Introduction and background
New product development team improvisation and speed-to-market: an extended model Ali E. Ak...
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Introduction and background
New product development team improvisation and speed-to-market: an extended model Ali E. AkguÈn and Gary S. Lynn The authors Ali E. AkguÈn is a Research Fellow in School of Business Administration, Gebze Institute of Technology, Turkey. Gary S. Lynn is an Associate Professor in Wesley J. Howe School of Technology Management, Stevens Institute of Technology, Hoboken, New Jersey, USA. Keywords Teams, New product development, Time-to-market Abstract Speed-to-market is cited as being vital in today's competitive, uncertain and turbulent environments. To help companies in their quest for speed in new product development, many tools and techniques have been developed. One of the these techniques ± team improvisation ± is receiving a great deal of attention in both practice as well as theory. However, we know surprisingly little about improvisation in a new product development context. In this paper, we extend previous team improvisation models and test them in a new product development context. By studying 354 new product projects, we found that team improvisation has a positive impact on speed-to-market under turbulent markets and technology conditions, and there are some mechanisms that can facilitate a team's ability to improvise, such as team stability and teamwork. We also found that having a clear project goal will detract from a team's ability to improvise. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1460-1060.htm European Journal of Innovation Management Volume 5 . Number 3 . 2002 . pp. 117±129 # MCB UP Limited . ISSN 1460-1060 DOI 10.1108/14601060210436709
Market and technological turbulence is changing the pace and approach that companies use in their new product development efforts. Rapidly changing customer preferences, exponential technological developments and readily available information from markets and technologies are forcing organizations to develop new products, services and technologies faster. Speed in new product development has become the mantra of companies wishing to compete and win in 2000 and beyond (Cooper and Kleinschmidt, 1994; Gupta and Wilemon, 1990). Speed has become a new paradigm for innovation. Over the past five to ten years, many studies have been completed to determine what factors or practices help speed the development of new products and services (see Table I). Despite the plethora of researches completed on cycle time and new product development, there are still new techniques emerging to help teams innovate faster. One of techniques that has emerged is called ``improvisation''. Improvisation is derived from Latin ``improvisus'', meaning ``not seen ahead of time''. It is defined as planning and implementing any action simultaneously (Moorman and Miner, 1998a,b). Weick (1993) explains that improvisation is about processes and designs that are continuously reconstructed. Crossan et al. (1996) assert that improvisation is a link between planning the predictable and responding to the unpredictable simultaneously. The literature review in Moorman and Miner (1998b) demonstrates that improvisation has been studied in different environments including but not limited to music, theater, clinical therapy (Lichtenstein, 1993), teaching in classrooms (Borko and Livingston, 1989) and sports. Scholars in organizational behavior and management literature (e.g. Crossan et al., 1996; Moorman and Miner, 1998b) mention that the term ``improvisation'' has been adapted from jazz performances and applied to business because jazz bands perform in fluctuating situations and organizations perform in turbulent environments. Preston (1981, p. 82) explains that jazz is a metaphor for organizational improvisation and he states that:
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Table I Literature review on speed-to-market Author
Study
Important factors for speed-to-market
Eisenhardt (1989)
Investigated fast decision making under the uncertain environments by studying eight microcomputer firms. The study investigated rapid decision making at the corporate level, not at the NPD team level
Using real-time information, considering many alternatives simultaneously, hiring experienced counselors, employing active conflict resolution and increasing integration among decisions
Bird et al. (1990)
Investigated the impact of knowledge, experience of founders and team members, marketing and manufacturing interfaces, funding, venture capital ownership on cycle time by studying 98 new firms founded in the semiconductor industry between 1978 and 1985. They examined the impact of organizational and environmental conditions on the speed in which new organizations develop their first products
Keeping the knowledge synthesis period short, integrating manufacturing and marketing, spending less money on a monthly basis during development, considering competitors in the industry
Kessler and Chakrabarti (1996)
Developed a conceptual framework of speed-to-market; its antecedents and consequences. Their model was not empirically tested
Emphasizing `speed', clarifying goals, supporting projects by top management, increasing experience of team members, using a strong project leader, employing a product champion, using external sources, reducing design changes in project during development, forming multi-functional teams, empowering the team; employing concurrent development, using new techniques (e.g. CAD/CAM)
Mabert et al. (1992)
Compared six new product case studies at six different firms. They analyzed motivation, workings of teams, external cooperation and project control. The generalizability of this study is limited due to its case study approach
Selecting a knowledgeable team leader who can devote time to the project manage and monitor it, forming a multifunctional team and increasing top management support.
Carmel (1995)
Investigated the role of cycle-time reduction in software development by studying 15 software companies
Forming a small and cohesive core team, having a common vision, employing experienced and knowledgeable team members, keeping a stable team, using automated tools and integrating quality assurance activities into the development process
Crawford (1992)
Explained the hidden cost of accelerated product development. This was a conceptual study
Developing a clear, understood and agreed to new products strategy, reviewing progress reports, time schedules, learning from past failures, and giving decisions based on information from customers and suppliers
Cooper and Kleinschmidt (1994)
Investigated speed of new product development in 103 new product projects in the chemical industry
Using multi-functional teams, supporting projects by management, emphasizing strong leadership, developing proficiency on pre-development activities, increasing customer-focused and market-oriented efforts
Griffin (1997)
Investigated impact of product newness and complexity, formal development processes and cross-functional team usage on product development cycle time by studying 343 projects from 21 divisions of 11 companies
Reducing the complexity of products, using multi-functional teams
McDonough III and Barczak (1991)
Investigated the impact of leadership style and the source of the technologies on speed of development by studying 30 new product development projects
Developing the technology internally, emphasizing participatory leadership
Gold (1987)
Identified approaches to accelerating development based on field research
Buying, licensing or contracting, increasing rewards for successful performance, employing peer reviews of project performance, organizing internal competition in research, integrating R&D with other functions (continued)
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Table I Author
Study
Important factors for speed-to-market
Karagozoglu and Brown (1993)
Investigated methods and approaches used in 35 high technology firms to accelerate their NPD processes
Using multi-functional teams, involving customers, using computer-aided tools (e.g. PERT, QFD, CAD/CAM), benchmarking, reviewing progresses of project, increasing top management involvement, learning from past lessons
Cordero (1991)
Described conceptually a number of techniques to manage speed of product development to avoid product obsolescence
Employing concurrent product development, using flexible manufacturing techniques (JIT), incorporating cellular manufacturing, project planning, product supply process, developing product policies, avoiding new venture units and skunk works
Kessler and Chakrabarti (1999)
Investigated important factors to speed up the product development by studying 75 new product development projects at ten R&D organizations. They also investigated the critical speed factors for different types of projects, such as incremental and radical
Having a clear time goal stable team members, executing the project simultaneously, less reliance on CAD system, less time spent on testing
Millson et al. (1992)
Based on a literature review, they developed a hierarchical model for reducing development cycle time for new products
Simplifying process, eliminating delays and steps, speeding up operations, and employing parallel development process
. . . jazz is in a continual state of flux; a continual state of creation and recreation, production and reproduction, development and redevelopment. Jazz is not in a state of being but is in a continual state of becoming . . . organizations may only be precisely defined at the expense of their dynamic and continual transformation.
Even though improvisation has only recently become a management tool (Crossan et al., 1996), studies on it originated with Dewey's (1910) action learning and Maier's (1940) ``direction''. Dewey's studies focused on educational psychology and classroom settings, whereas Maier's studies focused on animal behavior and social psychology. Maier (1940, p. 54) defined improvisation as changing and integrating memories in a particular manner without being a memory itself; and Dewey (1910) explained improvisation by using an analogy of a man traveling in an unfamiliar region who comes to a fork of the road. Dewey mentions two alternatives for action, the first one is blindly and arbitrarily taking a course, trusting to luck for the outcome (e.g. improvisation or action learning) or the second is discovering a basis for the conclusion that a given road is correct. Building on Dewey's and Maier's work, Weick and Mintzberg researched improvisation at the organization level. Improvisation at the organizational level involves exploring and continuous experimenting (Perry, 1991). In this sense, as Weick (1993) notes, organizational improvisation is largely an act of
interpretation rather than an act of decision making. Similarly, Mintzberg (1994, p. 111) states that: We think in order to act, to be sure, but also in order to think. We try things, and those experiments that work converge gradually into viable pattern that becomes strategies.
Improvisation has recently been applied to new product teams that operate under turbulent environments. For instance, Eisenhardt and Tabrizi (1995) indicate that teams using an improvisation strategy can accelerate product development in highly turbulent industries, such as computers. Moorman and Miner (1998b) also found that organizational improvisation was important for new product development processes under turbulent conditions. They have identified several antecedents of improvisation such as memory, environmental turbulence and realtime information flow. However, as they noted in their future research, the following is needed: . . . a general framework of the antecedents and consequences of improvisation in new product development by using relevant industry, firm, product environments and individual team factors (Moorman and Miner, 1998, p. 14).
To that end, we extended Moorman and Miner's (1998a,b) study by adding new variables into their improvisation model and to explore the impact of improvisation on speed-to-market. The antecedent variables we use are clustered into three groups ± goals, teaming and information sharing factors.
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Hypotheses development Even though it has been asserted by prior scholars (e.g. Eisenhardt and Tabrizi, 1995) that improvisation is useful for speeding up product development activities in turbulent environments, there are conflicting findings regarding the direct effect of improvisation on speed-to-market or launching products faster. Eisenhardt and Tabrizi (1995) by studying 72 product development projects in the computer industry found that improvisation or experiential strategy is better for speeding up new product development (NPD) under turbulent conditions. However, by studying two firms, Moorman and Miner (1998b) could not find any statistical significance between team improvisation and speed-tomarket (time effectiveness) regardless of environmental turbulence. Even though conflicted findings exist, spontaneous actions or team improvisation becomes important when time is a critical competitive factor (Crossan et al., 1996). Therefore: H1. The more NPD teams improvise, the faster they will develop and launch new products under turbulent environments. Goal related factors Goal related factors demonstrate how predetermined project goals impact team improvisation. Literature on improvisation in music shows that jazz performers do not have a clear and stable goal at the beginning of a performance. Performers act based on the other team members' and audiences' tunings. For instance, Yinger (1980) and Borko and Livingston (1989) state that when a teacher improvises, he/she begins with an outline and then details are filled in during the class session. At the organizational level, Egge (1986) describes environmental situations in which salespersons need to improvise when immediate action is required in the face of changing client demands that cannot be predicted earlier. Additionally, as indicated earlier, many improvisational decisions made by theatrical groups, firefighters (Weick, 1979) and some of the crew of ships also many not be based on any previously defined clear/stable plan and goals (Moorman and Miner, 1998a,b). Similar to jazz, NPD teams under certain conditions may also not have clear and stable team improvisation goals, because
improvisational decisions are not based on previously developed goals (Weick, 1993). For example, an instant development or appearance of a substitute product may force NPD teams to change the product specifications, design or plans spontaneously. Thus there may not be clear and stable development path determined earlier in the project and goals can change during the process (Perry, 1991) while teams improvise. Therefore, we hypothesize: H2. The clearer the goals are in a NPD team, the less likely it becomes that they will improvise. H3. The more stable the goals are in a NPD team, the less likely it becomes that they will improvise. Teaming related factors Besides team goals, there are several team related factors that also influence a team's probability of improvising during a project. These factors include team stability, teamwork, team experience and management support. Team stability during jazz performance impacts team improvisation and performance. Crossan et al. (1996) note that individuals need to be familiar with one another for an effective team performance. Similarly, employee changes during the project may be detrimental for improvisation in a NPD team context. Turnover of employees can cause interruptions of operations, increased replacement and recruitment costs, scheduling problems, disruption of social and communication patterns, decreased motivation of peers etc. (Dalton and Todor, 1982). Since improvised behavior in teams requires familiarity of team members, a slower rate of employee turnover will likely have an impact on the success of team improvisation. In addition to team stability, teamwork encompassing trust and support may also increase improvised behavior. Crossan et al. (1996, p. 28) state that teamwork is important in the improvisational process, because ``jazz improvisation requires a high degree of trust and mutual respect''. Hutchins (1991) also demonstrates the positive impact of teamwork on team improvisation by the action of a crew whose navigational system had broken in order to make their way into a harbor. Based on these discussions, we can conclude that:
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changing the team members may reduce the incidence of organizational improvisation due to unfamiliarity of new members to the group norms and each other; and teamwork in NPD teams can improve team improvisation due to trust and cohesiveness.
