979; Zirger and Maidique, 1990), assuming a direct link between product concept and customer satisfaction. However, a great product concept may falter if not properly executed in a timely manner. This research indicates that process performance has a direct relationship with customer satisfaction and an indirect relationship to customer satisfaction through reducing product development time. It also shows that process performance has a direct relationship with product cost and manufacturing cost. These roles of process performance in determining customer satisfaction and costs suggest that process performance may also mediate the relationship between a product concept’s potential value and the actual economic value achieved. However, further research is needed to directly test whether process performance mediates this important relationship.
Conclusions Process management theory suggests that one should not only implement the correct processes, one should also monitor how well the process is operating and, if necessary, intervene in a timely manner. Product development success measures that focus on overall project performance (endresult outcomes) are known at the end of the project, too late to improve the ongoing process. To better achieve product development goals such as customer satisfaction, product development time, and cost reduction, timely process performance feedback should be available. This paper has presented and validated behavioral measures of process performance appropriate for the product and process design stage of product development. Further research is needed to evaluate this process performance measure’s potential value as an early warning signal of later problems in overall project performance or financial returns.
References Adams, M.E., Day, G.S. and Dougherty, D. (1998), “Enhancing new product development performance: an organizational learning perspective”, The Journal of Product Innovation Management, Vol. 15 No. 5, pp. 403-22.
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Pawar, K.S. and Riedel, J.C.K.H (1994), “Achieving integration through managing concurrent engineering”, International Journal of Production Economics, Vol. 34 No. 3, p. 329. Pinto, M.B., Pinto, J.K. and Prescott, J.E. (1993), “Antecedents and consequences of project team cross-functional cooperation”, Management Science, Vol. 39 No. 10, pp. 1281-97. Pzydek, T. (1999), The Six Sigma Handbook: A Complete Guide for Greenbelts, Blackbelts, and Managers at All Levels, McGraw-Hill, New York, NY. Rabino, S. and Moskowitz, H.R. (1980), “Optimizing the product development process: strategical implications for new entrants”, Sloan Management Review, Vol. 21 No. 3, pp. 45-51. Reidelbach, M.A. (1991), “Engineering change management for long-lead-time production”, Production and Inventory Management Journal, Vol. 32 No. 2, pp. 84-8. Rusinko, C.A. (1999), “Exploring the use of designmanufacturing integration (DMI) to facilitate product development: a test of some practices”, IEEE Transactions on Engineering Management, Vol. 46 No. 1, pp. 56-71. Sethi, R. and Nicholson, C.Y. (2001), “Structural and contextual correlates of charged behavior in product development teams”, Journal of Product Innovation Management, Vol. 18 No. 3, pp. 154-68. Souder, W.E., Buisson, D. and Garrett, T. (1997), “Success through customer-driven new product development: a comparison of US and New Zealand small entrepreneurial high technology firms”, The Journal of
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Manufacturing firms and integrated solutions: characteristics and implications Charlotta Windahl Pierre Andersson Christian Berggren and Camilla Nehler
The authors Charlotta Windahl, Pierre Andersson and Camilla Nehler are PhD Students at the International Graduate School of Management and Industrial Engineering, and Christian Berggren is Professor in Industrial Management, all in the Department of Management and Economics, Linko¨ping University, Linko¨ping, Sweden.
Keywords Innovation, Services, Capital, Manufacturing industries
Abstract For an increasing number of firms in the capital goods industry, combinations of products and services, so called integrated solutions, are becoming part of their future growth strategies. By analysing three case studies, the article highlights the variety of such solutions and some important implications for the involved companies. The analysis suggests that companies need an extended set of competences to succeed in providing integrated solutions, amounting to a balance of technical and integration competence with market/business, consulting and partnering competences. This implies a move from product-focus to customer-centric orientation and focus on optimisation of user processes. From a research perspective the paper underlines the importance of integrating studies of product and service innovation, two fields that so far have been studied separately.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 218-228 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549900
Introduction Manufacturing companies in the capital goods industry face several challenges, which affect their traditional business model of selling products, spare parts and support services. Slow growth and declining margins are putting pressure on firms to search for new businesses whereas IT-based technologies, such as remote monitoring and control, are offering new opportunities. “Intelligent” technology enables a continuous optimisation of customer operations and new software makes it possible to improve performance without replacing physical components. Changes in markets and customers represent another set of opportunities. For example, deregulation of power generation and water markets are creating new business conditions and incentives for equipment suppliers to increase their responsibility and move forward in the value chain. An often suggested way to respond to these challenges is for manufacturers to develop services targeted to their installed product bases, which are often one or two orders of magnitude larger than their annual new-product sales (Wise and Baumgartner, 1999). This downstream market requires fewer assets, is often counter-cyclical and can provide higher profit margins (Oliva and Kallenberg, 2003). At General Electric this has been a major initiative since the mid 1990s: “When you own the technology there is never excess capacity. Our advantage lies in a high-tech installed base of jet engines, power turbines, locomotives and medical devices. This base has grown fourfold since the mid-1990s, and it remains one of our most valuable assets” (General Electric, 2002). A related strategy, which could be linked to but goes beyond exploitation of an installed base, is to offer tailored solutions intending to optimise user operations (Phillips et al., 1999; Foote et al., 2001; Miller et al., 2002). In this strategy, products and services are combined to address specific customer needs, hence referred to as integrated solutions in this paper. Strategies of integrated solutions have attracted the attention of consultants and strategy authors, but with some exceptions (Davies, 2001; Galbraith, 2002; Hax and Wilde, 1999; Shepherd and Ahmed, 2000), there has been little academic research on this subject, and few efforts to relate this phenomenon to the mainstream innovation literature. For a long time, this literature was focused on material product innovation, later complemented by research on service innovation, The authors would like to thank the Editor for his invaluable guidance. The financial support of VINNOVA, The Swedish Agency for Innovation System, is gratefully acknowledged.
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or innovation in services firms. Whereas these two streams of innovation studies have developed largely separately, integrated solutions represent a type of innovation, which combines products and services. This paper will build on three case studies in order to explore the development and characteristics of integrated solutions in the capital goods industry. The primary objective is to analyse the new challenges facing these companies in terms of customer interaction and competence requirements. A second objective is to address relations between product and service innovation, the neglected role of service organisations in manufacturing firms, and the importance of integrating the separate streams of product and service innovation in academic research. The next section will discuss the concept of integrated solutions and its implications for companies and academic research: the extended competence requirements; the need for a reorientation from product- to customer and service-focus; integrated solutions as architectural or recombinative innovation; and the changing role of the service organisation. This is followed by three case studies of firms who have implemented, or are in the process of implementing, integrated solutions. The cases are then analysed on the basis of the previously presented frameworks on competence requirements and strategic orientation. The final section discusses integrated solutions in relation to innovation research and suggests areas for further studies.
are proposed a package of hardware and services (Tellis and Stremersch, 2002). Instead, physical products and services are combined to provide a specific outcome fulfilling the customers’ need (see also Bjo¨rkman, 2001; Miller et. al, 2002). An example of integrated solutions would be a pump manufacturer selling the performance of xm3/s of pumped liquid, instead of just a pump. Another example would be to deliver “availability” of a specific equipment. In conventional contracts, suppliers of turbines, for example, profit from machine breakdowns after the guarantee period has expired. With condition monitoring systems it is now possible to build contracts on the provision of availability. In such contractual arrangements, suppliers no longer profit from customer problems, but will benefit from improved customer operations (see also the “Chinese doctor syndrome” where patients pay doctors an annual fee for every healthy and trouble-free year). Integrated solutions hence provide inducements for suppliers to optimise their provision, and could in some cases create incentives for providing operating services, where customers use the outcome without owning, maintaining or even operating the equipment (Bjo¨rkman, 2001). So far, this radical move downstream has not been common and some firms which actually built capabilities to operate their equipment at customer sites have tended to retreat from this offensive strategy (Oliva and Kallenberg, 2003). Manufacturing firms developing services and integrating products and services face substantial obstacles, which may well explain why so relatively few companies have made the transition from a focus on products to a focus on services and solutions, in spite of the many recommendations (Rangan and Bowman, 1992; Oliva and Kallenberg, 2003). One challenge is the lack of accepted business models, e.g. how to plan initial moves into this activity, how to build appropriate capabilities, and how to improve performance in the provision (Davies, 2001). New performance indicators and pricing models have to be developed. Furthermore, there is a need to build relevant application knowledge and to overcome traditional barriers between R&D, marketing and services. In addition, providing performance extends the responsibilities of the integrated solutions provider, thus resulting in an increased risk taking. Another challenge is to handle the changed relationships with customers and partners, including potential competition with previous partners and/or customers. Before moving on to the case studies, four aspects of integrated solutions will be discussed: the competence repertoire needed, the challenge of customer interaction and co-production,
Integrated solutions: characteristics and implications A new type of firm is emerging. . . that of integrated solution providers. These firms do not conform to the traditional categories of manufacturing or services. Instead, they add value - and perform their distinctive role - by bringing together products and services in “integrated solutions” that address the needs of large business or governmentowned customers (Davies, 2001, p.4).
Strategies to develop integrated solutions, described in the introduction and the quotation above, imply several challenges for capital-goods producing companies, both in their relationships to customers, and in their internal organisational structures. When developing integrated solutions, companies have to focus on user processes and operations, instead of their own products and spare parts (Shepherd and Ahmed, 2000). Providing integrated solutions thus represents more than a variation on the “mixing and matching” or “bundling” theme, where customers
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integrated solutions as architectural innovation, and the expanded role of the service organisation.
integrated solutions provider needs to match technical and product competences with integrating, consulting and partnering competences, based on a strong focus on customer interaction.