Hence, we hypothesize that: H4. The more stable the team, the greater the likelihood that NPD teams will improvise. H5. The more team members can work collectively, the greater the likelihood that a NPD team will improvise. Experience of the team is the third teaming related factor that influences improvisation. Crossan et al. (1996), for instance, state that, ``Experience is what improvisation is all about''. Borko and Livingston (1989) mention that performance is drawn from an extensive repertoire of experience during on improvisation. They showed that experienced teachers had a greater ability to improvise in the class than novice teachers. In a similar sense, it is logical to pursue that more experienced teams will likely have a greater ability to improvise during the project due to their extensive repertoire of experience from past projects. Therefore: H6. The more experienced the team, the more likely it becomes that a NPD team will improvise. The fourth teaming related factor is management support. The jazz literature notes the impact of a conductor on team improvisation. Crossan et al. (1996) state that the conductor has a vision and works with the group to achieve it. Top management can play a role in NPD similar to the role that the conductor plays in music. Since teams consist of individuals from different ``thoughtworlds'', management could integrate different perspectives and motivate team members to make improvisational decisions. Therefore: H7. The more support given to team members by top management, the more likely it becomes that a NPD team will improvise. Information sharing factors The third cluster of factors that impacts improvisation is information related factors.
Information related factors encompass information gathering and rapid sharing of that information in a team. The jazz literature demonstrates that information flow among band players has a positive impact on successful team improvisation. Real-time information flow between the actors and the audiences can not only inform but also stimulate specific improvisational activities (Moorman and Miner, 1998b). Bastien and Hostager (1988, 1992) mention that nonverbal cues among band members make jazz improvisation smoother. Similarly, real-time information flow may help teams to improvise effectively (Eisenhardt and Tabrizi, 1995). However, real-time information flow depends on the team's ability to gather and share recent information quickly. In this sense, NPD teams should conduct daily reviews to capture recent and updated information. For instance, analyzing the previous day's meeting reports and action items, reviewing information about customers, competitors, suppliers and available technologies as well as technical reports can help to use real-time information. Similarly, Moorman and Miner (1998b, p. 6) state that, ``Team meetings in which decisions and interpretations are made and behaviors are carried out are often source of real-team information flow''. We thus hypothesize: H8. The more attention paid to daily reviews, the more likely it becomes that NPD teams will improvise. Figure 1 demonstrates our hypothesis in graphical form.
Research method Sample To test the above hypotheses, a questionnaire was developed based on previous researches (e.g. Jaworski and Kohli, 1993; Moorman and Miner, 1998b). After designing and refining the questionnaire, we selected a contact person in a variety of technology-based companies in the northeast of the USA to participate in this study. To reduce the possible problem with single sourcing, we asked the contact person to select a project manager or senior team member (respondents were product/project managers, department managers and directors who were on the project from pre-
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Figure 1 Conceptual model
prototype through launch). Lukas and Ferrell (2000) and Podsakoff and Organ (1986) found that managers rely on their own selfreports and provide reliable and objective data. Huber and Power (1985) note that a single source is more reliable and accurate that averaging multi-sources. After the respondents were selected, each was informed that their responses would remain anonymous and their responses would not be linked to their companies or products. This increased the motivation of informants to cooperate without fear of reprisals (Huber and Power, 1985). Of the 428 people asked to participate, 354 agreed and completed a questionnaire (an 83 per cent response rate). Several industries were represented that included: telecommunications, computer and electronics, fabricated metal products, information services, pharmaceuticals, chemical manufacturing, food manufacturing and machinery manufacturing. The measures To operationalize the constructs, a Likert measurement scale of 0 to 10 was used (0 strongly disagree to 10 strongly agree). Question items that survived after the exploratory factor analysis are shown in the Appendix. A brief summary of the measures included the following: . Speed-to-market. We asked four question items to operationalize speed-to-market ± the ability of a team to develop and launch a new product rapidly (Kessler and Chakrabarti, 1999). Since we used a
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multi-company and multi-industry sample, we tried to control for speed-tomarket differences in the nature of projects by using relative speed measures. The approach and item content we used were similar to that of Kessler and Chakrabarti (1999) to measure speed-tomarket. Speed-to-market was assessed by comparing actual performance to pre-set schedules, company standards and similar competitive projects. All speed items loaded on one factor and their mean was used as our speed-to-market variable (see Appendix). Team improvisation. We asked three questions to operationalize team improvisation. Items were adapted from Moorman and Miner (1998b). All items loaded onto one factor related to improvisation and the mean of these items was used as the team improvisation variable. Goal clarity. Goal clarity was operationalized by asking six questions including if the team had a clear vision of the required product features, target market, customers' needs and wants, technical requirements and sales volumes. The items used to measure goal clarity were adapted from Larson and LaFasto (1989). After an exploratory factor analysis, three items loaded onto one variable and the mean of these items was used as goal clarity. Goal stability. Goal stability was measured by asking seven questions including if team had a stable design, if technical and
New product development team improvisation and speed-to-market
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production goals were stable from preprototype through launch etc., adapted from Lynn (1998). Four of these items showed high inter-correlation and their mean were used as our measure of goal stability measure. Team stability. Having a stable new product team implies that team members who begin a project remain on it through ``completion''. However, since precise beginning and ending dates are difficult to determine in NPD, we defined a highly stable team as one where core team members and managers remained on the project from pre-prototype through launch. Team stability was measured by asking four questions. These question items are new. All four items loaded on one factor with eigenvalues greater than one. The average of these items was used a measure for team stability. Management support. For management support, nine questions adapted from Lynn (1998) were asked. After performing an exploratory factor analysis, we deleted the items with low factor loadings or eigenvalue less than one. This resulted in five items being used for management support. The mean of these items was then used as the management support measure. Teamwork. Teamwork was measured by asking 11 question. These question items are adapted from Dominic (1998). After performing a factor analysis, all items exhibited high inter-correlation and the mean of all items were used as our teamwork variable. Team experience. We asked five questions to measure team experience. These items are new. Three of the items showed high inter-correlation and we used the mean of these items as our team experience variable. Daily review. We used two questions to assess daily review ± if the core team held daily meetings to discuss the status of the project throughout this project. These items were derived from Iansiti (1995). Environmental turbulence. We asked five questions to measure environmental turbulence. We used the items developed by Jaworski and Kohli (1993). An exploratory factor analysis revealed two factors: market and technological turbulence. This finding was consistent
with Jaworski and Kohli (1993). The mean of these items used as our market and technology turbulence variable. For high and low turbulence, we used median split. Measure reliability and validity Before doing any further analysis, the reliability and validity of construct items were tested. The diagonal of Table II includes Cronbach's alpha for each construct. Alpha coefficients of all 11 constructs are equal to or greater than 0.65, which indicates good reliability as suggested by Nunally (1978). We performed a confirmatory factor analysis (CFA) by using EQS 5.7 (Bentler, 1995) to assess the discriminant validity for the 11 measured variables recommended by Anderson and Gerbing (1988) and Bagozzi et al. (1991). A series of two-factor models were estimated in which individual factor correlations, one at a time, were restricted to unity. The fit of the restricted model was compared with that of the original model. In total we performed 110 models ± 220 pairs of comparison. And chi-square change ( 2 ) in each model by constrained and unconstrained were significant at p 0:05 level which suggests that constructs exhibit discriminant validity. The measures were subjected to further to CFA through EQS 5.7 (Bentler, 1995). All 11 factors were investigated in one CFA model. During the CFA analysis we used subscales for a CFA instead of individual items as recommended by Drasgow and Kanfer (1985), Schmit and Ryan (1993) and Schmit et al. (1995). These researchers noted that goodness-of-fit measures are affected when the number of items used to identify a small number of factors is relatively large. Consistent with this approach, two subscores for each scale were created, each consisting of a randomly divided subset of the items in the scale. The CFA produced a good fit with a normed fit index of 0.95 and a comparative fit index of 0.98. Table II also shows the correlation among all nine variables. The relatively low to moderate correlations provide further evidence of discriminant validity.
Results After validating our measures, a data screening procedure was performed as
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Table II Correlation matrix and descriptive statistics
1 2 3 4 5 6 7 8 9 10 11
Speed-to-market Team improvisation Goal clarity Goal stability Teamwork Team stability Team experience Management support Daily reviews Technology turbulence Market turbulence
Mean Std dev. Skewness Kurtosis
1
2
3
4
5
6
7
8
9
10
11
(0.88) 0.11** 0.39* 0.34* 0.49* 0.44* 0.32* 0.36* 0.18* 0.07 ±0.12
(0.80) ±0.04 ±0.02 0.13** 0.17* ±0.03 0.11** 0.1 0.19* 0.14*
(0.79) 0.45* 0.51* 0.29* 0.33* 0.40* 0.14** ±0.12** ±0.13**
(0.92) 0.41* 0.33* 0.27* 0.33* 0.08 ±0.06 ±0.12**
(0.96) 0.44* 0.28* 0.48* 0.17** 0.007 ±0.033
(0.84) 0.22* 0.27* 0.09 ±0.009 ±0.02
(0.77) 0.24* 0.20* ±0.08 ±0.15*
(0.88) 0.17* 0.14* 0.04
(0.94) 0.11** 0.01
(0.85) 0.33**
(0.67)
6.04 2.53 ±0.46 ±0.32
5.16 2.47 ±0.22 ±0.63
7.53 2 ±0.94 0.68
6.68 2.27 ±0.74 0.24
7.76 1.66 ±1.04 1.09
6.77 2.75 ±0.84 ±0.14
7.03 2.05 ±0.59 ±0.005
6.99 2.27 ±0.89 0.35
3.44 3.01 0.57 ±0.79
5.72 2.73 ±0.38 ±0.71
5.35 2.43 ±0.29 ±0.37
Notes: *p < 0.01, **p < 0.05 (two-tailed) Alpha coefficients are shown in parentheses on diagonal
suggested by Tabachnick and Fidel (1996). A frequency analysis was used to detect univariate and multivariate outliers. No outliers were found. Skeweness and Kurtosis of each variable were approximately zero, except for teamwork. We then normalized that variable and used the normalized score for our analysis. To assess the impact of team improvisation on speed-to-market under turbulent conditions, we ran two regression models shown in Table III. We found that for the turbulent markets and technologies, improvisation is positively associated with speed-to-market. Thus H1 is supported. Regarding the antecedents of team improvisation (see Table IV), we found that goal clarity has negative impact on team improvisation, supporting H2. We also found that team stability and teamwork were significantly positively associated with team improvisation: supporting H4 and H5. However, goal stability (H3), team experience (H6), management support (H7) and daily reviews (H8) were not significant. Thus H3, H6, H7 and H8 were not supported.
Discussion This study has attempted to add to the emerging scholarship on speed and knowledge management. We have argued that improvisation can help a team in reducing
cycle time especially in turbulent environments. Our results demonstrate that team improvisation has a positive impact on speedto-market under turbulent markets and technologies. When customer wants and needs or the technologies in the industry Table III Impact of improvisation on speed-to-market under the turbulent environments Speed-to-market Technology turbulence Market turbulence Low High Low High Team improvisation F R2
±0.09 0.84 0
0.25 11.82 0.07
±0.05 0.28 0
0.21 9.76 0.04
Notes: Speed-to-market is dependent variable. Improvisation is independent variable p < 0.01 Table IV Results of the model Constructs Goal clarity Goal stability Team stability Teamwork Team experience Management support Daily reviews
Hypothesis
Beta
H2 H3 H4 H5 H6 H7 H8
±0.14* ±0.08 0.17** 0.14* ±0.07 0.08 0.09
Notes: Dependent variable is team improvisation. Teamwork is normalized F (df)= 3.84** (7.35), R2 = 0.05 *p < 0.05, **p < 0.01
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change rapidly, teams may want to strive for a flexible NPD process versus following a rigid well-defined plan. This finding shows that, sudden changes can trigger teams to improvise and to understand the current situation, which may impact future team decisions during the product development process (Weick, 1993). However, the exploratory power of team improvisation on speed-to-market is relatively small. Only 7 per cent variation in speed-to-market is explained by team improvisation when there is market turbulence and 4 per cent variation in speedto-market is explained by team improvisation when there is technical turbulence. This finding indicates that team improvisation may have influence on facilitating factors of speedto-market, such as speed learning, rapid prototyping and probing and learning (Lynn, 1998). Given that improvisation is a significant technique for speed in this study, we also explored antecedents of team improvisation. We found that having a clear project goal is negatively associated with team improvisation, a finding consistent with previous research on improvisation (Hutchins, 1991). Under rapidly changing conditions, the importance of pre-determined product features, target market (user), target customers' needs and wants, and technical goals diminish quickly. As Aaker (1998) notes under rapidly changing environments, having a ``dynamic goal'' ± a broad set of goals ± rather than a few targets influences the outcome of a project. In this sense, for effective team improvisation, there should be less-certain project goals. We also found that for a team to effectively improvise, team turnover should be kept to a minimum. This finding is consistent with scholarship on jazz literature. However, the organizational and team member turnover scholarship demonstrate that team instability has a greater impact on team effectiveness under turbulent conditions. For instance, Muchinsky and Morrow (1980) state that bringing new ideas and blood can encourage organizations to be more adaptable to environmental pressures. Lant et al. (1992) found that turnover (i.e. CEO) increased the likelihood of strategic reorientation of an organization in highly turbulent and uncertain environments. However, past scholarship tested relations between team turnover and team performance in different groups, not in
NPD teams. Additionally, there were no studies testing the relationship between team turnover and team improvisation in NPD teams. The rational for this might be that when team members leave and/or fired from the team during the project, a large amount of knowledge can be lost. Since team improvisation is not based on previously recorded plans or actions, group memory during the project is reduced. In this sense, team memory during improvisation is what Wegner (1987) called ``transactive memory'' which is using people as a memory aid. Thus any personal loss in the team can damage team improvisation by the knowledge deprivation and/or loss of its memory aid. In addition to team stability, we also found that teamwork impacts team improvisation. This finding is consistent with previous scholarship (Crossan et al., 1996). For effective team improvisation, team members may want to consider the following: . acknowledge conflict and work to resolve issues in the team; . help others in the team by sharing knowledge and information; . encourage diverse perspectives and differing points of view from others in the team; . demonstrate interest and enthusiasm during team activities; . acknowledge the contributions made by others in the team; . try to work together toward a unified goal; . share information (technical, market, etc.) freely with others in the team; and . consider other people's feelings. However, we did not find that goal stability was significant for effective team improvisation. The reason for this finding may be the correlation between goal stability and goal clarity. We found a high correlation between goal clarity and stability indicating that unstable goals may indirectly impact team improvisation. When team has a clear understanding of the project goals, it will be more likely to stick to these pre-determined goals, resulting in fewer goal changes during the project. This can be good and bad. Under stable environments, teams may not want or need to change its goals, but under highly turbulent environments, it may be unrealistic for a team to be able to accurately predict its goals at the beginning of a project.
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Contrary to our expectations, we did not find that the information related factors i.e. daily reviews, were significant for team improvisation. These findings are consistent with Moorman and Miner's (1998b). Daily reviews of the project reports and team meetings may hinder team improvisation because these frequent reviews can help to create and clarify the team's goals and plans. Interestingly, we did not find a positive association between team experience and team improvisation. This finding is in contrast to the observation from the jazz literature. The reason for this may be how we operationalized team experience. We measured team experience as team members' knowledge about past projects. However, under turbulent conditions, many facts about a project evolve so rapidly that past learnings can become obsolete quickly. In this sense, the experience repertoire of team members may not impact team improvisation, we believe experience may even hinder a team's ability to improvise. Finally, we did not find a positive association between management support and team improvisation. The rational for this result may be twofold. First, we operationalized management support as moral support of team members. Second, management support may be important at the beginning phases of project, however, it may lose its impact as a project evolves. The jazz literature demonstrates that the group conductor leads the band at the early stage of jamming, however, at the later stage of the performance, leadership merges within the group (Bastien and Hostager, 1988, 1992). In this sense, management support may be particularly important at the initial phase of the project for team improvisation.
Conclusions This paper makes two contributions to our current knowledge of improvisation in NPD teams. First we extend the previous framework on improvisation by adapting constructs from the jazz literature. Second, we tested the direct impact of team improvisation on speed-to-market. We found that improvisation can help the ability of teams to produce and launch new products rapidly (speed-to-market). Third, we found that having less-clear project goals, a stable
team and team members who can work collectively, trust each other and support each other are factors more likely to facilitate improvisation.
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Appendix ± measures
.
We used Likert scale (0 strongly disagree to 10 strongly agree).
.
.
Speed-to-market This project: . Was developed and launched faster than the major competitor for a similar product. . Was completed in less time than what was considered normal and customary for our industry. . Was launched on or ahead of the original schedule developed at initial project goahead. . Top management was pleased with the time it took us from specs to full commercialization. Team improvisation The team figured out the new product development process as it went along vs following a rigid well-defined plan. . The team improvised in developing this product vs strictly following the plan. . The team improvised in commercializing this product vs strictly following the plan. .
Goals Goal clarity . The team had a clear vision of the target market (user). . The team had a clear understanding of target customers' needs and wants. . The overall business goals were clear. Goal stability The pre-prototype design goals remained stable through launch. . The pre-prototype technical goals remained stable through launch. . The pre-prototype vision of this project remained stable through launch. . The design goals remained stable from pre-prototype through launch. .
Teaming Teamwork . Team members acknowledged conflict and worked to resolve issues on the team. . Team members helped others in the team by sharing knowledge and information. . Team members encouraged diverse perspectives and differing points of view from others in the team.
.
.
.
. .
Team members demonstrated interest and enthusiasm during team activities. Team members acknowledged the contributions made by others in the team. Team members were working together toward a unified goal. Team members would freely share information (technical, market, etc.) with others in the team. Overall, team members were very trustworthy. Team members were usually considerate of one another's feelings. People in the team were friendly. I could rely on those with whom I worked in the team.
Team stability The project manager who started this project remained on it from pre-prototype through launch. . Department managers who were in the team remained on it from pre-prototype through launch. . Team members who were in the team remained on it from pre-prototype through launch. . I [the respondent] was on this project from pre-prototype through launch. .
Team experience There was a critical mass of experienced people on the team who had developed and launched similar products before. . People in the team brought with them a wealth of information gained from prior assignments within this company. . Department managers in this team (engineering, manufacturing, marketing, etc.) had previously worked on similar products within the company. .
Management support Overall, most senior company executives supported the vision of this project. . An executive champion/sponsor existed on this project. . During team meetings, senior company management, if present, frequently made encouraging vs discouraging remarks. . When the team members asked for help from senior company management, they received it. . Overall, senior company management helped surmount rather than create obstacles for this project. .
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Information sharing Daily review . Throughout this project, the core team held daily meeting to discuss the status of the project. . From concept to prototype, the core team held daily meeting to discuss the status of the project. Moderators Technology turbulence . The technology in the industry was changing rapidly.
.
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A large number of new product ideas have been made possible through technological breakthroughs in the industry. Technological changes provided big opportunities in the industry.
Market turbulence This product had to be sold to people or organizations outside our company's traditional customer base. . This product needed to be sold through unfamiliar channels of distribution. .
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Emerging e-commerce business models: an analysis of case studies from West Lothian, Scotland Tony Kinder
The author Tony Kinder is a Researcher, Department of Business Studies, University of Edinburgh, UK. Keywords Sociotechnics, Internet, Business strategy, Models Abstract The paper surveys existing theory of e-commerce business models and associated conceptual instruments. It employs three original case studies of SMEs using e-commerce to demonstrate the dynamic nature of e-commerce business models for networked SMEs. The idea of evolutionary business planning based upon Molina's sociotechnical constituency approach and the diamond of alignment is introduced. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 5 . Number 3 . 2002 . pp. 130±151 # MCB UP Limited . ISSN 1460-1060 DOI 10.1108/14601060210436718
Introduction E-commerce has entered the realm of buzzwords associated with major industrial and business upheavals. ``Businesses will be e-commerce, or no business at all'', said Tony Blair in a memorable speech aimed to enthuse or scare the business world to pay attention and join the fray of e-commerce. Many have indeed joined the fray, before and after Blair's speech, in pursuit of the new Klondike. Stories of success and failures abound in the press and an entire body of information, experience and knowledge has been building up on e-commerce in recent times. This paper builds on this body and has three objectives: (1) conduct a selected conceptual review of e-commerce issues and models; (2) propose a framework useful for understanding and informing the strategic development of e-commerce experiences; and (3) apply this framework to the experiences of three e-commerce start-ups, with the aim of the processes and lessons of how this is being made to happen. With this in mind, the second section of the paper reviews and discusses various concepts related to e-commerce models. It proposes first a definition of e-commerce, identifying as critical ingredients, on the one hand, the processes of search, assessment and transaction and, on the other, the factors of interactivity, connectivity and agility. Agility in particular is seen as critical to the dynamic learning processes involved in the current early phase of e-commerce evolution. The section also discusses the business concepts of intermediation, reintermediation, virtual supply chains and Internet communities. The third section introduces Molina's sociotechnical constituency approach and diamond of alignment as a conceptual framework to make sense and inform processes of e-commerce innovation and development. This paper results from the EU funded BuKs project, which supported the adoption of ecommerce by SMEs in West Lothian. I gratefully acknowledge the support of West Lothian Council Business Centre, my colleagues in the project Mark Winskell and Alfonso Molina for commenting upon earlier draft of this paper and the useful comments of the reviewers.
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A fourth section presents three original case studies of successful SME e-commerce businesses from West Lothian, Scotland. This section analyses the business models of these case studies showing the processes by which these have evolved and providing a framework that captures networked e-commerce SMEs' business models. A fifth section comes back to the ``sociotechnical constituencies'' approach in an effort to integrate it with the concept and ingredients of business plan. The combination, it is argued, lays the foundations for a dynamic approach to business models for networked SMEs using e-commerce. This approach is termed evolutionary business planning. A final section draws conclusions for the theory of e-commerce business models.
Selected review of e-commerce business models For almost 25 years banks and credit card providers have used electronic data interchange as a means to settle exchange balances between organisations. Later, lowgrade interactive e-commerce kiosks (travel tickets, telephones) became generalised. The recent boom in e-commerce is Internet related and differs from earlier systems by the extent of its connectivity and richness of its interactivity. Like all networks, offering positive externalities, the smartness and usefulness of Internet technology grows as the network flourishes. Table 1 summarises the
current growth rate and commercial significance of the Internet. Defining e-commerce We define e-commerce as commercially purposive systems or processes of search, assessment and transactions, including posttransaction interactions, enabled and supported by information and communications technologies. In a variety of shapes and ratios, e-commerce features physical and virtual constituents and its lifeblood are the communities of customers and suppliers interconnected and interacting to constitute markets and supply-demand chains within that network. This identifies connectivity and interactivity as fundamental features of e-commerce and, as we shall see, this paper will also identify agility as a third fundamental feature for e-commerce success. These characteristics are examined in detail below. Before, however, it is worth noting that e-commerce can involve interactions within and between at least three sets of parties: private business (B); public administrations (PA); and consumers/citizens (C). Table II shows a classification of these types of interactions. Note that the sequencing within titles is not important, thus public administration to private business (PA2B) equally represents B2PA. Already the PA title is dated since it represents publicly funded notfor-profit service traders. Since 20 per cent of new employment in Europe is now in the important third (or voluntary) sector, the PA category may require some re-designation.