New competence requirements The extended competence requirements and capabilities needed for integrated solutions can ideally be described by using the model for “organisational competence of a solutions provider” suggested by Shepherd and Ahmed (2000). The original model built on studies in the computer and electronic equipment industry, and has been modified to suit the type of firms studied in this paper (see Figure 1). When integrated solutions are developed, manufacturing companies need to augment their technical competence around hardware and software, to also encompass applications and operational competence, e.g. to maintain, finance, renovate and operate systems through the life cycle (Davies, 2001; Miller et. al., 2002). Integration competence denotes the ability of solution providers to integrate components and subsystems into operational systems. Market/business competence stands for the ability to support the customer with relevant industry and technology information, including consulting ability, i.e. to understand and offer solutions addressing specific customer needs. Finally, partnering competence refers to the ability of solution providers to build alliances and partnerships with other suppliers and consultants in order to offer integrated solutions, and to develop continuous businesses in partnership with their customers. A specific aspect here is the knowledge needed to move from pricing of product and service items to comprehensive contracts, based on sharing risks and rewards between the provider and the customer. In sum, the balanced competence profile suggests that an
The necessity of intimate customer interaction There has been extensive writing on the importance of cultivating customer loyalty, on the argument that it is more advantageous to retain customers than to search for new ones (Reichheld and Sassar, 1990). Building and maintaining customer relationships are central to improved business performance in many sectors (Ennew and Blinks, 1996). The relationship implied in integrated solutions provision, however, is more than customer retention and long-term relations. Providing integrated solutions is about continuous business, where the provider becomes part of the customer’s on-going operations. According to Galbraith (2002), companies wanting to deliver solutions must make both their organisation and product-structure customer-centric. A productcentric company tries to find as many uses and customers as possible for its product. In contrast, the ideal customer centric company aims at finding as many products as possible for the customer, and then integrate those products and services with the goal of finding the best solution, not the best product, for the customer. This requires a high quality flow of information from the customer to the supplier/provider. Technology development is also of importance since proprietary technology has the potential to create markets and customers and protect earnings. As a result, ideas and innovations need to flow both from technology developers to customers, and from customers to
Figure 1 Organisational competence of an integrated solutions provider
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technology development. In order to deliver the best possible solution, an integrated solutions provider could hence be expected to build both on customer relationship and advanced technology. In a simple model of strategic orientation modes, presented by Berthon et al. (1999), these two flows are combined to discuss the degree of focus on customer and/or technology within different organisations (see Figure 2). We will use the model to further illustrate the importance of customer focus. Four different modes are discussed in the model. In the isolate mode, the organisation itself becomes the focus of attention. Technology is developed as a result of the internal dynamics of the firm. In the follow mode, customers drive the innovations and the company relies on market research to establish the parameters for its product development. In the shape mode technological innovation drives the market. New technology defines customers’ needs and provides products and services, which induce changes in behaviour. Finally, in the interact mode an on-going dialogue is established between customers and technology development, as the basis for a relationship with strong elements of co-production. There is no ideal mode – the environment in which the company operates is critical for choice of strategic orientation (Berthon et al., 1999). However, we believe that product-focused companies moving towards supplying integrated solutions would over time need to orient themselves towards the interact co-producing mode. Client involvement is often seen as a fundamental aspect of knowledge-intensive service activities, and the notion of co-production developed in service management studies is highly relevant to firms offering integrated solutions. As Gallouj and Weinstein (1997) emphasise, the interfaces characteristic of co-production are more conducive to innovation than the constrained information exchange typical of subcontracting relations.
In their study of management challenges facing machine manufacturers when moving from products to expanded services, Oliva and Kallenberg (2003) have stressed the scale of the cultural change required. This change both involves a shift from transaction-based interactions (sales of individual product and services items) to relationship-based interaction, and in the next step a shift from product-oriented services to user process-oriented services. To implement such a change, there is not only a need for new capabilities (discussed above) but also for new metrics, performance measures and incentives.
Figure 2 Strategic orientation model
Integrated solutions as architectural innovation With respect to the competence demands, it could be argued that integrated solutions represent a particular type of architectural innovation. According to Henderson and Clark (1990, p.13), architectural innovation is essentially “a reconfiguration of an established system to link together existing components in a new way, . . . that creates new interactions and new linkages”. This is contrasted to “radical innovation” which destroys existing capabilities. In an architectural innovation, the core design of various components remains the same, but linkages and interfaces change which present firms with far-reaching but subtle challenges. Henderson and Clark (1990) discuss physical products, but the idea of architectural change implying a need for new communication channels and problem-solving strategies is highly relevant for the innovatory combination of products and services in integrated solutions. In an effort to build a theory for interpreting innovation processes in the service sector, Gallouj and Weinstein (1997) have suggested recombinative innovation as an adaptation of the Henderson and Clark (1990) concept: “Innovation of this kind exploits the possibilities opened up by new combinations of various final and technical characteristics, derived from an established stock of knowledge, and a given technological base or existing within a defined technological trajectory” and depends on “the ability to explore and mobilise an extended set of knowledge and techniques“ (pp. 550,552). Although attempting to build a more general framework and typology, the authors limit their empirical illustrations to services and service firms. Integrated solutions as combinations of products and services highlight the importance of integrating the two fields of product and service innovation studies. Noting the call for such a marriage, Miles (2000) emphasised the roles played by technology-based services in innovation
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systems, and the need for deeper understanding of interaction between R&D and service activities. Hopefully the case studies presented below will contribute to this discussion of integrating diverse fields of innovation studies. The increasing role of service organisations in manufacturing firms The initiatives for moving towards integrated solutions can be found within an expanded spectrum of organisational units. Sometimes it is about technology push, where the R&D department develops a new IT-enabled “intelligent product”, which makes it possible to propose new offerings to traditional business customers. In other cases, it is market pull when, e.g. water companies on a deregulated market demand extended services from their previously productfocused suppliers. These two types of innovation drivers are well known in the literature. However, among the emerging integrated solutions providers there are also important examples of manufacturing firms where the initiative has come from the service organisation. In studies of new practices in product development during the last ten years there is a recurring emphasis on cross-functional collaboration, involving R&D, marketing, purchasing and manufacturing (see Brown and Eisenhardt, 1995; McDonough, 2000), but the participation of service engineers and technicians is seldom mentioned. This is in line with the generally weak interest shown in the service organisations of manufacturing firms (see also Hull and Cox, 1994). It seems to reflect the division of innovation research in the two streams of either product/technology studies or studies of innovation in services/service firms, with manufacturing services falling somewhere in between. After sales, service and maintenance already play a significant and profitable role for many capital good manufacturers, from heavy trucks to power turbines. Usually, however, they have a rather isolated existence, profiting from the sales of marked-up spare parts, but with few, if any, links to R&D. Triggered by technological opportunities and commercial threats, a recent trend in service organisations in capital goods producing companies, is to refocus from “waiting for problems” (spare parts provision and corrective maintenance) to a pro-active role, based on contracts specifying the availability of installed equipment. The increasing role of the service organisations, both for business growth and commercial innovation, is observed in the case studies presented below. We believe this trend deserves more interest in the innovation literature.
Varieties of integrated solutions: three case studies Methodology Products and services could be combined to integrated solutions in many ways. The variety of approaches and challenges encountered are reflected in the cases discussed below. To highlight different aspects of the concept of integrated solutions, three cases will be presented: BT, a specialist in making and marketing lift trucks in rental agreements; ABB Facilities Management, offering performance-based contracts for energy optimisation; and finally, Alfa Laval, a company moving towards integrated solutions in the water treatment industry. All three are international firms in the capital goods industry, focused on industrial customers. They were selected for the case studies on the basis of their interest in the area, and the variety of their experiences and business models. Field studies were carried out during 2002 on the basis of an explorative framework, designed to capture the breadth of approaches, opportunities and obstacles, which had been facing these companies. In each case, technical, marketing, service and business development managers were interviewed, normally in tape-recorded settings. In the BT study, nine interviews were conducted, whereof two on customer sites. The ABB FM study also builds on nine interviews, including four with customers. For the third case, 11 key persons at Alfa Laval and one customer were interviewed. The interviews were conducted in a semistructured manner with open-ended questions regarding business drivers and business models for integrated solutions, obstacles so far, and prospects for further growth. Customer interviews focused on the reasons for their interest in the integrated offerings and their assessment so far, including intentions to prolong, terminate or modify existing contracts. Interview data was supplemented by continual contact with key persons, by archival material and by participation in internal meetings at the three providers. The findings were presented in case reports (Andersson, 2002; Nehler, 2002; Windahl, 2002) and discussed at a series of workshops in 2002 2003 for emerging providers of integrated solutions Case 1. “Don’t buy a lift truck” BT Industries is an originally Swedish manufacturer of warehouse trucks, but since 2000 a member of Toyota Industries Corporation, Japan. BT’s products and services are marketed in 70 countries around the world. Triggered by an early demand from a few large customers in
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Sweden, the marketing organisation at BT developed a rental concept, which has gradually expanded both in terms of service scope and market penetration. In 2002, 60 per cent of all trucks delivered in the UK, Sweden, and France were embedded in a rental contract. At the transport and logistics exhibition in Gothenburg, Sweden, 2002, BT Industries stood out as the only manufacturer not displaying a physical product, and asking customers not to buy any lift truck. The BT rental concept means that the customer pays for a materials handling solution with trucks, maintenance, spare parts, training and financing. This can be combined with an added rental service, supplementing the customer’s core fleet with peak-time back-up trucks. Normally a rental contract covers a five-year period, but the BT’s range of offerings also includes short-term rental with various levels of services and maintenance. A rental agreement allows customers to replace or upgrade equipment, which in principle means that the customer may have access to the latest technology and the most efficient trucks. According to BT Industries, the rental concept helps customers to take stock of the total costs associated with the use of lift trucks and to concentrate on their core business. The need to tie up capital in materials handling equipment is eliminated, while BT promises to ensure troublefree and efficient materials handling. The customers could be found in a variety of industries. Most of them are large firms in the retailing sector. BT’s primary objectives are to obtain long-term customer relationships and a well-balanced utilisation of its service organisation, which employs more people than the manufacturing plants. However, a rental contract is no guarantee for continuation of the relationship when the contract expires. The two customers described below illustrate this. Customer A used to have a comprehensive contract with BT for 90 lift trucks including financing, maintenance, spare parts and a service technician stationed at the customer site. However, when a new manager was appointed at the customer company he examined the agreement thoroughly feeling that the contract was too aggregated and lacked transparency. It was difficult to question actions taken during the contract period and implement cost reduction since different cost items could not be analysed. The result after renegotiations was a downgraded contract, making BT responsible only for preventive maintenance. It seems as if it had been too comfortable both for BT and the previous customer manager just to keep the relationship going, without taking any actions to increase efficiency, and BT had not been very active in