Table I The current growth rate and commercial significance of the Internet Key facts
Details
Globally 163.25 million people use the Internet
Of this 1.14 are from Africa, 26.55 Asia/Pacific, 36.11 Europe, 0.78 the Middle East, 94.2 North America and 4.5 million South America
In the US 32% of users have a household income of below Euro70,000
32% of users have an income above $75,000 (compared to 17.4% of the whole population)
Internet user penetration in Europe varies in a north-south divide
In the larger northern and more affluent countries user rates are Germany (3.39%), Italy (1.26%), UK (5.13%) France (0.5%), The Netherlands (4.26%), and Belgium (2.29%). The Scandinavian countries and Ireland enjoy a higher diffusion rate. Detailed surveys of Internet and e-commerce are carried out regularly in Ireland. aOver-all adoption of Internet use at home is increasing by 12% per annum in Europe
Notes: a A survey (http://www.iia.i.e./new), by the Irish Internet Association found the average age of Internet users to be 35, 75 per cent men, equally married or single, 60 per cent without children, 39 per cent with degrees, 65 per cent in computer/professional/education occupations, 57 per cent using Explorer and 36 per cent Netscape, 73 per cent MS Windows, 45 per cent accessing commercial information ``a few or several'' times a week, 29 per cent having made Internet purchases.
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Table II Spectrum of e-commerce business transactions B2B
B2C
B2PA
PA2PA
PA2C
C2C
Business to business
Business to customers
Business to public administration
Public administration to public administration
Public administration to customers/citizens
Direct exchange between consumers
Growth area, currently 75 per cent of value of Internet e-commerce
Mainly '`buy'', some '`barter''. Powerful for information and difficult search/ assessment products
Public tendering via e-commerce, also paying for and accessing PA services to business
Joined-upgovernment agenda. Also important in holistic and integrated ICT-innovation planning
E-commerce, e-services and teledemocracy
Consumer initiated buys, bids and barters with other consumers. Often 25 per cent commission
Search, assessment and transaction ± decomposing e-commerce exchange Commercial activities revolve around exchange, which may be decomposed into three elements: search, assessment and transaction (SAT). This is also valid for e-commerce. In Kinder (2000a) this approach is used to analyse Internet-based recruitment. Search, the purposive prospecting around options meeting an effective demand, involves collecting, (at a cost), by current or previous study, available options, their costs and consequences. Doing this in a virtual market-space, as opposed to a physical market-place may prove faster and less expensive for customers. A second element of exchange is assessment: making a judgement on information and options and their consequences. As Veblen (1953) established, assessment is often socially patterned into bounded sociocognitive effort. Exchange processes are concluded by a transaction: a mutual interchange of values resulting in a change of ownership or use and any after-care service, usually this entails a monetary transfer and may be synchronous with or before search and assessment. Each element of the exchange process contains at least one decision node for the purchaser. This approach is similar to the reach, richness and affiliation process developed by Evans and Wurster (1999). The SAT decomposition of exchange is from a userperspective focusing upon the exchange rather than the person or organisations participating in it. A similar approach to SAT is taken in the Web site assessments conducted at http://businessmedia.org. Table III summarises how the SAT elements of an e-commerce exchange differ from off-line physical exchanges. Decomposing exchange
into elements can not only assists detailed analysis of business processes, this approach also highlights the significance of the Internet's connectivity and interactivity for e-commerce business models. Figure 1 represents a simple Internet-based e-tail e-commerce business. Like any business, its sustainability depends upon income exceeding costs. The main costs under search are site construction, upkeep and marketing; for assessment and transaction, the main costs are the product/ service, distribution, administration and support (such as call centre). Some income may be made from advertising (typically very little) and commission for clickthroughs, however, the main income is from sales and after-sales services. The sticky site is well-designed, easily navigable and directs visitors towards making a purchase (it inspires confidence in security and privacy). Conversion ratios vary with product and customer base. By way of illustration, using Figure 1, if one in ten hits register, and one in ten of these make a purchase, then 1 in a 100 hits conclude a transaction. Important dynamics in Internet-based e-commerce e-tail businesses are therefore attracting hits (search), keeping interest (assessment) and concluding sales (transaction). This is, of course, little different from many off-line businesses and supports the view of some authors that e-commerce models are little different from conventional business models (Treleaven, 2000). On the other hand, others believe that all business models are now affected by e-commerce (DTI, 2000). The two views may be more complementary than contradictory, as new and established organisations must take account of business developments associated with e-commerce,
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Table III Showing how e-commerce exchange potentially differs from off-line exchange in search, assessment and transaction elements Search
Assessment
Transaction
Wider Deeper More thorough Less expensive Less time consuming Segmentation of markets and focus of searches
Wider benchmarks Less expensive Supports cognition Less time consuming Degree of interactivity available during assessment
Speedier Less expensive Audit trail of transaction Use of Net community Accuracy of digital information and payment transmissions Irrelevance of distance
Figure 1 Showing the importance of site ``stickiness'', conversion ratios and click-throughs
such as those of intermediation/ reintermediation, virtual supply chains and Internet communities (discussed below). Interactivity, connectivity and agility As anticipated in the definition of e-commerce, e-commerce businesses each have the three dimensions shown in Table IV. The three variables (interactivity, connectivity and agility) have each appeared many times in e-commerce theory. Interactivity here refers to virtual and physical and the relation between them (the ``click-and-brick'' balance). The emphasis here is upon functional integration i.e. qualitative deployment of knowledge, rather than simply the multiplication of functions. Finally, interactivity here is purposive and not an end to itself. Complex knowledge embodied within hidden computers may, for commercial purpose, produce as rich an interaction as a learned e-forum discourse.
Just-in-time (JIT) processes were powerful within manufacturing plants; however, their potential was unleashed when interorganisational relations were driven by JIT. The same is with connectivity. Defragmentation of functions previously separated by organisational boundaries is the simplest way to re-intermediate value streams. Note that connectivity too is purposive. Breadth of connectivity is not intrinsically of value; breadth of connectivity, which mines a profitable seam in a propitious value stream, is significant. Connectivity is both technical and social; it entails both communications linkages and knowledge networking via inter-organisational links. Nagel and Dove (1992) have used the term agile enterprises to mean a firm with longterm inter-organisational relationships from which they learn in addition to learning from environmental scanning. Here the term also
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Table IV Methodological dimensions of e-commerce Interactivity
Connectivity
Agility
Definition
Interdependent mutually agreed actions in pursuit of a common goal ± the richness and depth of shared mutual advantageous actions
Technological and organisational openness and communications ± the breadth of effective technological and social networking
To learn from and contribute to knowledge networks and to speedily implement the organisational and technological results
Description
Effective interactivity results in deeply integrated business processes featuring rich knowledge flows
Connectivity relevant and appropriate to fulfilment of business strategy i.e. ability to exploit targeted value stream mediation
Flexible, adaptable and risk taking in order to secure the advantages of early adoption of new technologies and ways of working
Operational parameters
Efficient and speedy search, assessment and transaction ± purposive deployment of relevant knowledge
Enables and supports search, assessment and transaction with social and technological communications and interaction
Responsiveness to market and technology changes in order for product and processes (especially SAT) to remain aligned
Qualitative degrees
Trade-off between depth of knowledge interaction and numbers of people participating in the interactions
More focused in B2B and PA2B than B2C or PA2C ± social and technology conduits between inside business and its constituency
Degree to which innovativeness is within the time/space which aligns and satisfies inter and intra-organisational players
means having the absorptive capacity and/or knowledge generating ability to resourcefully participate in knowledge networks. Critically, the term means the capability and desire to continually innovate organisational or technological change in order to remain aligned with unfolding business opportunities. Agility is knowledge and action, agilmente. Figure 2 represents these three variables constituting a framework of e-commerce modelling in a three dimensional quadrant. Degrees of high and low interactivity and connectivity correlate with degrees of agility. Unlike many models which suggest simplistic typologies and pre-determined actions to achieve each, Figure 2 shows the variants of high/low interactivity and high/low connectivity crossing over quadrant boundaries. There are two reasons for this. First, such is the pace of market, organisational and technological change in e-commerce it would be wrong to suggest anything but the most dynamic model: reconfiguration and change are part of the life experience of successful e-commerce companies. Second, there is no ``stable
equilibrium'' here. Even with a particular time-frame, poor interactivity and connectivity (for example) may be overcome where agility (for example) is exceptionally good. As Jim Lieshman, the Manager of Livingston Football Club is fond of saying, ``often hard work beats talent''. The successful e-commerce networked SME is then continually realigning ensemble of social and technological capabilities and competencies, a prospect far removed from traditional conceptualised internal and external relations and structures. Business developments in e-commerce Combining the insights of mediation analysis with patterns of marketing interaction (one to many, many to one and so on), Timmers (1998) proposes the structure of 11 generic e-commerce business models shown in Figure 3, and plotted against the variable of functional integration and degree of innovation. Timmer's work was based upon empirical data available in the early adoption phases of e-commerce. Although the issue of degrees of innovation seems too lineal, Timmers' methodology remains useful and
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Figure 2 Connectivity, interactivity and agility in e-commerce models
Figure 3 Timmers' (1998) 11 generic e-commerce business models
the current paper builds upon his initial contribution. Our argument is that models of e-commerce are now more crystallised than when Timmers proposed his multiple and integrated functions and degree of innovativeness quadrant methodology. For example, it appears that use of buy, bid or barter are (mainly) tactical rather than strategic decisions, and that B2B and PA2C are likely to yield greater value in the shortterm than B2C. In the following, we review
some of the business developments associated with e-commerce, in particular, intermediation/re-intermediation, virtual supply chains and Internet communities. Intermediation Just as it was the ``white space'' gaps in the old hierarchic diagrams that were most revealing, so it is the relationships between businesses, which disclose most about business models. For some time economists (Kamien and Schwartz, 1982; Fein 1998) have understood 135
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how particular technologies and power relationships give rise to particular structures of industries. Less understood has been why and in what direction these structures alter. ``User'' perspectives laid the foundation for answering these questions. Work by von Hippel (1988) and Fleck (1996) closely aligned with analyses of supplier-producer relational partnering (Rackham et al., 1996) illustrate how particular patterns of innovation and particular technologies introduce realignments which result in new industrial structures. Hammer and Champy's (1993) work on business process reengineering (BPR) called attention to the value-adding opportunities of de-fragmenting industrial processes. Both Kodama (1992) in general terms, followed by Gates (1999) more specifically, migrated the BPR approach to an understanding of changed relationships between proprietors of technological knowledge, particularly as a result of information and communications technologies (ICTs) being deployed. The notion of intermediation, and its sub-sets disintermediation and re-intermediation, are now frequently used concepts in analysing the changing structures of value streams ± an approach highlighted by Hagel and Singer (1999) and popularised in management media (for example, Business Week, 2000). Figure 4 illustrates in the light dotted line a traditionally sequenced value stream in which components via sub-assemblers and manufacturers are distributed and retailed before reaching the consumer. Arrowed lines connecting manufacturers and distributors directly to consumers, without the mediation of retailers represent disintermediation. The darker dotted line (manufacturer to e-tailer and e-tailer to consumer) illustrate new points of mediation: re-intermediation. In Figure 4, this new mediation point (shown as a grey box) is an e-commerce Web site. This may be the site of a particular e-tailer, an aggregator who gathers and hosts B2C offers, or a portal site offering click-through to the e-tailer's offer site. Most value streams are subject to dis-(re)intermediation via new distribution and sales channels. The difference that e-commerce makes is that without physical proximity between buyer and seller products can be found, assessed and the transaction completed. For this reason, e-commerce may enable the speedy and inexpensive
restructuring of mediation patterns. Note in the block-arrows at the top and bottom of Figure 4 how value shift from being manufacturer-centred in physical supply towards being consumer and their point of sale centred with e-commerce. Virtual supply chains The rapid growth in e-commerce by volume and value has been, and is predicted to be, B2B usage. Decomposing the e-commerce exchange into search, assessment and transaction elements (categories returned to below), Table V gives the reasons why B2B e-commerce has grown faster than the other categories mentioned above in Table II. From the discussion on intermediation, it is clear that the value contained in supply chains may be redistributed as a result of using e-commerce. Further, e-commerce may result in enhanced delivery speed (US Express) and lower prices (electronic competitive bidding which can (BT example) reduce supply costs by 10 per cent. (See The Economist, 2000a, p. 78, which gives the example of Dell's customised ordering and flexible scheduling). In addition, e-commerce may open new markets for information goods and digital distribution channels (see Shapiro and Varian, 1999). In addition, like any technological innovation, there are intended and unintended effects of e-commerce on knowledge flows. On the positive side knowledge flows in e-commerce driven supply chains may increase. Virtual integration may help overcome the well-known barriers to knowledge flows found in vertically integrated companies. Coupled with ICTs, e-commerce supports the alignment of knowledge and its shared use by organisations. Outsourcing increases knowledge flows where the benefits from imported competencies exceeds search and monitoring costs and the spillover effect into improved absorptive capacity deriving from in-house knowledge sources. Coupled with ICTs, e-commerce may support the devolution of power within organisations and knowledge transfer, socialisation, cumulation and generation. Alternatively, where the goal of managing inter-organisational dependency is limited to cost minimisation (so-called lean supply), particular were associated with trust reducing strategies such as competitive sourcing, e-commerce could help reduce supply chain knowledge flows. This may be
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Figure 4 Mediation, disintermediation and re-intermediation
particularly so where critical elements of knowledge remain tacit and are not subject to easy digital transference. In summary, e-commerce has the potential to increase knowledge flows within B2B or B2PA supply chains; however, these flows could be reduced where the technology replaces relationships.