giving any customer advice. For customer B, a rental agreement with BT provided high-tech lift trucks without any capital investments. But the purchasing manager was not satisfied with the costs of repair and maintenance, since BT did not provide any detailed reports. Similar to customer A, a lack of transparency resulted in dissatisfaction. In contrast to customer A, however, this did not result in a downgraded contract, but instead a transition to open books. This means that BT has to specify all different costs item, and measure and report service and maintenance data per truck. This is monitored on bi-annual follow-up meetings between BT and the customer. The transition to transparency and more intensive communication can be interpreted as a change from service or solution delivery to service co-production, implying a more demanding customer relationship. Case 2. “Too good to be true?” Performancebased provision of climate control The second case focuses on a solution developed by a service division, called Facilities Management (FM), operating within the electro-technical conglomerate ABB. The original core business of this division was to install and service climate control systems, manufactured and sold by another company in the group. Several years ago, a long-time customer approached the division with a request for a new system. In the ensuing negotiations, FM pointed out the great potential in configuring a system that would dramatically reduce energy expenditures. The customer suggested that if FM could deliver such a system they might also be able to run it more efficiently than the customer could do by himself. The result was a contract giving FM a percentage of the energy savings on the condition that they financed the investment. The co-operation between FM and the customer as well as between the FM organisation and hardware suppliers within the group worked very well. By combining existing physical products and services FM had created an innovative offering. In the words of Gallouj and Weinstein (1997, p. 549) this can be seen as a case of ad-hoc innovation, “the interactive (social) construction of a solution to a particular problem posed by a given client”. Later this service has been formalised, backed up by consulting competences and divided in two principal contractual forms. The first option means that FM carries out a feasibility study to evaluate the existing climate control system at the potential customer’s site before signing a contract. If the study shows sufficient possibilities to lower the customer’s energy consumption by installing new equipment
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and taking over operations of the system, FM proposes a deal. The contract period then starts with an overhaul of the customer system. In the second contractual arrangement, FM takes over operations directly and is paid a monthly fee for running the climate control system. During the contract period, FM may invest and upgrade the control system to curtail energy consumption, on the provision that savings are shared between the partners. FM takes the financial risk. The customer is only obliged to pay the monthly operations fee. In both cases, the ultimate source of success for the contractual agreements is a diminished energy cost for the customer. The better the performance of the control system, the larger the savings and hence also the income for FM. FM finances the investments and must obtain sufficient savings to pay them off. The pricing model for the first contract type is depicted in Figure 3. The initial total cost for the climate control at the customer site can be viewed to the left in Figure 3. As the contract period begins, the cost of energy expenditure is supposed to decrease. The savings, symbolised by the two top areas, are shared between FM and the customer. The area at the bottom depicts the fixed compensation fee. Both the financial and technical risks are transferred to the climate control provider. FM will finance all investments in the system. The customer is guaranteed a maximum cost no larger than the initial (exempt for cost increases related to changes in energy prices, taxes, etc.). After the contractual period is over, the installed hardware is formally turned over from provider to the customer. Targeted customer groups are fabrication and processing plants and other facilities with
significant energy use and complicated climate conditions. The offerings suggest a true win-win situation and customers interviewed in the study made very positive assessments, citing substantial savings in energy costs. Nevertheless, according to FM, some of their potential customers tend to think that it is too good to be true or that they should do the proposed savings themselves to get all the net earnings and to maintain control over their own facilities. Potential customers may also disagree to pay for the pre-study necessary in the first contractual option, since they do not know if this will pay off until the study is finished. If, on the other hand, FM goes for a non-pre-study contract, potential savings and profitability are unclear. To make up for this uncertainty, FM needs extensive experience of various industrial sites. The length of the contractual period, normally three to seven years, plays a significant role for the provider’s internal planning and investment margin. A long contract period means that the service personnel acquire a detailed knowledge about individual installations, which help them during unexpected troubles, and is a basis for investment in up-grading the equipment. According to FM, however, the trend among customers is shorter rather than longer time perspectives, which impedes such relationshipspecific knowledge formation
Figure 3 Pricing model for energy management
Case 3. Going from selling decanters to selling integrated solutions? Alfa Laval is an international specialist in centrifugal separation, heat exchange and fluid handling based on products such as high-speed separators, decanters (centrifuges), and heat exchangers. The company’s diverse customer base includes oil and gas, energy, marine, process industries, food and beverages, biotech and pharmaceuticals, and water and wastewater. This study is focused on the wastewater treatment segment, where Alfa Laval specialises in the sludge treatment process. Traditionally, municipalities own and operate the local wastewater treatment plants. In Europe this is now changing due to deregulation and privatisation. International water companies which both own and operate treatment plants have emerged. Environmental demands and requirements are another factor influencing the business. An example is the prohibition of organic landfill disposal in the European Union after 2005, which has increased the interest for obtaining a dry sludge suitable for incineration. Alfa Laval Environment supplies components and system modules to the sludge treatment process, either to the contractors in charge of building the plant or to the end customers. Another part of the
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organisation, Alfa Laval Parts and Service, normally handles the after sales and services directly to end customers. Over the years Alfa Laval has increased its scope of supply to cover a range of technologies within sludge treatment, including heating, thickening, de-watering and drying. This market-based strategy is shifting the focus of the company from stand-alone products to process engineering and sales of entire systems. At the same time, the launch by the R&D department of a new generation of “intelligent”, IT-enabled products, such as a self-optimising control systems, makes it possible to improve capacity utilisation and reduce operational costs for customers on a continual basis. This opens up a huge market for upgrading the company’s installed base of equipment. The new technology makes it possible to move beyond the traditional business model based on selling products and spare parts, and offers the potential of creating customer relationships built on performance optimisation and incentive contracts. A successful pilot installation was completed during 2001-2002, with the first commercial version expected in early 2003. In parallel to this technology-based innovation, the service organisation has increased its focus on customer value and performance. Traditionally, the service department was waiting for customers to call when they had problems or needed new components. A healthy profit margin on spare parts supported this reactive attitude. Envisaging harder competition in the future, the service organisation is implementing a more ambitious strategy. At the core is a system of different contracts, ranging from a traditional service level to comprehensive agreements including a customised performance optimisation. Together, these developments, increased scope of supply, self-optimising control systems and enhanced service performance agreements, make it possible for Alfa Laval to offer new value for customers and to increase its own part in the value chain. Several problems need to be addressed, however. One is to find ways of pricing the extended offerings. There are several alternatives, from fixed prices plus subscription fees, to incentives contracts, sharing rewards and risks. Another challenge is to co-ordinate the separate activities of new sales with the sales of services and to enhance the skills and competence of the sales and services staffs. The key question of course is what kind of solutions the customers really are willing to pay for. Are they interested in outsourcing areas previously under their responsibility? It may be the case for private contractors who have taken over plant operations, and are looking into ways of reducing risks and
differentiate their offer to the end users. This might not be the case for all customers, however. At Alfa Laval the old product-based business model is challenged, but a new model focused on integrated solutions is still in the emergence phase.
Strategic reorientation and new competence requirements In the analysis below, the cases will be contrasted with the competence profile and the strategic orientation model discussed in the second section. The aim is to highlight characteristics and competence implications in various types of integrated solutions. ABB Facilities management is the only of the three cases, where customers use the outcome provided without owning, maintaining or operating the product. In terms of competence profile, the company has built its business on technical knowledge of energy optimisation and climate control, consulting competence for analysing customer facilities and suggesting solutions, as well as operational competence for actually running climate control systems. The technical competence has been honed through years of experience during which the hardware only changed incrementally. Recently, the need for co-ordination and control of components has led to the development of a systems integration tool, used to further enhance operations and performance of installed systems, thus adding to the company’s technical integration competence. A key skill of the company’s field personnel is to make correct evaluation of potential customer facilities; if they overestimate its savings potential, the company can be stuck with a loss-making deal for years; if they underestimate the potential the company will lose business. For FM, an important objective is to refine its ability to do efficient and effective evaluations of prospective customer sites. If we use the simple model of “strategic orientation for innovation” presented above, FM could be seen as an instance of “follow mode”, where a customer was the initial driver of the process. But it should be noted that the innovating partner at FM was the service organisation, which was able to combine products and services in an original way without affecting the R&D department in the first instance. The company has developed a sophisticated incentive-based business model, but the customer base has been expanding rather slowly, also in the high-energy use process industry, although this might be changing (Brochner et. al., 2002). One way to further expansion might be more intensive use of reference customers in co-marketing efforts. This would
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probably require enhanced customer partnering competence on the part of FM. The rental business at BT Industries is based on a robust and only marginally customised product platform. On this product basis, a far-flung service organisation has been built. The business model is a relatively simple cost-based arrangement compared to FM’s incentive-based contracts, although in the BT case too, the rental concept was first developed as a response to customer demand. Within BT there is a strong focus on technical competence, and even for customers with rental contracts, the truck itself is still important. One of the challenges for BT Industries seems to concern its internal integration competence. So far, there has been only minor input from the service organisation in technical development. As a result, there has been no extensive product reconfiguration to facilitate upgrading and retrofit of existing truck fleets, although some examples of adaptations to specific rental customers could be cited. The need for increased market/business and consulting competence to strengthen customer ties can be seen in several cases. It seems as if the provider too easily assumed customers to be satisfied as long as they did not terminate the contract, and neglected to build communication channels, which could transmit early warnings on changes in customer priorities and key personnel. In the literature on service management, the role of stable and effective service personnel is often emphasised, whereas the importance of stability and change on the customer side attracts less attention. The case of BT shows the consequence of managerial turnover at the customer company. As this experience illustrates, new customer requirements of detailed reporting, follow-ups, and cost reduction could result in more limited and closely controlled contracts. They could, however, also propel the solution provider into more of an interact mode, from service delivery to service co-production. To avoid retreats into constrained contracts, BT may need to expand its offering and add services for continual optimisation of materials handling systems at customer sites. This would probably require a further enhancement of competences in the applications and consulting area. Alfa Laval can be seen as approaching integrated solutions from three different perspectives. A new market strategy has changed the emphasis from product sales to process and system deliveries; R&D efforts have created a technology push in the shape of “intelligent products”; and the service organisation is repositioning itself from standard maintenance to performance contracts. At the time of study, these developments were not interacting and there was
no clearly developed strategy for integrated solutions. The transitional process is challenging the company’s established competence profile in several ways. First, there is an increased need for technical and integration competence in line with the extended scope of supply. Sales people with a former expertise in a specific product need more knowledge regarding both the extended product range and crucial customer processes. Second, performance optimisation has to build on an understanding of the customer’s broader business and the role of a specific wastewater plant; hence there is a need for Alfa Laval to extend its market/ business knowledge. Third, the emergence of privatised customers with a preference for few suppliers with increased responsibility means that Alfa Laval needs to sharpen its partnering competence, and form alliances with other suppliers and sub-suppliers, in order to cover a larger scope of the wastewater plant processes. In relation to the model of strategic orientation discussed above, it could be argued that in its pursuit of new technological solutions Alfa Laval is in the shape mode. Increasingly, however, the company is moving towards the interact mode, with an emphasis on intensified customer interaction and development of applicationspecific knowledge and customized solutions. Future business success seems to hinge on several factors, where a key aspect would probably be the company’s ability to leverage its installed equipment base. Narrowly defined, several thousand original machines could be targeted for upgrading by means of the optimisation features involved in its new offering. The variety of potential organisational sources for integrated solutions is an advantage but can also create coordination problems. Studying machine manufacturers moving downstream, Oliva and Kallenberg (2003, p. 167) noted the importance of separating services from manufacturing and product placement operations, to protect “the emerging service culture with its metrics, control systems and incentives from the values and incentives predominant in the manufacturing organization”. However, in its next step from product-based services to solutions, Alfa Laval would probably need some organisational innovation to create the co-ordination needed, if products and services are to be seamlessly combined into integrated solutions.
Discussion and future research The analysis of the three cases emphasises the importance of customer partnering and expanded competences, as proposed in the balanced
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competence profile for integrated solutions providers. Further studies are needed to establish to what extent and under what circumstances an integrated solution provider could build or acquire these competences, and when it will be beyond the limits of its core competencies, thus requiring the mobilisation of broader external alliances and networks. Another aspect related to new competence requirements is the importance of new contractual arrangements. These are essential to enable capital goods manufacturers to charge for the knowledge and “invisible” values created for customers, to provide some form of transparency, and to avoid retreats into least cost bargaining when customers are facing increasing cost pressures. Studies of various contractual forms, and their unfolding under prolonged processes of customer interaction, are essential for understanding the long-term commercial possibilities of integrated solutions. Performancebased contracts focus on outcomes and user processes, and not on technologies per se, but in the long run they are likely to affect priorities in R&D departments concerning what type of products and functionality to target. They may, for example, reduce the relative importance of developing new hardware in favour of more modular and recyclable approaches. With respect to the capabilities and new organisational interfaces needed, the concept of architectural or recombinative innovation seems to capture the processes at both FM and Alfa Laval, although the latter case also entails an important technological component. A key point in this case is the need for changes in linkages and communication channels between departments when the company moves from a disjoint process with several separate initiatives to a co-ordinated effort to build integrated solutions. In their analysis of service innovations, Gallouj and Weinstein (1997) emphasise the importance of formalisation, of breaking down the offering into clearly defined elements, which are then rigorously specified. Such formalisation, they argue, tends to precede recombinative (architectural) innovation. Further, it is noted that successful recombinative innovations often build on a modular architecture both for the service products and the delivery system. The three case studies highlight the value of customer interaction and tailored solutions, but customisation needs to be combined with welldefined modular structures to achieve economies of scale at the component level. More detailed studies of integrated solution-development are needed to clarify these issues. Such studies will hopefully provide ground for the cross-fertilisation of different research streams, bringing together insights from studies of both service and product innovation.
References Andersson, P. (2002), ”Funktionsfo¨rsa¨ljning: en studie gjord pa˚ ABB Facilities Management”, working paper, Linko¨ping University, Linko¨ping. Berthon, P., Hulbert, J.M. and Pitt, L.F. (1999), “To serve or create? Strategic orientations toward customers and innovation”, California Management Review, Vol. 42 No. 1, pp. 37-59. Bjo¨rkman, M. (2001), “Funktionsfo¨rsa¨ljning: att flytta fokus fra˚n produkt till funktion”, paper presented at the IBC Euroforum Konferens – O¨ka lo¨nsamheten med funktionsfo¨rsa¨ljning, Stockholm, March. Brochner, J., Adolfsson, P. and Johansson, M. (2002), “Outsourcing facilities management in the process industry: a comparison of Swedish and UK patterns”, Journal of Facilities Management, Vol. 1 No. 3, pp. 265-72. Brown, S.L. and Eisenhardt, K.M. (1995), “Product development: past research, present findings and future directions”, Academy of Management Review, Vol. 20 No. 2, pp. 343-78. Davies, A. (2001), Integrated Solutions: The New Economy between Manufacturing and Services, SPRU, University of Sussex, Falmer, Brighton. Ennew, C.T. and Blinks, M.R. (1996), “The impact of service quality and service characteristics on customer retention: small businesses and their banks in the UK”, British Journal of Management, Vol. 7 No. 3, pp. 219-30. Foote, N.W., Galbraith, J., Hope, Q. and Miller, D. (2001), “Making solutions the answer”, The McKinsey Quarterly, No. 3. Galbraith, J.R. (2002), “Organizing to deliver solutions”, Organisational Dynamics, Vol. 31 No. 2, pp. 194-207. Gallouj, F. and Weinstein, O. (1997), “Innovation in services”, Research Policy, Vol. 26 No. 4-5, pp. 537-56. General Electric (2002), “Letter to stakeholders”, General Electric Annual Report, General Electric, Chicago, IL. Hax, A.C. and Wilde, D.L. (1999), ““The Delta Model: adaptive management for a changing world”, Sloan Management Review, Vol. 19 No. 4, pp. 11-28. Henderson, R.M. and Clark, K.B. (1990), “Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms”, Administrative Science Quarterly, Vol. 35, pp. 9-30. Hull, D.L. and Cox, J.F. (1994), “The field service function in the electronics industry: providing a link between customers and production/marketing”, International Journal of Production Economics, Vol. 37 No. 1, pp. 115-27. McDonough, E.F. (2000), “Investigation of factors contributing to the success of cross-functional teams”, Journal of Product Innovation Management, Vol. 17 No. 3, pp. 221-35. Miles, I. (2000), “Service Innovation: coming of age in the knowledge-based economy”, International Journal of Innovation Management, Vol. 4 No. 4, pp. 371-89. Miller, D., Hope, Q., Eisenstat, R., Foote, N. and Galbraith, J. (2002), “The problem of solutions: balancing clients and capabilities”, Business Horizons, Vol. 45 No. 2, pp. 3-12. Nehler, C. (2002), “Funktionsfo¨rsa¨ljning – en studie av rental vid BT Industries”, working paper, Linko¨ping University, Linko¨ping. Oliva, R. and Kallenberg, R. (2003), “Managing the transition from products to services”, International Journal of Service Industry Management, Vol. 14 No. 2, pp. 160-72. Phillips, F., Ochs, L. and Schrock, M. (1999), “The product is dead: long live the product-service!”, Research Technology Management, Vol. 42 No. 2, pp. 51-7.
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Rangan, K. and Bowman, G. (1992), “Beating the commodity magnet”, Industrial Marketing Management, Vol. 21 No. 3, pp. 215-25. Reichheld, F.F. and Sassar, W.E.J. (1990), “Zero defections: quality comes to services”, Harvard Business Review, Vol. 68 No. 5, pp. 105-11. Shepherd, C. and Ahmed, P.K. (2000), “From product innovation to solutions innovations: a new paradigm for competitive advantage”, European Journal of Innovation Management, Vol. 3 No. 2, pp. 100-6.
Tellis, G.J. and Stremersch, S. (2002), “Strategic bundling of products and prices: a new synthesis for marketing”, Journal of Marketing, Vol. 66 No. 1, pp. 55-72. Windahl, C. (2002), “Sludge treatment application: on the way towards integrated solutions? A preliminary study at Alfa Laval”, working paper, Linko¨ping University, Linko¨ping. Wise, R. and Baumgartner, P. (1999), “Go downstream: the new profit imperative in manufacturing”, Harvard Business Review, Vol. 77 No. 5, pp. 133-41.
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Introduction
The use of strategies in managing technological innovation Jarunee Wonglimpiyarat
The author Jarunee Wonglimpiyarat is a Certified Public Accountant and Science Policy Researcher at the National Science and Technology Development Agency, the Ministry of Science and Technology, Klong Luang, Thailand.
Keywords Innovation, Technology led strategy, Strategic management
Abstract The objective of this paper is to understand innovators’ pursuit of strategies in securing the benefits from an innovation. The study develops a methodological framework of platform for analysing three case study innovations – Windows-operating system for PC, plain paper copier and video cassette recorder. This paper examines the process of innovators creating platform advantage (the capability to engender an increasing future and continuing success of new innovations or businesses) in order to understand why innovators pursue collaborative or competitive strategies in managing technological innovations. It is argued that collaboration is motivated by risk considerations as much as by a search for profit. The results indicate that the use of strategies (whether collaborative or competitive strategy) depends on how innovators see the benefits from using particular strategies to exploit the innovation.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 3 · 2004 · pp. 229-250 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410549919
The present paper aims to contribute to the area of innovation management. The study highlights the pursuit of independent and collaborative strategies, asking how the strategies in securing the benefits from an innovation relate to the capabilities of innovators. In the author’s opinion, the analysis of three major innovations (the case of Windows operating system for PC, plain paper copier and video cassette recorder (VCR) provides important insights into the platform creation process on innovation. The next section presents the literature review on innovation management, the concept of platform and the strategies in competing for competitive advantage. In this study, the concept of platform is defined more tightly than in the literature. Platform in this study is defined as the capability to improve the success of further innovations. Platform advantage can be viewed in terms of product synergies, control of distribution, capture of standards or creation of a scaleable/replaceable technology. This meaning is therefore distinct from the conventional use of platform (Venkatraman and Henderson, 1998; Taylor et al., 1999) which is essentially static and describes the assembly of a set of requisite capabilities for a particular innovation. The third section introduces the new methodology for analysing the platform creation process. The fourth section discusses the analysis of findings. The final section concludes the paper by drawing ideas from the findings. Possible avenues for further research on innovation management are suggested.
Theoretical framework Innovation concept Before discussing how innovators manage the innovation to create platform, we need to understand the concept of “innovation”. The concept of “innovation” is viewed in different ways in the literature (see Table I). These concepts offer perspectives on the meaning of “innovation” in describing technological change. Rosenberg (1976; 1982), Nelson and Winter (1977; 1982) and Dosi (1982) view innovation as a process of improvement which may reside in the form of a problem solving activity (a new method) whereas Pavitt (1984), The author would like to thank Professor Douglas Wood (Manchester Business School) and Professor Denis Loveridge (Policy Research in Science and Technology, University of Manchester) for useful advice about the conceptualisation and research.
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Table I Alternative concepts of “innovation” Concepts of innovation
Scholars
(1) Innovation: a process of enhancing existing technology
Rosenberg (1976, 1982); Nelson and Winter (1977, 1982); Dosi (1982) Pavitt (1984); Tidd et al. (1997)
(2) Innovation: a process of turning opportunities into practical use (3) Innovation: an integrated process involving (1) and (2) (4) Innovation: any new technologies and new processes
Schott (1981); Daft (1982); Rothwell and Gardiner (1985) Rogers and Shoemaker (1971); Porter (1990); Voss (1994)
Source: The author’s design
Tidd et al. (1997) regard it as a process involving commercial use (a new business). A concept of innovation combining these in an integrated process of incremental improvement and turning into commercial use is developed by scholars likeSchott (1981), Daft (1982), and Rothwell and Gardiner (1985). The last concept of innovation, used by Rogers and Shoemaker (1971), Porter (1990) and Voss (1994) is somewhat broader. This is because the concept is concerned with implementation of new technologies and new processes although not necessary both together in all cases. The term “innovation” used in this study will follow the third concept, that is a process of transforming the technology frontier into the commercialised product/process innovation in a competitive market. Innovation models Technological change has been described by technology push (Schumpeter, 1939) and demand pull (Schmookler, 1962) or their interaction (Freeman, 1982) as triggers of innovation. More recently (1990s), the theoretical analysis has moved towards the theory of technological change as an interaction within a network of companies identified in the systems integration and networking (SIN) model (Rothwell, 1992b). Rothwell proposed five generations of innovation models to explain the historic pattern of innovation (see Table II). The importance of networking is reflected in the fifth generation of his innovation – SIN model. Following the collaborative approach of Rothwell (1992a), Hamel and Prahalad (1994) propose a managing migration paths model. They argue that technology push is not enough because it can be constrained by the power of technological change in shaping the competitive dynamics of an industry. In other words, technology push is not stable because rapid technological changes create many alternatives from which firms choose their technology strategy. Nor does demand pull provide a complete explanation in circumstances where customers lack the necessary foresight of possibilities in a world with radically new products or systems. To say it the other way round, Hamel
Table II Rothwell’s five generations of innovation models Generation
Key features
First
Technology push: simple linear sequential process Need pull: simple linear sequential process. Coupling model: recognising interaction between different elements and feedback loops between them Integrated model: integration within the firm, upstream with key suppliers and downstream with demanding and active customers, emphasis on linkages and alliances Systems integration and extensive networking model: flexible and customised response, continuous innovation
Second Third
Fourth
Fifth
Source: Rothwell (1992a)
and Prahalad (1994) suggest that innovations come to be seen as a result of collaboration for integration of skills and capabilities when competing for the future market. In the network externalities literature, collaboration is often seen as a means to ensure adoption. Firms with large existing networks (particularly specific purpose networks) tend to be against collaboration and vice versa. In other words, when firms enjoy large market shares with existing proprietary procedures and routes to customers, they will resist innovations that provide shared or open procedures (Katz and Shapiro, 1985; 1986). The concerns over returns to adoption and falling transactions costs yielded from the diffusion (Williamson, 1988; Wood and Erturk, 1996) are also significant in deciding whether to collaborate or not. The networking model (Rothwell, 1992b) in the case of innovations can be seen as a response to avoid the failure of innovation, particularly in commercialisation. According to Bowonder and Miyake’s (1992, 1993) study of technological forecasting in Japanese firms, the development of the national innovation system in Japan utilised network structures which facilitated the reduction of risk and uncertainty. The intention was to create a joint or complex competitive advantage and a more rapid development of innovation.