B2C and PA2C supply chains gather important marketing knowledge on the main effect of e-commerce on these supply chains. Specialist e-tailing is moving into niche segments (art dealers, collectors) in which search speed and cost, information retrieval and assessment and credit-based transaction
Table V Reasons why B2B/PA2B may be more significant than B2C/PA2C categorised by the three elements of a completed exchange Search
Organisations, generally have computers, and face less entry costs to e-commerce than individuals Large organisations are able to dictate the use exchange techniques Transaction speed is likely to be more important to organisations
Assessment
Organisations have patterns of buying/selling behaviour. These patterns engender trust over payment, delivery times and quality assurance Order-tracking costs are reduced where real-time information is available on the Internet; these can be more significant for organisations than individuals Particularly organisations operating in global markets Just-in-time reduces the costs of stock holding. E-commerce can increase these savings where it enables single-sourcing to replace multiple-sourcing
Transaction
Organisations' volumes are larger than those of individuals making minor percentage savings of greater monetary significance Significant savings may accrue to organisations avoiding tax or the disbenefits of currency fluctuations by purchasing/selling using the Internet Transaction cost savings for organisations are greater than for individuals especially where auctions are used
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completion are important. Physical retailing uses a hold and sell supply chain architecture whereas commodity product e-tailers (CDNow, Amazon) held no stock, preferring to ``pick-and-pack'' using intermediary or manufacturer stocks. Often early e-tail commodity product vendors preferred this approach which reverses the traditional buysell stock holding model in favour of a sellbuy-fulfil approach in which no stock is held. This is possible either because their product is an intangible service (travel, tourism, banking), because it is digital and immediately reproducible at little cost (music, information, money). Stocks of goods were held for these early e-tailers, and the costs of stock hold borne by outsourced distributors who welcomed a high volume of business for low-margin products. PC e-tailers (Dell) had the alternative approach of holding (or locating in proximate satellite stores at supplier expense) sufficient stock to meet customised orders readily, whilst other stock was pulled as a result of orders. Physical ``aggregators'' of commodity products (such as clothing and food) offer a single source of a diverse range of products necessitating the holding of stock to service their physical and virtual sales channels and distribution to the customers of each. Thus ``click-and-brick'' models merge physical and virtual product offers. A major issue for e-tailers is ascertaining the optimum mix between the ``click'' and the ``brick'' from the viewpoint of minimising the costs of stock holding[1]. Internet communities Communities in everyday parlance are bonded groups sharing a common goal (``how we see ourselves'') and a common perspective of non-members (``how we would like others to see us''). These common goals often beget solidarity going far beyond instrumental association. Armstrong and Hagel (1996) argue that communities can empower consumers vis-aÁ-vis sellers by generating criticism, whilst at the same time online communities are an opportunity to exploit brand loyalty[2]. Communities include informal communities that may give rise to product recommendations, sites offering some added value to visitors who clickthrough to sales sites or e-tailer's sites, which over time have generated trust from a community of users. Building an online community of shoppers may be easier when,
as the physical products hold symbolic significance (see Bocock, 1993), where customers are captive (bank), where an attractive and information-rich site engenders ``stickiness''[3], or where the site facilitates search and assessment of complex or overloaded information (tourism, travel). Authors such as Alstyne (1997) express concern that physical communities (including trading communities) may be broken down as a result of atomised living in cyberspace. Rayport and Sviokla (1995) interpret the same trends as positive for e-commerce arguing that new trading communities develop characterised by virtual value chains. Work by Klein (1996) on the Electronic Mall Bodensee in Germany was an early demonstration of a B2B trading community. Armstrong and Hagel's (1996) view is that Internet-based communities are a new business model. They argue that communities of interest, fantasy, relationship and transactions ± this is the Net-networking view discussed in the introduction to the current paper. So-called aggregators attract consumers to a site on the basis of low-cost goods hoping for site-stickiness ± the consumers will buy other goods offering higher margins having bulk purchased from suppliers (see www.internetinvestorUK.com March, 2000). Two British examples of aggregators are BigSave and letsbuyit.com Other examples include Yahoo! migrating from a search engine to a portal and AOL from an Internet service provider to a portal. ``Tipping'' effects (consequential sales arising from ``comfort'' generated by the host site) are reinforced by technological lock-in (to for example Apple brand products) by the cost of switching. Aggregator sites may offer bestbargain search facilities such as Andersen Consulting's bargain finder for CDs. It is likely that new e-commerce access platforms (WAP and i-TV) will result in e-commerce models in which, in some instances, content rather than access are paid for. The nature of the content is yet to evolve as is the source (supplier or consumer) of payment. It is likely that a mixture of models will evolve. This leads to the presentation of a framework able to make sense and inform processes of e-commerce innovation and development. This is the framework of ``sociotechnical constituencies'' and the reason is that in our view the pursuit of any
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kind of e-commerce business model always involves a process of constituency building.
Sociotechnical constituencies The sociotechnical constituency approach developed by Professor Molina at TechMaPP captures the multi-layered, dynamic shifts of alignment as new technologies emerge into social use. The diamond of alignment captures the various interrelated dimensions of the process of sociotechnical alignment essential to technology/service development (see Figure 5). Sociotechnical alignment is the answer to the question: how are sociotechnical constituencies built up? It is what social constituents try to do (however consciously, successfully, partially or imperfectly) when they are promoting the development of a specific technology either intraorganisationally, inter-organisationally, or even as an industrial standard. It may be seen as the process of creation, adoption, accommodation (adaptation) and close or loose interaction (interrelation) of technical and social factors and actors, which underlies the emergence and development of an identifiable constituency. As such alignment should neither be seen as a mere jigsaw-like accommodation of static available pieces nor
as complete and permanent, once achieved, see Molina (1997). It accommodates the rich picture of competing influences and trends, across institutional settings and governance systems. An important characteristic of the framework of sociotechnical alignment is its social groundedness, making it an appropriate tool for analysing innovation, implementation and diffusion. The diamond of alignment is able to capture constituency building process ex-post, as is shown in analyses of completed processes. It is also able to facilitate real-time evaluation to inform on-going constituency building processes (see Molina, 1999a,b). A particular strength of this approach is its use in uncertain processes of technology development such as emerging products and services (see for example Kinder et al. 1999 and Kinder 2000b). The diamond of alignment shown has two layers, each showing six segments (in analyses of more general constituencies further layers may be incorporated). At the centre of the diamond, ``E-commerce sociotechnical constituency'' signifies the technology constituency to which the diamond refers. The inner layer in Figure 5 refers to the intrainstitutional aspects of alignment within the e-commerce company. The outer layer refers to the inter-organisational level beyond the company, including the interaction with other
Figure 5 Molina's diamond of alignment
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constituencies, and the impact of the more general social and technological trends and developments. The areas (I) and (II) represent the sociotechnical nature and state of development of the overall product/service constituency (intra- and interorganisationally) at the centre of analytical attention. In turn, the surrounding four segments (1-1i), (2-2i), (3-3i) and (4-4i) represent aspects of critical influence to the success or failure of technological processes. A description of the content of each of the dimensions in the diamond is: . (I) Constituents' perceptions, goals, actions and resources. This dimension relates to the present state of the constituency's resources: the type of organisation, people, material and financial resources, knowledge, expertise, experience and reputation and other elements such as current perceptions, goals, visions and strategies. In short, what the constituency is at this point in time including its cumulated heritage. . (II) Nature and maturity of the technology. This dimension highlights the importance of alignment of the innovated technology with the governance and strategic directions of the organisational, industrial and market environments of the constituency. For each of the constituents the innovation of an integrated ICT infrastructure must make sense and assist their performance. The innovation must also make sense to their customers, meaning that the environment for innovation is promissory and viable to merit allocation of resources and market demand. . Alignment (1-1i) ± Governance. This dimension highlights the importance of alignment of the innovated technology with the governance and strategic directions of the organisational, industrial and market environments of the constituency. For each of the constituents the innovation of e-commerce must make sense and assist performance. The innovation must also make sense to customers, meaning that the environment for innovation is promissory and viable to merit allocation of resources and market demand. . Alignment (2-2i) ± Target constituents' perceptions and pursuits. This dimension relates to the people, organisations and
.
.
technologies the constituency is seeking to enrol behind its vision. This includes alignment of perceptions and goals between the constituent organisations and potential or target constituents in their organisational, industrial and market environment including suppliers and significant players in the relevant value streams and networks. Alignment (3-3i) - Nature of target problem. This dimension highlights the importance of alignment between the capabilities of the e-commerce constituency and the technical services/product it offers (i.e. target functionality, quality and cost). This includes alignment between the product and widely recognised technical and market trends and standards in the target industrial area (see alignment 4). In short, to avoid ``failure'', the constituency must create the technical capacity to deliver appealing services within available resources value-for-money parameters. Alignment (4-4i) - Interacting technologies/ constituencies. The e-commerce constituency may have ``heritage'' systems and processes as may its target constituents and customers. The e-commerce technology will come into a world already populated with ways of doing things. This dimension relates to the type of interaction and relations bridging the past heritage to the future. It also includes alignment between organisational structures, information systems and functional processes. In the case of the information society constituency alignment with widelyrecognised technical and market trends and standards in the target industrial area will be important (see alignment 2). In particular the successful e-commerce will have to re-negotiate existing rules and governance arrangements, carving out a place for itself within value streams.
All these dimensions influence each other and, put simply, the diamond acts as the overall setting and guide to alignments between people-people, people-technology, technology-technology and technologypeople. In this view, a successful constituency building process is a virtuous cycle in which all these four types of alignment effectively reinforce and strengthen each other.
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However, misalignments can reverse this process, creating a vicious cycle exacerbating internal and external conflicts and contradictions. Indeed, care must be taken that alignment in certain directions should not involve potential mis-alignments in others. This could be the case of promising unrealistic targets with a view to obtaining funding for instance.