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Given the competitive environment of the innovation/diffusion process in the industry, Utterback and Abernathy (1975) developed a model of the dynamics of innovation – the innovation life cycle model (see Figure 1). The model describes the process of innovation and the degree of technical change (incremental/ radical change). The product innovation precedes the improvement in the process innovation. Relatedly, the diffusion theory based on the innovation life cycle (Utterback and Abernathy, 1975) can be linked to the industry life cycle (Twiss, 1995) (see Figure 2). Indeed, the industry has played an important role in the innovation process since innovations are developed along with the markets for them. Figure 2 also presents the concept of innovation in terms of a process of commercialisation. The innovation process characteristically exhibits an S pattern. The stages along the S-curve are characterised by the efforts of the innovator to adapt a technological development (invention) for transformation into an innovation (commercial product). The introduction stage represents the period of uncertainties which require problem-solving
activities to make a saleable product or useable process. The growth stage reflects the situation where uncertainties are reduced. This can be seen by the accelerating rate of innovation adoption after a period of relatively slow growth (the introduction stage). The maturity and decline stage reflect the diffusion of innovation (commercialisation of innovation) according to the impact of the adoption (Easingwood, 1988).
Figure 1 The innovation life cycle model
Figure 2 The industry life cycle model
Innovators’ strategies towards platform Firms, according to the resource-based approach, compete according to their different capabilities. Strategies to cope with a changing competitive environment are associated with the firm’s capabilities. Under the model of Schumpeterian competition[1], being the first mover or follower in the industry not only influences the extent of innovation adoption but also the benefits secured. According to Nelson and Winter (1982, pp. 280) and Schumpeter (1950, pp. 105), “. . .perfect competition was incompatible with innovation. As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced. . .” implies the importance of timing and critical mass of use. Being first to the market can help firms to take advantage of benefits from initial demand in the market and enjoy an extra profit until competitors can respond. The pre-emptive move to capture the profit-making opportunities and to respond more accurately to the needs and responses of customers before a further move to launch other products may be more important and thus the innovation, from the outset, does not have to take off with the first best solutions to the market. As far as analysis of strategy is concerned, the adoption of strategies (whether collaborative strategy or competitive strategy) is important in managing innovations and in making the innovation happen. When the resources and capabilities required in the diffusion of innovation are not available within an economic entity, it is likely that innovators adopt collaborative strategy and vice versa. However, the innovatory strategies employed by innovators along the stages of innovation can change over time. The changes of the strategies of the innovator in the light of everchanging market competition, in turn, influence the progress of innovation. The adoption of strategy to achieve successful innovation is a question that needs some reviews of strategy concepts. According to Porter (1980), a firm should adopt competitive strategy to defend itself against outside forces. Although his competitive forces model is widely accepted in the 1980s, it has increasingly been subject to criticisms in a competitive context in the 1990s. The
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competitive strategy in Porter’s model ignores the active and dynamic roles of complex socioeconomic factors of which firms may not have sufficient resources or capabilities to implement strategies unilaterally. Practically, it seems difficult for any innovators to have full resources and therefore they need integration of capabilities to create and build know-how into their product innovations. The chosen strategies along the stages of innovation have a strong connection with innovators’ organisational conditions in reacting to the competitive environment. In Porter’s model, firms adopt competitive strategies rather than collaborative strategies. This view clearly ignores the active and dynamic roles of complex socio-economic factors where most organisations do not have the capabilities to compete on their own or wish to take the sole risks of using them if they have them. Theoretically, Porter’s strategy can only be fulfilled provided firms are ready in terms of the resources or capabilities to implement strategies unilaterally. Practically, the adversarial relation may not be preferred if innovators see the benefits of entering into collaboration being higher than those from pursuing the going alone strategy. In other words, innovators may choose a collaborative approach because: . it reduces the absolute size of risks and capital involved; . it reduces the risk of competitive innovation; and . it provides innovation with opportunities to leverage their resources according to their comparative advantage.
Their competitive advantage in product extension comes from Microsoft’s ownership over the business platform (capabilities in owning over 90 per cent PC customers). However, while the firmspecific capabilities other than technology seem to be important, it is not argued that the technological capabilities underlying the firm’s technology platform assumed by Porter should be understated. In the process of innovation, the innovator’s choice to carry out particular strategy may have implications for platform creation. Whether a firm has the capabilities to achieve competitive advantage or not seems less important than whether it has appropriate strategies or not (Schroeder, 1990). This is because effective competition can be enhanced if innovator could adopt appropriate strategy to establish its technology as an industry standard. The ability to establish the standard would attract more use of the innovation from of its capability in interoperability (Hawkins et al., 1995), e.g. GSM standard in mobile telephony, VHS and Betamax standard in video cassette recording. A disproportionate share of the benefits that innovators could expect is strongly dependent on their decisions on the use of strategies.
Porter’s view of using technology platform as a resource (Porter, 1980) to achieve a competitive advantage can be seen as incomplete. This is because technology platform, while potentially generating a variety of new innovations and applications with advantage, is vulnerable to imitability and obsolescence by a better technology even though it is highly protected by patent. For example, the competitive advantage of Xerox’s technology platform of xerography and IBM’s technology platform of PC was overtaken by the liquid toner technology of Canon, Ricoh and Konica; and the cloneable IBM-compatible PCs of Compaq and Phoenix Technologies respectively (Hill, 1997). The use of technology platform as the basis of the sustainable competitive advantage described by Porter is challenged by the business platform emphasised by Hamel and Prahalad (1994). They argue that competitive advantage is not necessarily rooted in technology platform but a bundle of skills and technologies. The case of Microsoft Windows in the software industry provides a good example.
The concept of platform Most of the studies dealing with the platform (see Table III) concept relate to information technology. As a result, the term is rather biased towards technology-enabled contexts. For example, Kim and Kogut (1996) define a technology platform as consisting of bundles of technologies that increase the likelihood of penetrating new markets. They provide empirical evidence, in the semiconductor industry, on the wide adoption of a memory based technology platform into diversified fields. Meyer and Selinger (1998) also define a platform as a set of subsystems functioning as a structure to produce a stream of derivative products. From their point of view, software (e.g. VISIO, Hewlett-Packard’s Open View network management, Netscape Navigator, Microsoft Internet Explorer) provides technological platforms that allow the development of further plug in applications which gain from the existence of a compatible user base but which can be used for no other purpose if they fail. A more general view of the term is suggested byVenkatraman and Henderson (1998), andTaylor et al. (1999) (and in Downes and Mui, 1998) who define platform in terms of integrating business networks which leverage capabilities within and across organisations. Ciborra (1996) provides a rather different view based on organisational
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Table III Different concepts of platform Concepts of platform
Studies by
Platform characterised as
1. Technology (technological component embedding in the system) 2. Collection of subsystems for development of derivative products 3. Integration of capabilities from organisations
Kim and Kogut (1996)
Memory technology
Meyer and Selinger (1998)
Software
Downes and Mui (1998) Venkatraman and Henderson (1998) Taylor et al. (1999) Ciborra (1996)
Internet Virtual organisation, e.g. GM, Ford, Chrysler Integrated network, e.g. FedEx, Lufthansa Organisations (the combination of structures and strategies)
4. Platform organisation Source: Author’s design
science literature. Ciborra defines platforms as arrangements or combinations of organisational structures and strategies that are created to meet the changing environment. Again, the examples raised in her paper are concerned with technology organisations (e.g. Olivetti, IBM, AT&T, DEC) but deal with their organisation rather than their technology. Whilst the existing literature on platform is often based on technology-determined context, this study is going to develop an alternative view of platform. In this study, the term “platform” is used to describe a cluster of capabilities or competencies capable of creating competitive advantage for a company (companies) in terms of subsequent innovations but which does not necessarily include all the core competencies required for these activities. In other words, platforms involve an ability to excel at the innovation process itself by generating a continuity of commercially successful innovations, a role not previously identified in previous discussion of the platform concept. Platform capability as used in this research is a dynamic concept whereas the literature regards it as a static collection of particular capabilities needed for particular innovations. In other words, the conventional platform concept does not have any implication of subsequent benefits. The resource-based approach to innovation (Barney, 1986; Cool and Schendel, 1988; Penrose, 1959; Wernerfelt, 1984; 1989) argues that the firm’s performance is influenced by its own specific amalgam of resources – technology, organisational capabilities, experiences and relationships. Some of which are engendered from the capabilities that are tacit, difficult to imitate and transfer, not quickly substitutable (Bell and Pavitt, 1993; Collis and Montgomery, 1995; Howells, 1996; Mansell and When, 1998; Senker, 1995; Winter, 1987), and thus give the owner of the platform an ability to introduce subsequent innovations with competitive advantage. Whether innovators actually achieve the competitive advantage is
ex post the qualifier for platform status. However, it is clear that an innovator considering platform potential will look at innovations rather differently from an innovator simply concerned with a successful innovation. A platform innovator probably has different view of collaboration and equity sharing than an innovator concentrating on a particular innovation and on the direct benefits of that innovation. An innovator who sees the opportunity to create a platform may be much more generous in expanding the scope of collaboration beyond the point where benefits from an innovation are maximised.
Type of platforms The understanding of how platform can influence future innovation strategy is helped by considering the type of platforms available. Figure 3 distinguishes between two types of platform: technology platform and business platform: (1) Technology platform (vector X) refers to a cluster of technological capabilities in which the potential of the technology generates a variety of new innovations/applications with advantage to the organisation owning the platform. (2) Business platform (vector Y) refers to a cluster of business capabilities which provides access to suitable customers bases or continuing new businesses with advantage to the organisation owning the platform. Concerning the term “innovation” which involves the process of achieving adequate commercialisation, particular innovations may support a variety of subsequent innovations with advantage. In other words, only certain innovations provide a basis for a platform with a continued ability to effectively generate a second derivative of innovation – the potential to accelerate further technology and product/process innovations (vector Z). Professor Rubic’s cube for
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Figure 3 Types of platform
browser, and wireless telecommunications to reach customers. These innovations, in terms of effective functionality are relatively minor and it would be difficult to argue that Microsoft products themselves are distinguished by high technical competencies or performance. But Windows based products provide the interchangeability between uses and interoperability between third parties that characterises a business platform. The third possibility is where technology platform and business platform co-exist. For example, Xerox’s imaging technology platform supported the creation of the scanner, the printer and the facsimile with little frontier technology innovations. Xerox’s salesforce, superior product feature (the copier model 914 known as the onetouch copier revolution) and brand strength synonymous with the copying process provide a business platform that enabled Xerox to enter the new businesses such as insurance and finance, Office of the future (office automation), plug-andplay products, and the internet business. The content of the synthesised variables for use as indicators of technology and business platform will be explained in the following section.