Case studies These case studies[4] arise from the EUfunded BuKs project (Building a KnowledgeSharing e-Business Cluster) within West Lothian, jointly initiated by TechMaPP and the West Lothian Council. EQL case study Constituents' perceptions, goals, actions and resources In 1993, EQL spun-out from the Institute of Chartered Accountants of Scotland from whom it licensed computer-based accountancy education packages, later developing its own mathematics, financial management and taxation and companysystems specific courses. EQL's vision is one of ``using technology to deliver training and learning'', targeting burgeoning student numbers in British and worldwide universities. After three years, the company had repaid an equity investment and became owner-managed. It is now part of BPP Holdings, with a £1 million turnover from online sales. Nature and maturity of the technology In 1993, selling 5.5-inch discs or 3.5-inch floppies via university or large firm local area networks (LANs) was an innovative activity. At a time when the computer industry leadership was passing from hardware to software, EQL was restricted to a LANs. In 1966/1997, CD-ROMs become the favoured format for open and distance learning materials. Its immense storage supported multimedia pedagogic presentations, sophisticated didactic testing and the inclusion of a wide range of reference materials and tools. Updating to CD-ROMS was costly and in 1998, EQL began offering live courses via browsers to large companies. It is now an e-commerce company and
regards Internet technology as mature and proven. Governance The world into which EQL was born in 1993 was on the crest of a wave of change. The company has realigned its networking arrangements and the rules by which it operates to take account of the emergence of e-commerce and the Internet. In 1998, EQL strategically aligned itself with BPP Holdings (the largest European publisher of professional educational materials), in order to meet customer needs for both online and off-line hard-copy materials and to access BPP wider market. Market growth makes course accreditation easier. EQL employs an expert on developing computer-based assessment, which feature qualitative questions and skills, in addition to multiple choice, and quantitative tests. Increasingly ``world-class'' educational institutions are validators and accreditors of externally designed and provided designed courses ± the education value stream is reintermediating. EQL aims to dis-intermediate training managers by offering courses directly to students via the Internet, in partnership with the Chartered Institute for Management Accountants (CIMA), the products will be known as ``CIMAinter@ctive'', and lowers EQL's customer-find and assessment costs. Materials will be available for purchase from both EQL's and CIMA's Web sites using credit card payment. Courses will also be available worldwide through participating (licensed) colleges where course materials will be downloaded or available on CD-ROMs. EQL's Web site also offers exam tips, tutorials, tools, click-through to the BPP bookstore and possibly interaction with online tutors. EQL sees this virtual campus eventually offering e-commerce and business degrees. Target constituents' perceptions and pursuits EQL started with orders from some large accountancy firms and the new universities targeting more of the same with a wider range of products including specialist training. Unlike most educational publishers, EQL develop material retaining IPR. Companyspecific course materials contain knowledge captured from client companies and validated by their training managers. EQL's contribution to these value streams is
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expertise in drafting and delivery. A professional body or university accredits EQL materials, with an accountancy firm validating complex tax regulation materials. EQL benchmarks against its own quality standards rather than EU standards. All materials are in English ± the language of target constituents in the USA, Australasia, South Africa and the Far East tiger economies. Currently 90 per cent of EQL business is in Britain, half corporate. The lack of adequate intranets in British schools puts constraints on EQL's under-16 education offers, although their packages can cost only half the traditional cost. Nature of target problem In 1993, EQL's perceived problem was low intranet take-up by firms and universities. With their shift into e-commerce, the company define their target problem in terms of service to customers not in terms of technology stating: Where we're almost unique, in some respects, is that we're not really a technology company. EQL are educational publishers. . . . We deliver educationally sound material and the technology's just a vehicle for that.
EQL possesses both graphic interface and educational content expertise that it uses to modularise to made downloading easier. For EQL, the ability of materials to run on client systems being accessed by large numbers of students is a design qualifier. Only where pedagogically justified are audio-visual materials included. In short, EQL has successfully aligned its offering with the technology used by its customers. It has not made the mistake of becoming too far ahead or behind its customers' technological requirements. Interacting technologies/constituencies EQL states that none of the barriers to e-commerce, (security, authorisation, theft of IPR, online payment difficulties including lack of trust), have affected its business. However, its customer base has been intermediate training package purchasers; it is now targeting and final users. Product marketing has been targeted towards decision-takers in large firms and universities, and EQL has not spent heavily on general marketing. Consequently, customer ``search/ find'' and ``assessment'' costs have not curbed EQL's use of e-commerce. The ``brand recognition'' of CIMA and other well-
established accreditation bodies help this, creating a validation and certification network for products which otherwise could be inexpensively reproduced. EQL product market was delimited by the low diffusion of its delivery channel ± the personal or networked computer. This changed rapidly after 1993, posing major strategic issues for continued alignment with the delivery channels for its products. EQL successfully migrated from disc to CD-ROM and now Internet technologies, incorporating improved design and assessment technology into its product range. The company's strength is in the content and accreditation of its offering, and its use of mature and proven technologies. EQL have extended their focus from business to public administration (B2PA), into business to business (B2B) and latterly business to consumer (B2C). Importantly EQL includes, within its B2B plans, the provision of training for SMEs in the use of e-commerce. Summary In seven years EQL has: . increased the interactivity of its products (customised, flexible, student-centred); . improved connectivity now to include B2B, B2PA and B2C; . widened it product range; . created alignments with accreditors, validators and educational institutions, which it employs as online communities; . avoided high transaction-cost physical interactivity with customers (absence of call-centre, development of qualitative assessment); . borne sunk costs of content development and successful dis(re)-intermediated education value streams. emfinance case study Constituents' perceptions, goals, actions and resources The company's visionary founders have strategic, distribution, marketing and technological skills and the shared dream of merging mortgage supply with Internet technology. Launched in 1999, emfinance's Livingston office has 35 staff and has secured calls on £1bn of mortgage funds. The company partnered with eXchange Holdings (eH, an e-commerce financial services company) when venture capitalists failed to provide equity.
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Nature and maturity of the technology The company uses proven Web technology, emphasising system security and user confidence, with a Web site configurable as the business grows or the legal regime alters (legally binding digital signatures and i-TV). Spending £2m on pre-launch IT, emfinance (with BT and Verisign) developed the first 128-bit Windows NT encryption and finds no problems interfacing with customer and partner systems. However, it finds variation in the use of IT by partners. Some are digital others still require hard-copy. Older financial institutions retain closed systems offering limited access, whilst newer players often have open Web based systems. For legal reasons emfinance can complete all processes of mortgage application digitally, but still requires a paper-based signature for completion. Governance As a dedicated online start-up, emfinance has a small core staff, and leverages the physical, brand, and networking resources of its lenderpartners (upstream), parent group, and independent financial advisors (IFAs), (downstream). Its partnership with eH gives emfinance access to the wide customer constituency, however, additional intraorganisational alliances are important in increasing the size of the online value stream. The company sees itself as subverting established institutions and governance regimes in mortgage supply. In developing plans for overseas expansion, emfinance is faced by the need to conform to national and regional regulations and established practices. Hence, its Web site is modular to allow reconfiguration. Nature of target problem The mortgage industry is fiercely competitive: emfinance is competing for site visitors and its re-intermediation brokerage role, against branded names. Its strategy is two-fold: to align itself as a supplier of business to existing mortgage providers and offering mortgages directly in niche markets. In creating an entirely online business emfinance faces the reluctance of customers to complete major personal financial transaction online, this they believe will evolve as e-commerce grows. In addition, converting visitors to customers without (expensive) physical interaction remains a priority.
The company has three sets of target customers (private borrowers, especially remortgagers), and IFAs for whom it aims to add new value via re-intermediation. (1) To established lenders, it offers a low cost distribution (international) channel particularly appealing to small regionallyconfined lenders or new and bespoke products, but a potential threat to large physically-based lenders. (2) IFAs, currently registered with eXchange Holdings are now linked to emfinance's site; this simplifies their products selection and application processes. IFA activity patterns are monitored and training offer where necessary attempting to convert a physical community into an online community. (3) To private borrowers, emfinance offers a range of concessions; flexibilities and discounts coupled with simplified product assessment. Above all, emfinance offers speed and convenience in assessment and transaction (20 minute turnaround, online tracking and 24 hours completion). Typical e-commerce issues affecting the company include low site stickiness, being perceived as ahead of the market, lower than desired conversion ratios and pressure to offer off-line support. Innovations addressing these issues include decomposing the eight page application form, an online interactive flowchart and the use of focus groups. Target constituents' perceptions and pursuits Re-intermediation is viewed differently by emfinance's target constituents: the ``bricks'' are retaliating against the ``clicks''. The UK's major established lenders have launched online mortgage catalogues and application facilities. As emfinance seeks to reintermediate mortgage supply, established lenders are hoping Internet technology will dis-intermediate it ± bypass brokers and physical branches and sell online directly to private borrowers. Whilst emfinance aims to target constituents across Europe, online mortgage business (for example Europeloan from Belgium) are targeting British markets. For purely online businesses, establishing customer trust is a particularly difficult hurdle for high-value transactions such as mortgages. Many Web users continue to require additional off-line support before a major online purchase. The company recognise this,
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but consider that as brokers they are able to leverage the brand-name and physical assets of their lenders, such as the Woolwich. This achieves a successful ``clicks and mortar'' balance ± whilst retaining the cost savings and competitive advantage of being itself purely online. Interacting technologies/constituencies There are few issues of technology alignment, but where these exist (such as network integration with lenders), they are more matters of institutions' divergent policies and traditions rather than `hard' technological misalignment. There are a number of constituencies, at different levels, within which emfinace is seeking to align itself. These are the parent group, (by providing a distinctive industryleading service) the mixed online/off-line mortgage supply chain (by offering high-value products and intermediary services). Additionally, the broader e-commerce constituency, within which the company shares a broad interest in converting established supply chains into better value online supply chains. A major strategic question is whether other constituencies which are currently collaborative will become competitive and whether other high-value and mortgage related services (such as planning, conveyancing) migrate to e-commerce to strengthen customer trust. Summary In one year emfinance has: . launched a new interactive product and positioned its site's connectivity; . created a B2B and B2C online network and begun to enrich an online community of IFAs; . created an opportunity to dis(re)intermediate the mortgage supply value stream; . plans to offer other financial services on its site and to expand into Europe; . established strategic partnerships with eH, lenders and IFAs. Real Time Engineering (RTE) Constituents' perceptions, goals, actions and resources RTE is a rapidly growing software and IT systems privately owned company, founded in 1988 and currently turning over £12 million from four sites, employing 180 staff. Originally focused on the oil and gas industry,
the company has recently re-organised into specialist divisions, one of which is an embryonic financial services unit named First October. The company is experimenting in ``off-the-wall'' areas ± defined as those without any immediate application or business benefit. One of these is the development of e-commerce products and services for SMEs in which it aims to employ its cumulated consultancy and technological innovation expertise, and forms the subject of this case study. RTE aims to translate its database expertise from blue-chip customers (in which RTE's opportunities to offer e-commerce services are limited) to SMEs via a standard platform. Currently is unclear whether a generic SME e-commerce product will be successful, a more customised approach is not thought viable. RTE considers that too many SMEs are badly advised to adopt e-commerce solutions with the associated necessary business process re-engineering. Further, it believes it can act as educator and mentor to nascent SMEs transferring its cumulated e-commerce expertise. Nature and maturity of the technology RTE views the Internet as a simple technology, subject to front-end design improvements. However, in developing a generic product for SME e-commerce, it aims to migrate into a SME product its IT systems expertise garnered from large companies. This will involve the transfer and codification of knowledge and its translation into the different context of e-commerce SMEs. Since only high-growth SMEs are likely to offer repeat business, RTE will refocus its technology strategies from large-scale systems integration (often of standardised products), to small-scale provision of customised solutions. It believes that four databases (human resources, product handling, financials and sales) form core tools for any e-commerce business. RTE hopes to create a standard product, which provide SMEs with a Web front-end, an online trading system and the four core databases. Governance RTE recognises that its relationships with e-commerce SMEs are likely to require longterm investment in a knowledge and incubation network ± the building of an e-commerce constituency. RTE is presently engaged with several West Lothian small
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firms from a wide range of backgrounds. These discussions are a two-way education process, in which RTE educates small firms about the potential of e-commerce technology, whilst itself learning about the issues and scenarios confronting SMEs. RTE's ideas include extending the work with the pilot groups into collective discussion groups ± perhaps in association with a third party ± so as to develop a better understanding of common fundamentals. The company will offer pilot firms free remote hosting of their databases, avoiding the need to install hardware. With a limited R&D budget it may be that RTE's core business requires its complete product development attention in future, a scenario which would support First October's spin-out. RTE's core business is ``customer-driven'', care is needed not to fall into the more ``technology-driven'' governances sometimes typical of e-commerce. Target constituents' perceptions and pursuits In educating pilot firms about Internet-based technologies, RTE emphasises business processes ahead of technology. The object is to identify and distil underlying generics. Working with a small group of companies, enables RTE to engage in ``prototyping'' ± understanding the e-commerce requirements of its clients arising from the nature of their business, learning what is generic. The company then designs or sources appropriate material, ultimately developing an off-theshelf product for all SMEs. At First October, RTE offers free e-commerce development services. Most of the SMEs had Web sites from which little value flowed. RTE has upgraded these sites, installing online trading facilities, and helping integration with back-office processes, demonstrating the simplicity of Internet technology. RTE is critical of the lack of education offered by many IT-solution sellers, which fail to help SMEs integrate e-commerce with business processes. RTE believes it is possible to differentiate the underlying generic fundamentals of e-commerce, from superficial techniques that vary by sector and firm. It argues that many IT-solutions sellers offer only context-dependent techniques that may be inappropriate for any given business.
In its core business divisions, RTE invests heavily in understanding its customers' individual circumstances in order to identify appropriate techniques. However, they argue this is not possible with diverse and numerous SMEs. RTE's approach is to provide SMEs with the fundamentals of ecommerce, whilst the SMEs must learn the techniques itself. RTE's view is that if e-commerce is to become an integrated aspect of an SME's processes and systems, then the SME must learn to maintain and improve its Web site and not out-source these fundamentals. Nature of target problem RTE believes that only when SMEs are educated to distinguish between techniques and fundamentals and to maintain and integrate e-commerce technology with their business processes will e-commerce be successfully adopted by SMEs. SMEs can be poorly informed and unwilling/unable to devote significant resources to projects with uncertain returns. RTE has therefore prioritised user education of its pilot group and is working with IT consultants and public sector bodies in an effort to improve levels of understanding in the local SME community. Interacting technologies/constituencies Since RTE recommends the use of standard hardware and software there are few cases of incompatibility with heritage technologies within the SMEs. Absence of effective e-commerce amongst SMEs is not the result of technical difficulties. The essential problem, RTE argues, is at the application level: identifying the underlying generics of SME e-commerce and embedding these into a standard set of business process databases. The company recognises that some SMEs may in future diverge into non-standard ecommerce technology. Summary RTE's pilot invests time and resources in SMEs, aiming to learn sufficient to develop a generic e-commerce product targeted at SMEs. This product will provide SMEs with the fundamentals of e-commerce connectivity. To exploit this RTE believes SMEs also require support to integrate and re-engineer business processes.
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Analysis This section uses the conceptual instruments presented in the second section to analyse these case studies at two levels. First, dynamic processes of alignment and realignment as a characteristic of e-commerce business models are examined. Second, these processes are reexamined as holistic and strategic, which we term evolutionary business planning. Dynamic alignments The case studies show the successful growth of e-commerce at the level of the firm to be one of continually re-aligning in response to changing social and technological opportunities. These re-alignments are feature both intra and inter-organisational change and adjusted alignments between segments of the diamond of alignment. Each re-alignment poses strategic issues in relation to connectivity, interactivity and agility. Constituents' perceptions, goals, actions and resources In all three cases, the constituency formed by the innovating company had four characteristics. Core product-related competences were proven (education content and distance learning, mortgage lending and fund raising and systems integration and databases). Each viewed e-commerce as a new delivery channel offering the possibility of dis-intermediating existing product value streams populated by profitable companies. All three ventures were commercial: each had the purpose of profitable trading, acted and built the constituency in pursuit of this goal. This goal was ``privileged'' above other goals (such as research or innovation). Finally, none of these examples has burst into shortterm profitability. As investments, their price, earnings and growth ratios are likely to become positive only in the three to five year period typical of small business start-ups. Nature and maturity of the technology Only emfinance spent substantially prior to trading (though arguable EQL inherited sunk costs that had been written down and First October enjoyed hidden subsidy from RTE). In each case study the entrepreneurs emphasised the technological maturity of Internet-based e-commerce, ``the technology is just a vehicle'' say EQL. Notable, is the simplicity of e-commerce relative to many other technologies being innovated (only 6
per cent of Scottish businesses trade over the Internet). The scalability of e-commerce technology is profound (emfinance's modularisation, EQL's multi-purpose site, RTE's system integration). These three companies view Internet-based e-commerce technology as technically mature. In each case the immaturity, risk and innovativeness lies in migrating a proven product to the uncertain governances and value stream structures found in the immature world of e-commerce markets and relationships. Governance Re-aligning governances is the major challenge facing each of these three companies. However, the nature of the challenge varies. RTE's strategy is to reintermediate the IT value chain by disintermediating purely IT consultants and hardware sellers, substituting an e-commerce hardware-software package which meets the integrated needs of SMEs. In the piloting stage, RTE has formed a community of SMEs and a wider constituency of public agencies and consultants who share its vision. This latter constituency will be necessary if it is to generalise its product (which combines hardware with software and business reprocessing advice). Replicating the softer sides of its constituency will be a major challenge to RTE at rollout stage, as will entry into this niche by major software or hardware purveyors. In its pilot stage, RTE has successfully aligned these governances. EQL's aim of direct sales to students requires maintenance of its validator and assessor communities synchronously with a dis-intermediation of some institutions providing education courses. To date EQL has successfully made these inter-institutional alignments within its constituency. The slowness (inability) of educational institutions to enter the online market has given EQL first-move advantage. Continued alignment with validators and assessors appears promissory provided accreditation and content standards are maintained. The community of IFAs appears ready to adopt emfinance's services and support, an alignment which may prove crucial as traditional mortgage lenders launch their own e-commerce offers and compete with emfinance. Brand names entering this market may challenge emfinance's position, though
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its re-mortgage business and niche regional operations are likely to be a different matter. The emfinance case shows that disintermediated value streams are subject to threat of re-intermediation in lucrative, easily entered markets. RTE has a B2B strategy (SME customers, in its pilot stage), emfinance is B2C (with a brokerage B2B role on behalf of existing lenders) and EQL is migrating from B2B (institutions) to B2C (worldwide students). From a cost viewpoint, these differences are reflected in their e-commerce SAT configurations. RTE is ``hands-on'' investing heavily in inter-organisational liaison. Its conversion rates are extremely high as expected of a low-volume, high-margin product. Value for RTE is extracted towards the end of assessment and in the transact phase of e-commerce. EQL is migrating from a directed ``search'' (by institutions) towards an open market search in B2C. Marketing the site and site stickiness (conversion ratios) are important. Thus funnelling hits through assessment towards transaction is critical and is reflected in an offering attractive in form upon entry, and content in later phases. The product offering of emfinance is a complex variety of products to a wide range of target customers. The case studies illustrate that for SMEs, the challenging alignments in e-commerce include a focused view of relevant connectivity, an approach to interactivity which involves carefully re-brigading resources to align with key constituents, and finally, the strategic agility to implement intra-organisational change and strategy alterations. Target constituents' perceptions and pursuits RTE is investing resources in a pilot action. As such, it has found little difficulty in enrolling SMEs, public agencies and consultants behind their vision. Should the company decide to spinout First October, as an independent product, maintaining these alignments will be crucial. RTE's venture seeks alignment with a new type of contentdriven value stream (which merges software, hardware and consultancy). SEMA and IBM have also adopted such a ``solutions-based'' approach. However, RTE targets solely a SME constituency. These are costly value streams which may at first sight appear unattractive compared to ``virtual'' low-cost
hardware-software perceived alternatives (Dell). EQL's constituency contains education institutions (mass distribution of course modules) with whom it is going to compete for some market segments using a virtual value chain. Its advantage in an increasingly crowded market is its ability to provide content, online qualitative assessment and alignment with validators, publisher and assessors: in short, the quality of its offering. It will be important to any avoid tension between quality assurance (e.g. validators) and student throughput. Since open and distance learning is a growth market, EQL seems well positioned with its existing interorganisational alignments. Future ``finaluser'' sales may require significant investment in site search and assessment. The mortgage value stream, like many B2C streams migrating into ecommerce remains in flux. It would appear that virtual value streams for the ultimate virtual product ± money ± are promissory. As an early entrant, emfinance is cumulating expertise in aligning IFAs and customers, an expertise which is likely to be tested when traditional lenders enter the market and previous collaborators become competitors. Nature of target problem RTE defines its problem in creating a new product not in terms of technology but rather capturing knowledge from its SME pilot which can be incorporated into a system integrative, database and e-commerce tool with associated service support. In the rapidly changing environment of IT services to SMEs, time-to-market for RTE may be at a premium, and it may decide to launch a product and then upgrade it. In such a scenario, building the constituency of support organisations will be challenging. It may be that it targets SMEs in particular sectors or with (for example) export potential where e-commerce take-up is especially auspicious. EQL's target problem too is not technology innovation (except qualitative assessment). Indeed, it recognises the need not to get ahead of its market. EQL has a proven agility and ability to enrich the appropriate interactivity of its offering. Growth in the distance learning market appears to be an important sensitivity for the company. However, growth markets attract attention and EQL's positioning (connectivity) to
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paying customers may be their dominant target problem. Only emfinance of these companies invested heavily (e2.8 million) prior to launch. This level of expenditure, coupled with the threat of competition make their ``dash-for-cash'' (positive cash-flow followed by profitability) particularly urgent. Mortgages are a complex and costly product. Nevertheless, similar products (cars, insurance, jobs) are now widely secured online. All three companies face pressure for positive cash-flow. In this, they are no different from most start-ups. Where they are different, is that each face potentially serious competition and may have to realign themselves, as collaborators become competitors. Interacting technologies/constituencies Mortgages, educational courses and business IT systems are varied e-commerce products, which these case studies show to be united in the maturity of the delivery technology. The complex alignments shown by these case studies are of governance and constituents rather than technologies. Interestingly, EQL's progression from discs via Intranets, to CDroms and then the Internet, underscores the general flexibility of Internet-based e-commerce technology. The different mixes of B2B and B2C markets of these three companies, also illustrates how search, assessment and transaction moments in e-commerce exchange are configurable to suit different business needs. Holistic alignment Each technological innovation, diffusion or transfer involves processes of continual sociotechnical realignment. The pace of social and technical change and premium upon time-to-market in e-commerce are such that realignments, as the case studies illustrate, are likely to be strategic in addition to being tactical. Businesses in less dynamic sectors often evolve incrementally in a series of tactical realignment punctuated by periodic strategic modifications. In such a scenario, time-scales may allow incremental realignment between segments of the diamond of alignment. Dynamic change offers no such luxury. In the case studies entrepreneurs are shown to be making frequent strategy changes. This scenario calls for a new dynamic and holistic approach to
business planning. This, we outline below and term evolutionary business planning. Each new technological regime gives rise to new funding arrangements ± railways with joint stock companies, Fordist manufacturing with institutional investors etc. ICT innovating SMEs currently seek risk capital from venture funds, angels and corporate venturers. Start-up or development capital and often in-house investment normally requires a business plan. Unfortunately, the process of drawing up and seeking risk capital by presenting the business plan to potential investors can constrain SME e-commerce innovation. Let us decompose the phrase the business plan. The, suggests a static recipe, business, indicates aversion to alternative risk or deviation, and plan implies actions based upon unachievable foresight. Our alternative approach for SMEs innovating e-commerce prefers to conceptualise evolutionary business planning. This is a truly a dynamic instrument in the process of constituency building from concept stage through to IPO and beyond. In fast-moving industrial sectors it recognises the need for strategic continual renewal of strategic outlook (not simply tactical changes) which inter-relates dimensions within SMEs, maintaining alignment with unfolding opportunities and technological changes. It is a process of constituency building. In this respect, every business plan is both a reflection of the trends, achievements and potentials of the constituency building at a given point in time, and a projection and mapping of the alignments required for its long-term future. This may imply a more-ofthe-same approach or a substantial shift in the business strategies to be pursued. The critical methodological point is that, by shifting from ``plan'' to ``planning'', the preparation of business plans is positioned within the understanding and conceptual tools of the ``sociotechnical constituencies'' framework, particularly the diamond of alignment. Indeed, it is this positioning that enables, as well as demands, the shift in the first place. From the viewpoint of constituency building, however, the generation of a business plan for each new product/service requires a strategic outlook to at least six crucial areas of operation. These are presented in Figure 6 and are finance, marketing, technology, organisation and human resources and production.