Methodology for platform creation process analysis
example, although an extremely successful innovation, provides no platform for further successful innovation or even for distribution of third party innovations. Dolby’s noise reduction is a technology platform providing further innovations in motion-picture sound, home hi-fi equipment, compact cassette and video game. The upward/downward compatibility with Dolby innovations and the acceptance of both media provider and media user of Dolby enhancement technologies create ongoing advantage to Dolby. Xerox’s xerography provides a technology platform (imaging platform) engendering further platform innovations in electronic copier, scanner, printer and facsimile. The business platform helps increase the likelihood of market penetration by creating a pathway which can be used for subsequent innovation. For example, Microsoft’s dominance in Windows operating system for PC becomes a business platform that provides a successful channel to facilitate migration of its new businesses - Windows 95, 97, 98, 2000, NT, Internet
To understand innovators’ use of strategies in securing the benefits from an innovation, this study will carry out the analysis of platform creation process. The intention is to explain how the chosen strategies influence the diffusion of innovation and to demonstrate that the ownership of delivery channels and customers seems to be an important factor in gaining competitive advantage. To develop an understanding of the platform creation process, this study uses the methodology developed from the literature and applied to a selection of cases. The two sets of variables related to the technology platform and the business platform were extracted based on the relevant empirical literature (see Table IV): (1) Technology platform variables. These variables are concerned with the mechanism of technology, which has influence on the development of continuing innovations. The study allows the understanding of the way innovator builds up a technological capability to gain a competitive advantage. (2) Business platform variables. These variables are concerned with business capabilities, which have a great impact on the profitability and advantage in new follow on businesses. The study allows an understanding of the factors
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5. Mostly single ownership
4. Subject to obsolescence from new technology
3. Intermediary serving multiple value chains
1. High performance relative to existing practices in several dimensions of performance 2. Variety of continuing applications
Technology platform variables
Innovations produced by single ownership organisation
Dolby application in audio, motion-picture sound, home hi-fi equipment, compact cassette, video game; xerographic application in copier, printer, scanner, facsimile Fund transfer network to serve electronic payment system, Porvair to serve footwear suppliers Xerography by liquid toner technology, IBM PC by cloneable PC
The potential of technological capabilities creates continuing arrays of new innovations and applications
The technological capabilities are used in serving multiple networks, e.g. suppliers, distributors, other businesses The technological capabilities are vulnerable to be substitutable by the new technology The capabilities to innovate are provided by a single firm’s resources, skills and knowledge bases
Improvement in data capacity of disk, memory chip, microprocessor speed
Examples
Having high performance in applications engendered by technological capabilities
Description of variables
Table IV Technology platform and business platform variables
5. Often complex collaborative ownership
4. Subject to obsolescence from new channel
3. Consolidating multiple value chains
2. Variety of continuing markets
1. High performance in several dimensions of services
Business platform variables
The capabilities to innovate are provided by a complex web of organisations
The potential of leveraged business capabilities creates various continuing businesses. The continuing markets are in terms of new market development, new businesses The business capabilities are from consolidating multiple networks (e.g. suppliers, distributors, other businesses) Vulnerability to be removed by alternative/substitutable delivery channels
Improvement in product/service offerings, the high performance in terms of product development
Description of variables
(continued)
MAOSCO consortium in the smart card business; DVD forum in audio business; Symbian in mobile phone business
Internet to replace EDI, mobile phone to replace bank branch
New types of loan offerings, combined banking/loan accounts, different product versions for different market sectors Virgin’ s continuing business of train, airlines, music, mobile telephony, financial services; Sony’s continuing business of consumer electronics, mobile phones, credit cards, PC Mergers and acquisitions, takeovers, joint ventures
Examples
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The launch of innovation controls the supply delivery channel to the market
The provision of solutions comes from extensively used communication lines, intensive analytic programming, integrated software, database and expert systems
7. Utilising numerically intensive analytic processing
Description of variables
6. Controls channel of supply to customers
Technology platform variables
Table IV
System of credit processing, bank’s clearing system, switching network
Network of electronic fund transfer, containerisation (intermodal containers)
Examples
236 9. Extensive scale, scope and experience advantage
8. Firm-specific competencies
7. Utilising data intensive analytic processing
6. Controls channels of distribution to customers
Business platform variables
The competitive competencies are generated from organisation-specific capabilities, e.g. uniqueness of innovation, monopoly, brand strength The economic advantage lies in the large-sized operation in terms of cost savings, productivity improvement
The provision of solutions comes from intensive analytic information about customers, market data and variety of knowledge and skill bases
The launch of innovation controls the delivery channels or customer acquisition chains
Description of variables
Scope advantage of Virgin’s vast business undertakings; experience advantage of American Express in charge card business
Brand strength of Virgin; Xerox’s brand synonymous with copying; Sony Walkman synonymous with personal stereo
Microsoft’s Windows operating system dominates the PC manufacturers and the PC customers Store cards with keeping shopping patterns for offering other products; Amazon’s track record of customer buying habits via its Web site
Examples
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that help an innovator gain a sustainable competitive advantage.
licensing constrained the growth in the installed base of Apple machines, lowered Apple’s capability to compete and limited the potential to create a business platform. Among the competitors launching the innovation of Windows operating system for PC (Microsoft, IBM, Apple, Xerox), only Microsoft could create technology platform and business platform. The development of Microsoft’s Windows created a technology platform in terms of generating further related software products including scalable operating systems for intelligent devices, PCs and servers, software development tools and internet and intranet software and technologies. Microsoft also created its business platform by pursuing a low-cost licensing strategy to license its Windows via OEM arrangements with the PC manufacturers. Microsoft business platform was reinforced by a product bundling strategy to include software applications running on its operating system in the OEM deal which further increased the value of Microsoft Windows to PC users, increased the demand for its products and reduced the scope for competing suppliers. The distribution strength of global PC manufacturers and the value of application programmes running on Microsoft Windows enabled Microsoft Windows to reach wide adoption and become a de facto standard. The wide adoption and the de facto standard of Microsoft Windows operating system then served as a strong business platform that helped Microsoft to successfully launch subsequent Windows products such as Windows 95, 97, 98, 2000, Windows NT, Windows CE, Windows ME, Windows Media and enter the new businesses such as the Internet browser, Web TV business, computer game. Although IBM had a great presence in the mainframe computer business and operating systems since the 1960s, IBM lost the opportunity to extend its competitive position into operating system for PCs. The launch of IBM OS/2, although technically superior to Windows 3.1 and Windows 95, could not compete with Microsoft Windows. This is because IBM OS/2 was a closed system, not offered with other PCs and was seen as too complicated and unwieldy for the customers. Thus IBM failed to establish its OS/2 as standard operating system although IBM had a strong distribution capability. IBM’s aim of developing an operating system business platform creation was unsuccessful. From the study, it can be seen that the way that innovators launched successive Windows products to match their competitors within a few years suggests that technology can quickly be caught up.
Analysis of findings This section discusses the process of platform creation using the methodological framework of platform variables described in the previous section. The case studies of Windows operating system for PC, plain paper copier and VCR are the context through which the key issues in strategic management will be discussed in this paper. The analysis will attempt to understand innovators’ strategies employed in the competitive environment and their pursuit of platform creation. Case 1. Windows operating system for PC The attempt to compete for potential platform creation began when Xerox and Apple launched Xerox Star and Apple Lisa (see Figure 4, Table V and Table VI). By tying the operating system to their own hardware, Xerox and Apple expected to command a high price and establish proprietary business platforms. However, the price they set was regarded by the customers as too expensive (Xerox Star $16,595 and Apple Lisa $10,000 comparing to a standalone PC $2,000). Moreover, as Xerox Star and Apple Lisa ran as a closed system, this prevented software development firms from writing application programmes. Thus, the machines of Xerox and Apple were not seen as valuable for the customers to purchase. The result was that both Xerox and Apple failed to establish a business platform even though they were early movers in the PC Windows operating system market and might have established their technologies as standard. Apple in its launch of Macintosh, continued the strategy of not licensing MacOS to Original Equipment Manufacturer (OEM) hardware suppliers. In other words, Apple thought superior Macintosh technology would make it the industry standard, allowing Apple to gain proprietary benefits. However, Apple did not realise that Microsoft was a close follower who was ready to launch the Microsoft Windows which had similar characteristics to MacOS and would reduce the point of differentiation of Apple’s Graphical User Interface (GUI) that Apple intended to use for gaining superior benefits (Apple Macintosh was launched in 1984; Microsoft Windows was launched in 1985). The strategy of not licensing also showed that Apple overlooked the importance of speed in using other PC manufacturers’ distribution capability to bring the innovation to market. As a result, the MacOS failed to take off as quickly as Microsoft Windows. The strategy of not
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Figure 4 The innovation process of Windows-operating system for PC
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Table V Technology platform analysis: Windows operating system for PC Technology platform variables
Description
1
High performance relative to existing practices in several dimensions of performance
X
2
Variety of continuing applications
X
3 4
Intermediary serving multiple value chains Subject to obsolescence from new technology
X X
5 6
Mostly single ownership Controls channel of supply to customers
X X
7
Utilising numerically intensive analytic processing
X
Multithreading – the running of programs simultaneously; memory protection – the control of the areas of read/write of programs so that programs cannot interfere with each other; operating system based on the capacity of microprocessor technology, e.g. from Intel’s X86 series to MHz series Microsoft Windows 95, 97, 98, Windows NT, Windows 2000, Windows ME, Microsoft.Net, Windows.Net, WebTV product with each application focusing on different markets Windows operating system to serve PC and variety of devices Linux operating system and Sun’s Java technology as a possible Windows NT alternative for the network operating system; Symbian as a possible Windows CE alternative for the hand-held markets GUI Windows product by Microsoft, Apple, IBM Microsoft controls channel of supplying Windows operating system through PC makers by pursuing the low price licensing strategy This applies in particular for the information highway
Table VI Business platform analysis: Windows-operating system for PC Business platform variables
Description
1
High performance in several dimensions of services
X
2
Variety of continuing markets
X
3
Consolidating multiple value chains
X
4
Subject to obsolescence from new channel
X
5 6
Often complex collaborative ownership Controls channels of distribution to customers
X
Microsoft Windows controls the delivery channel of PCs through the channels of global PC manufacturers
7 8 9
Utilising data-intensive analytic processing Firm-specific competencies Extensive scale, scope and experience
X X
Monopoly power of Microsoft over Windows for the PCs Microsoft’s scale economies from its largest software operation and a number of acquisitions
Microsoft Windows with different versions according to different markets, e.g. server market, desktop market, hand-held market Microsoft’s Windows for Smart Cards, mobile phones, computer game, Internet, Web TV business Acquisitions of/investments in technology firms in many areas, e.g. Internet, mobile telecommunications, browser Smart phones, Web phones, internet kiosks, mobile phones and other specialised access devices as new delivery channels
Taking into account the competitive position among innovators, it is worth noting that Microsoft enjoyed platform advantage through ownership of over 90 per cent of PC customers. Microsoft developed platform advantage from its control over the technology platform, business platform and de facto standard for operating systems. However, Microsoft’s business platform is vulnerable to erosion by state regulation rather than from competitors reacting to Microsoft’s anticompetitive software bundling and predatory pricing of software. Microsoft’s declining share price (see Figure 5) was a result of legal action by the US authorities against Microsoft’s anti competitive behaviour in the market for PC operating systems and software. To remain competitiveness in the software business, Microsoft aggressively upgraded its technology platform and business platform by purchasing/acquiring the software firms, e.g.
Forethought, Fox Software and Visio Corp. Microsoft’s market capitalisation and high marketto-book ratio reflects its platform ownership (see Figure 6 and Table VII). The overall financial performance of Microsoft compared with those in the PC-operating system market demonstrates the competitive advantage of Microsoft in the operating system market. Figure 7 gives an overview of the progress of Windows operating system for PC innovation as a result of innovators’using strategies in managing innovation. The outer circle represents the total revenue pool of innovation. The inner circle represents the size of market share of individual innovator. In the innovation process, Apple MacOS and Microsoft Windows were the major competing Windows operating systems. However, the use of the low price licensing strategy by Microsoft enabled it to achieve adoption for a variety of manufacturers and hence to create a
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Figure 5 The share price of Microsoft and other players in the PC-operating system market
Figure 6 Market to book value and operating profit of major players in the PC-operating system market
Table VII Market value of major players in the PC-operating system market Market value (million US$)
1986
1988
1990
1995
1997
1999
Microsoft Intel Sun Microsystems Apple Computers Compaq Computers
1,231 2,438 654 2,578 517
2,858 4,209 1,204 4,952 2,277
8,571 7,685 2,078 5,151 4,831
51,975 46,603 8,667 3,911 12,758
155,965 114,718 14,938 1,671 42,771
602,432 275,006 121,843 16,540 45,817
Source: Datastream Figure 7 The progress of innovation in the context of innovators’ strategy – Windows-operating system for PC
virtual standard. The self-reinforcing effect was evident in that the pursuit of low price licensing strategy to the PC manufacturers led to the
growing installed base of PCs running Microsoft Windows operating system. A larger installed base of the Wintel machines led to a greater availability of software applications. In turn, this increased the value of Microsoft Windows to PC users and increased the demand for its products. Microsoft gained the largest market share (the internal benefits represented by the size of the circle). Microsoft’s benefits from exploiting noncollaborative innovation were high relative to the total benefits. In other words, Microsoft Windows becomes a de facto standard established from Microsoft’s non-collaboration approach.
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Microsoft’s ability to establish its technology as industry standards then allows it to control the delivery channels, own the customers and enjoy a continuing advantage (the main benefits from owning the customers can be seen in terms of the largest market share of Microsoft in the Windows operating system for PC market). Thus, Microsoft did not see collaboration as important[2].
The business platform of Xerox was also undermined as a result of strong competition from the Japanese copiers (stated above). The falling market share during the 1970s-1980s indicated that Xerox’s business platform was eroded. Although Xerox had brand strength and the capabilities of PARC[3] that enabled it to enter new businesses (stated above), Xerox was slow to bring the new products to commercialisation. Thus Xerox could not fully exploit its business platform capabilities to subsequent advantage. The competition in the plain paper copier market increased in the 1990s as non-traditional competitors in the printer business like HewlettPackard took printed pages away from the copier business. The Japanese copiers, e.g. Canon, Ricoh, Konica also continued to take the share in the copier business. The situation became worse when Xerox’s attempt to reorganise its salesforce backfired. Xerox kept losing market share and was in a state of near collapse. The falling business platform is reflected in Xerox’s stock price plunge (Figure 9). Xerox’s market value was 8 times lower than that of Hewlett-Packard and not much larger than the Japanese competitors’ (Table X). The market to book value and operating profit of Xerox (Figure 10) were dwarfed by the major rivals like Hewlett-Packard and Canon. The market share of only 25.8 per cent in the late 1990s comparing to the share of 90 per cent-100 per cent in the 1970s indicates that Xerox is much less competitive than before and charts the erosion of its business platform. From the study, Xerox built a technology platform as well as business platform but could not maintain them to enjoy continued platform advantage. As the market is now moving towards the digital copier and networked solutions, there are many competitors who are ready to compete in the light of this new opportunity. Canon, a rival of Xerox, is a pioneer in digital and colour copiers. Hewlett-Packard also competes in the digital market with its high-speed digital electronic copier and printer. These are indications of increased competition in the copier market. Xerox strategy to rival Canon or Hewlett-Packard and rebuild its platform with its strategy of “document processing” has attracted little confidence in the market. Figure 11 gives an overview of the progress of plain paper copier innovation as a result of innovators’using strategies in managing innovation. The circle represents the total revenue pool of innovation in the plain paper copier market. Xerox had the dominant market share during the 1960s-1970s because its superior copier protected by the strong patent and the aggressive direct selling enabled Xerox to develop a new
Case 2. Plain paper copier The process of platform creation in the plain paper copier market (see Figure 8, Table VIII and Table IX) began in the early years of the Xerox copier. The development of Xerox copier created a technology platform of xerography/ electrophotography in that the underlying technology was capable of driving a variety of imaging applications including printer, copier, fax and scanner which could be created using common parts and technologies. The launch of the model 914 enabled Xerox to create a business platform. The model 914 which was easier to use than the existing copying machines using different technologies created a strong demand for Xerox’s copier. The demand for Xerox’s copier can be seen from the 15 per cent annual growth in terms of copying volume in the 1960s. The combination of capabilities in terms of the product feature, the strength of Xerox’s brand and salesforce served as a strong business platform that helped Xerox enjoy a competitive advantage in terms of uninterrupted sales growth and profits through the 1960s. In the year 1965, Xerox’s sales growth was 10 times higher than the first year sales (962 per cent increase). In 1969, Xerox’s profit increased by 600 per cent from$23 million in 1963 to $161 million. Further, Xerox’s business platform enabled it to enter the new businesses such as PC, Office of the future (office automation), plug-and-play products, internet business, insurance and financial services. In the late 1970s, the technology platform of Xerox began to erode when most of its patents expired. Japanese competitors entered the fray to compete with the price which was 25 per cent below the cost of Xerox copier. As a result of Xerox’s technology platform of xerography/ electrophotography being matched by the liquid toner technology of the Japanese firms, the market share of Xerox was reduced from over 94 per cent in 1970 to 41 per cent in the early 1980s. The way that Xerox’s technology platform was destroyed thus demonstrates that technology could not be permanently monopolised and could provide only temporary competitive advantage (Xerox copier was launched in 1960 and matched in the late 1970s).
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Figure 8 The innovation process of plain paper copier
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Table VIII Technology platform analysis – plain paper copier Technology platform variables
Description
1
High performance relative to existing practices in several dimensions of performance
X
2
Variety of continuing applications
X
3 4
Intermediary serving multiple value chains Subject to obsolescence from new technology
X
5 6 7
Mostly single ownership Controls channel of supply to customers Utilising numerically intensive analytic processing
Colour printing – dye-sublimation for continuous-tone, photographic-quality output; high-density optical storage for encoding pictorial information capacity; photoreceptor for laser printing digitization technology for faster and sharper printing Electrophotography as a photo conducting imaging platform towards electronic copier, duplicator, scanner, printer, facsimile Selenium-coated drums replaced by photoreceptor (imaging medium); xerographic technology (powder technology) replaced by liquid toner technology; analogue technology will be replaced by digital electronic and networking technology Xerox, Canon, Ricoh, Sharp, Minolta, Oce0
X
Table IX Business platform analysis – plain paper copier Business platform variables
Description
1
High performance in several dimensions of services
X
2
Variety of continuing markets
X
3
Consolidating multiple value chains
X
4 5 6 7 8
Subject to obsolescence from new channel Often complex collaborative ownership Controls channels of distribution to customers Utilising data-intensive analytic processing Firm-specific competencies
X
9
Extensive scale, scope and experience
X
The document products for different market segments – production publishing solutions, document outsourcing, the networked office and the small office/home office market Xerox’s expansion into PC business, office of the future, insurance and financial services, plug-and-play products, Internet business Joint ventures and acquisitions in related area, e.g. colour printing, software tools, fax system, networked equipment
Patented technology of xerography (up to 1970s); powerful brand synonymous with copying process Experience advantage of Xerox in copier business; advantage of international size and volumes
Figure 9 The share price of Xerox and other major players in the plain paper copier market
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Table X Market value of major players in the plain paper copier market Market value (million US$)
1973
1975
1980
1985
1990
1995
1999
Xerox Hewlett-Packard Canon Ricoh Konica
9,710 2,169 140 143 73
4,029 2,612 143 195 142
5,057 5,370 871 690 398
5,750 9,452 2,689 1,855 835
3,274 7,727 6,584 3,150 2,090
14,776 42,863 16,626 7,832 2,845
15,070 115,911 31,100 11,713 1,195
Source: Datastream
market. In other words, Xerox could get rid of competing copiers (alternative copiers with different technologies) with the launch of its superior one-touch copier (copier model 914). Also, Xerox initiated the concept of leasing which not only allowed it to remove technology risk for customers but also gave it an extremely strong position in the marketplace. In the early 1970s, Xerox controlled the plain paper copier market with 100 per cent market share. The largest market share could best be adjudged as the internal benefits. Xerox was satisfied with its internal benefits and therefore did not see collaboration as important.
Figure 10 Market to book value and operating profit of major players in the plain paper copier market
Figure 11 The progress of innovation in the context of innovators’ strategy – plain paper copier
Case 3. VCR The competition for platform began in the early 1970s when innovators (consumer electronic suppliers) began developing home VCRs independently (see Figure 12, Table XI and Table XII). In other words, innovators aimed to gain the proprietary benefits if their format became an industry standard and a proprietary business platform was created. Sony was the first to enter the marketplace in 1975. By pursuing the first mover strategy together with the licensing strategy, Sony was initially successful. However, Sony’s Betamax technology was caught up a year later (1976) when Matsushita introduced the better recording hours version of video format (the VHS format with the tape recording capacity of two hours comparing to one hour of Betamax format). The launch of Sony’s Betamax and Matsushita’s VHS could be seen as exploiting their technology based capabilities. Sony and Matsushita were already in the consumer electronic industry at the time of launch. Underlying this VCR is their knowledge of products using magnetic recording, video recording and imaging technology as well as knowledge in the design and manufacturing mass market products. These capabilities enabled Sony and Matsushita to take the lead as innovators of the VCR for the mass consumer market. The brand strength of Sony and Matsushita in the consumer electronics industry was one important ingredient of their successful launch. However, it was the better technology of recording hours of Matsushita that helped
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Figure 12 The development of VCR innovation
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Table XI Technology platform analysis: VCR Technology platform variables
Description
1
High performance relative to existing practices in several dimensions of performance
X
2
Variety of continuing applications
X
3 4 5 6
Intermediary serving multiple value chains Subject to obsolescence from new technology Mostly single ownership Controls channel of supply to customers
X X X
7
Utilising numerically intensive analytic processing
Semiconductor for performance improvements in digital equipment; video games and portable phones; Dolby noise reduction technology/surround sound system for sound quality of VCRs, DVDs The extension of VHS development into Super VHS and VHS-C, D-VHS; the extension of Beta development into Beta Hi-Fi, Betamovie DVD players will replace VCRs in the digital age VHS by Matsushita and Betamax by Sony Controls channel of supplying video format through consumer electronics firms via licensing
Table XII Business platform analysis: VCR Business platform variables
Description
1
High performance in several dimensions of services
X
2
Variety of continuing markets
X
3
Consolidating multiple value chains
X
4 5 6
Subject to obsolescence from new channel Often complex collaborative ownership Controls channels of distribution to customers
X X
The VHS VCR with the control of electronics firms’ distribution channels
7 8
Utilising data-intensive analytic processing Firm-specific competencies
X
9
Extensive scale, scope and experience
X
Matsushita capability in distribution with its aggressive multiple licensing; leader in the audiovisual equipment, reputation for the professional equipment Sony’s brand synonymous with the TVs, portable music players and video games; expertise in miniaturisation Experience advantage – Matsushita (over 70 years) and Sony (over 50 years); extensive scale and scope in a variety of audio solutions
Video recorders for different sectors, e.g. consumer, professional market Online music over the Internet, game business, multiamusement players, computer, online financial services, Internet-related businesses, insurance and credit card business Acquisitions and joint ventures to add value to business, especially in digital age, for example: Sony with Palm Computing to create hand-held products with audio-visual functionality: Sony with Microsoft for online music content delivery Internet, PC, mobile phone
Matsushita to be successful in the VCR market. The extended recording capacity helped Matsushita to convince the Hollywood studios to release films on VHS format. The availability of prerecorded software (entertainment content) helped Matsushita to sell its VHS format. Matsushita’s share of the VHS format in the market increased from 39 per cent in 1976 to 75 per cent in 1983 whereas the share of Sony’s Betamax format was reduced from 61 per cent to 25 per cent during the same period. Taking into account the other industry players, Ampex’s attempt to launch the Instavideo failed in commercialisation due to the production problem (since Toamco was inexperienced in high-volume production) and did not even ship its VCR. Thus,
even though Ampex had brand strength in video for broadcasting market, it failed to exploit the brand value for entry into the home video market. In the case of RCA, although RCA had wide distribution in the US which could have supported its format if the project of home VCR was successful; RCA failed to bridge the gap between design and manufacture and never launched its Selectavision to the market-place. Although Philips came up with the format VR2020 in 1980, its launch was also too late to establish its technology as standard. This is because Matsushita already built the market share, defined standard and enjoyed volume advantage in the VCR industry, making it almost impossible for other innovators to catch up with Matsushita.
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Despite the capabilities of Matsushita, it could not transform these capabilities into the platform (technology platform and business platform) in the VCR business. The VCR itself was not a technology platform since there were no ongoing innovations coming from VCR which could lead to subsequent advantage. Another important aspect of VCR that prevents Matsushita from establishing a business platform is that the switching costs between standards for Betamax competitors are low. Thus, Sony could still sell VCR by exploiting its brand strength to compete with Matsushita. The financial performance does not show that any innovator has clear competitive advantage. Although Sony has the highest market value (Table XIII) and dominant stock price (Figure 13) among the other competitors, Matsushita’s market value is steadily increasing. The market to book value and operating profit of Matsushita, Sony, Toshiba and Sanyo are similar (Figure 14). Thus, the financial performance does not show that any innovator has the superior market returns. Also, the capability of Matsushita and Sony to use their brand in launching further innovations is more or less the same. Figure 15 gives an overview of the progress of VCR innovation as a result of innovators
(consumer electronics manufacturers) using strategies in managing innovation. The outer circle represents the total revenue pool of innovation. The inner circle represents the size of market share of individual innovators. Sony was the first to launch VCR, using a Betamax format with onehour recording time in 1975. In the early innovation period, the larger size of the Betamax Group was a result of Sony’s use of licensing strategy. Sony persuaded the other companies to back the new format with an intention to make the other companies fall in behind it to create a critical mass and so avoid a format or standard war. However, the improvement of recording capacity of Matsushita’s VHS (two-hour system), along with the aggressive licensing strategy enabled Matsushita to expand the format share. In the 1980s, the VHS Group had the largest format share in the VCR market (format share of over 70 per cent worldwide). It should be noted that although Sony and Matsushita could launch the innovation independently, they saw that external benefits are large relative to the benefits of independent innovation (internal benefits). Thus, they chose to enter into collaboration to broaden the format share and deepen penetration (external benefits).
Table XIII Market value of major VCR industry players Market value (million Yen)
1975
1980
1985
1990
1995
1999
Sony Matsushita Toshiba Sanyo
493,770 588,802 239,440 99,630
708,462 1,205,950 492,437 317,491
942,969 2,246,707 988,987 451,160
1,921,949 3,269,484 2,228,322 1,126,171
2,314,626 3,546,691 2,604,146 1,160,814
12,531,867 5,836,820 2,510,819 781,484
Source: Datastream
Figure 13 The share price of Sony and other major players in the VCR market
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Figure 14 Market to book value and operating profit of major VCR industry players
did not see collaboration as important. This is because the competitive strategy gives them opportunity to capture customers. Microsoft in the case of Windows operating system for PC and Xerox in the case of plain paper copier could maximise their internal benefits from the use of competitive strategy. However, collaboration was the predominant strategy in the case of VCR. The collaborative strategy is motivated by the desire to establish standards before major investment in production and distribution. Sony and Matsushita saw the benefits of collaboration in terms of broadening the format share and deepening penetration to ensure that penetration reached the levels where software in the format was provided (external benefits). In other words, the use of collaboration strategy helped innovators deepen the penetration of the VCR format. In the circumstance where the innovator has the resource or capability which might enable it to access most potential customers in the market, the use of competitive strategy seems reasonable (the case of Xerox copier). The innovator might use collaborative strategy if the external benefits are large relative to the internal benefits from noncollaborative strategy or else if there are severe risks from standards competition because interchangeability is required to fulfill market potential (Sony and Matsushita in the case of VCR). In the case of the Windows operating system for PC, although there was no collaboration between Microsoft and PC manufacturers (as the relation was on an arm’s length basis), the support (distribution capability) of the global PC manufacturers helped speed up the adoption of Microsoft Windows. Realising that the delivery of operating system needs the hardware (PC) to run on, Microsoft pursued a low-cost licensing strategy (an arm’s length basis) and could create a business platform. Innovators’ use of strategies is consistent with the potential of platform creation. The following implications appear to be important in managing innovations. First, the ability to establish the innovator’s own technology as standard provides a route to competitive advantage. This is because standards can help create network externality effect through compatibility. Also, standards help tie in the customers since standards allow the creation of a base of compatible users, making it difficult for any competitors to capture on an individual or niche basis. For example, a de facto standard of Microsoft Windows creates demand for subsequent Windows products. Therefore, Microsoft could effectively capture PC customers and enjoy a continuing advantage from its ability to offer further innovations. From the analysis, Microsoft Windows is a de facto standard established from Microsoft’s non-collaborative
Figure 15 The progress of innovation in the context of innovators’ strategy
Conclusions The analysis of the three case study innovations has shown that the use of strategies (whether collaborative or competitive strategy) depends on how innovators see the benefits from using particular strategies to exploit the innovation. In the case of Windows operating system for PC and plain paper copier, it can be seen that innovators
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approach whereas VHS format is a de facto standard established form Matsushita’s collaborative approach. Second, the study has shown that platforms (technology platform and/or business platform) emerge from a combination of strategies. The study also suggests that platforms need to be consistently upgraded/renewed to maintain a platform advantage. Microsoft consistently improves its technology platform and business platform by continuously upgrading its platform (e.g. purchasing/acquiring software firms whose software applications could be bundled into the Windows operating system). However, Xerox failed to maintain its technology platform and business platform, mainly because the enormous profitability of its customer base for service and consumable sales disguised the ultimate importance of customer acceptance of the technology for new sales. The difference in maintaining the competitive advantage provides useful insights in the way of managing innovation. That is, innovators must consciously employ the strategies to manage the innovation in coping with the changing competitive conditions. Third, it could be argued that technology could render competitive advantage to innovators. However, over time, the technology could be caught up by the competing technology (Xerox’s xerography in the case of Plain paper copier). The study does not agree with the study of Porter (1980) who emphasises only the use of technology towards competitive advantage. The finding has shown that competitive advantage depends on the innovator’s capability to acquire or develop particular skills or resources in order to get access to and own the customers. The findings show that although a business platform is difficult to create, it renders sustainable competitive advantage to the innovator who owns it. This is because the business platform is rather firm-specific, difficult to imitate and not quickly substitutable. The analysis also shows that although a competitive advantage is the goal innovators want to achieve, the ability to create platform(s) depends on how they could manage the innovation. Nevertheless, it does not mean that the innovator has to possess all requisite capabilities, the important thing is the ability to organise and use the capabilities of others in order to create a business platform. The empirical studies strongly support the point that an innovator who owns enough customers to allow effective operations secures a business platform and is able to dictate terms for the launch of subsequent innovations, for example, Microsoft in the case of Windows operating system for PC. These findings are in line with the concept of Hamel and Prahalad (1994) who argued that competitive advantage was a result of bundling skills and technologies (competitive advantage not
necessarily rooted only from technological capabilities). Finally, our analysis suggests some thoughts on strategic management of innovation. The management of technological innovation is increasingly involved in strategic decision making. Firms need to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage. Thus, further research in the area of technology strategy[4] by focusing on strategic decision makers as much as on technology managers will be more useful in terms of technology design (providing a better fit between IT, corporate structure and strategy).
Notes 1 The Schumpeterian competition means the industries where there are hypercompetition that can quickly erode the firm’s competitive advantage. The emphasis under the Schumpeterian hypothesis (Schumpeter, 1950) is rather on the use of technology for competition in order to reap the benefits. 2 Microsoft did not collaborate, simply licensing its operating system to the computer manufacturers via OEM sales (on an arm’s length basis). 3 The Palo Alto Research Centre (PARC) was established to support the research in copying process. Also, the research at PARC was to provide technology in personal computers, office equipment, laser printers and others, particularly from the mid 1970s onwards. This is because the sales revenue from copier business began to slow down and the management saw the necessity to move into the noncopier business (Fortune, 1983; Price Waterhouse, 1996). 4 Quinn (1986) provides a review on the issue concerning why innovation cannot be managed tidily. See also Starbuck (1993) on the limits to corporate strategy and Kay (1993) on the development of corporate strategy.
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