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Figure 6 Crucial areas of strategy in STC's business plan
Each of these areas of strategy inter-link with each other and misalignments between them could prove disastrous for the success of the venture. In fact, each of these strategies evolve during the process of constituency building, making sustainability the result, not only of a financial strategy, but of the effectiveness and alignment between all of the strategic areas indicated. Indeed, without effective technology, human resource, organisational, marketing and production strategies the financial strategy is worthless. Figure 7 integrates the business plan strategies more fully within the framework of
constituency building. In particular, it illustrates that at all times the definition and realisation of strategies demand multidirectional alignments involving people and technology. In addition, the main centrearrow of ``constituency-building process'' now makes explicit that this process is made up of combinations of the several fundamental moment (not sequential stages) of ``creation, production, diffusion/ implementation''. These moments are essential to all constituency-building processes and this means that the different strategies will relate to all of them with greater or less emphasis
Figure 7 An overview of aspects of diamond of alignment
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depending on the approach taken for each of the strategies. For instance, a marketing strategy may concentrate primarily on the ``market diffusion'' moment of the constituency's product/service; the technology strategy may concentrate on the nature of the product/service as well as on its production process; and so on. Overall, it must never be forgotten that the purpose of the inter-linked strategies is to ensure the sustainability of the operation and, ultimately, the growth and consolidation of the constituency. The essential process in product/service constituency building is that of multidirectional and multi-layer alignments, as encapsulated in the diamond of alignment. Successful business planning (as encapsulated in the evolving business plan and its interrelated strategies) must therefore relate clearly to the various dimensions of the diamond[5]. There is no one-best-way approach to business planning. Effective solutions, particularly in the dynamic e-commerce environment, require and evolutionary and holistic approach to business planning
Concluding remarks In analysing the evolution of three e-commerce businesses in West Lothian, this paper has outlined in a systematic way relevant conceptual instruments. Coupling these to the sociotechnical constituency approach illustrates the possibility of business modelling in the evolutionary and holistic manner. Whilst the emergence of e-commerce remains fluid (particularly in governance arrangements and the relationships between virtual and physical businesses), we believe that discernible patterns now allow analyses to shift from case studies towards taxonomising and theorising e-commerce. However, extensive research is required into social flows, especially power relations, in the e-commerce sector.
Notes 1 Less than 5 per cent of retail sales derive from e-tailing (The Economist, 30 January 1999, p. 23) 2 See Wheeler's (2000) article on ``Reputation management'' in which he demonstrates the effectiveness of cyber-criticism and the growth of
consultancies specialising in rebuttal and protection techniques. 3 Cyber-shoppers, a University of Minnesota survey suggests, leave Web sites that fail to capture their interest within eight seconds. '`Stickiness'' is the ability of sites to retain interest directing visitors through the layers necessary towards concluding a transaction. 4 These case studies were conducted by Mark Winskell, Alfonso Molina and Tony Kinder during March 2000 as part of a deliverable for the EU funded BuKs project. The complete case studies can be found at www.techmapp.org 5 A constant mistake made at all stages in constituency growth is to isolate one strategic area such as total quality management or process re-engineering believing that a single area of a constituency's operation can be radically altered without affecting other areas of its operation.
References Alstyne, M.V. (1997), ``The state of network organisation'', Journal of Organisational Computing, Vol. 7 No. 3, pp. 45-9. Armstrong, A. and Hagel, J. (1996), ``The real value of online communities'', Harvard Business Review, May-June, pp. 134-41. Bocock, R. (1993), Consumption, Routledge, London. Business Week (2000), 20 March. DTI (2000), ``UK online for business'', available at: www.ukonlineforbusiness.gov/uk/government/ bench/international/int00cover.pdf (The) Economist (2000), 1 April, p. 78. Evans, P. and Wurster, T.S. (1999), Blows to Bits, Harvard Business School Press, Boston, MA. Fein, A.J. (1998) ``Understanding evolutionary processes in non-manufacturing industries: empirical insights from the shakeout in pharmaceutical wholesaling'', Journal of Evolutionary Economics, Vol. 8, pp. 231-70. Fleck, J. (1996), ``Informal information flow and the nature of expertise in financial services'', International Journal of Technology Management, Vol. 11 No. 1/ 2, pp. 104-28. Gates, B. (1999), Business @ The Speed of Thought, Penguin, London. Hagel, J. and Singer, M. (1999), Net Worth, Harvard Business School Press, Boston, MA. Hammer, M. and Champy, J. (1993), Re-engineering the Corporation, Nicholas Brealey, London. Kamien, M.I. and Schwartz, N.L. (1982), Market Structure and Innovation, CUP, Cambridge. Kinder, T. (2000a), ``Issues of theory and practice for ecommerce diffusion and analysis evolving of labour markets ± Internet-based recruitment in West Lothian'', Technovation, Vol. 20 No. 9, pp. 461-75. Kinder, T. (2000b), ``A sociotechnical approach to the innovation of a network technology in the public sector ± the introduction of smart homes in West Lothian'', European Journal of Innovation Management, Vol. 3 No. 2, pp. 72-90. Kinder, T., Klaes, M. and Molina, A.H. (1999), ``Sociotechnical alignment in the build-up of a telemedicine constituency in Scotland'', Science and Public Policy, Vol. 26 No. 6, pp. 415-35.
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Klein, S. (1996), ``Electronic commerce in the centre of Europe ± concepts and experience for supply chain management and customer relations in Switzerland, Germany and Austria'', paper presented at the 6th World Congress of Electronic Commerce Users. Kodama, F. (1992), ``Technology fusion and the new R&D'', Harvard Business Review, July/August, pp. 70-8. Molina, A.H. (1997), ``Insights into the nature of technology diffusion and implementation: the perspective of sociotechnical alignment'', Technovation, Vol. 17 Nos. 11/12, pp. 601-26. Molina, A.H. (1999a), ``The role of the technical in innovation and technology development: the perspective of sociotechnical constituencies'', Technovation, Vol. 19, pp. 1-29. Molina, A.H. (1999b), ``Transforming visionary products into realities: constituency-building and observacting in the case of NewsPad'', Futures, Vol. 31, pp. 291-32. Nagel, R. and Dove, R. (1992), 21st Century Manufacturing Strategy ± An Industry Led View, Iacocca Institute, Lehigh University. Rackham, N., Friedman, L. and Ruff, R. (1996), Getting Partnering Right, McGraw-Hill, London. Rayport, J.F. and Sviokla, J.J. (1995), ``Exploiting the virtual value chain'', Harvard Business Review, November-December. Shapiro, C. and Varian, H.R. (1999), Information Rules ± A Strategic Guide to the Network Economy, Harvard Business School Press, Boston, MA. Timmers, P. (1998), ``Business models for electronic markets'', Electronic Markets, Vol. 8 No. 2, pp. 3-8. Treleaven, P. (2000), ``E-business st@rt-up'', The Sunday Times, Kogan Page, London. Veblen, T. (1953), The Theory of the Leisure Class: An Economic Study of Institutions, Mentor Books, New York, NY. von Hippel, E. (1988), The Sources of Innovation, OUP, Oxford. Wheeler, O. (2000), ``Reputation management'', Revolution, 1 June, pp. 32-8.
Further reading Cooper, R. (1995), When Lean Enterprises Collide, Harvard Business School Press, Boston, MA. Cyert, R.M. and March, J.G. (1963), A Behavioural Theory of the Firm, Englewood Cliffs, NJ. de Bary, W.T. and Haboush, J.K. (Eds) (1985), The Rise of New-Confucianism in Korea, Macmillan, New York, NY. (The) Economist (2000), ``E-commerce Survey'', 26 February, p. 15. Gattiker, U.E. (1990), Technology Management in Organisations, Sage Publications, London. Itami, H. (1987), Mobilising Invisible Assets, Harvard University Press, Boston, MA. Kinder, T. and Molina, A.H. (2000), ``A sociotechnical model of learning organisations ± new ways of working and emerging organisational forms'', TechMaPP Working Paper, Department of Business Studies, University of Edinburgh. Kollman, T. (1998), ``Marketing for electonic market places ± the relevance of two critical points of success'', Electronics Markets, Vol. 8 No. 3, pp. 36-9. Lamming, R. (1993), Beyond Partnership ± Strategies for Innovation and Lean Supply, Prentice Hall, London. Leadbeater, C. (1999), Living on Thin Air, Penguin, London. Remington, W.S., Pedigo, R. and Fox, T.L. (1988), ``Building the virtual organisation with electronic communication'', Electronic Markets, Vol. 8 No. 3, pp. 43-5. Schwartz, E.I. (1997), Webonomics, Penguin, London. Smith, M. and Brynjolfsson, E. (1999), ``Understanding digital markets: review and assessment'', available at http://ecommerce.mit.edu/papers/ude Spar, D. and Bussgang, J.J. (1996), ``The net'', Harvard Business Review, May-June, pp. 125-33. Williams, S. (1999), Small Business Guide, Penguin, London.
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Innovation networks in economics: from the incentive-based to the knowledge-based approaches Andreas Pyka
The author Andreas Pyka is Assistant Professor, Economics Department, University of Augsburg, Augsburg, Germany. Keywords Innovation, Networks, Economics, Information Abstract Innovation networks have become a persistent organisational phenomenon in industrial innovation processes. However, in economics they were considered in the first place only as a temporary hybrid phenomenon between markets and a hierarchical organisation within a single firm. The main focus of traditional neo-classical analysis simply was on cost reduction of R&D within a network. Only with the coming up of evolutionary economics with its prevailing knowledge orientation, learning and synergistic partnering also move to the centre of interest. Without a consideration of the roles strong uncertainty, heterogeneity as well as the historical character of time play in innovation, networks cannot be explained as a self-organisational persistent phenomenon. The present paper brings together different strands of the new theory of innovation and develops an evolutionary theory of innovation networks. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 5 . Number 3 . 2002 . pp. 152±163 # MCB UP Limited . ISSN 1460-1060 DOI 10.1108/14601060210436727
Introduction Modern technical solutions are characterised by an increased interrelatedness between heterogeneous actors and knowledge fields. No single firm can keep pace with the development of all relevant technologies. Therefore, firms seek access to external knowledge sources. In this respect innovation networks have gained significant importance as a mean of co-ordination of industrial research and development (R&D) processes. Although in economics the impact of technological change on economic development, progress and growth was always widely recognised, no detailed study of the emergence and diffusion of innovation not to mention innovation networks were performed. Even economists as Schumpeter (1912), who puts innovation in the centre of his theory of economic development of 1912, in the first place attributed innovative success just to the specific feature entrepreneurship of outstanding individuals in an economy. Almost 30 years later Schumpeter (1942), inspired by the development of the USAmerican industries, identifies a significant change in the organisation of R&D processes in the specialised R&D laboratories of large firms (routinized innovation). And another 40 years later, again a significant change has taken place in the organisation of R&D. This change manifests in the interaction between these R&D labs and the other innovative actors as universities and other public research institutes, namely innovation networks. Nevertheless, it took until the end of the 1980s and the beginning of the 1990s until a certain interest in the theoretical explanation of this phenomenon awakened in economics. An important reason for the late interest in and the problems with the investigation of networks and specifically innovation networks can be seen in the difficulties the theory of the firm poses for economists (see e.g. HolmstroÈm and Tirole, 1989). Here, the questions ``why do firms exist?'' and ``what are their boundaries?'' are analysed and controversially discussed. Winter (1991, p. 179), reflecting on this problem, has to admit that the present state of the art is characterised by incoherence and contradictions. In an economy without firms, a specific industrial sector would consist simply of
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isolated labour sharing individuals connected by markets. Only the bundling and organisation of several activities within a firm gives this branch its specific structure (e.g. small and medium-sized firms, large enterprises etc.). However, not only firms, but on a higher level also networks between them (and other involved actors) are a decisive feature of the industrial patterns we are observing. In the theory of the firm three different approaches exist, which are also used for the explanation of networks and are suitable to different degrees to explain the observed structures. In a way, in these approaches networks are considered either as a means to minimise R&D costs, or as a means to minimise transaction costs, or as a means to create novelties. In the first approach the firm is seen as a functional relationship between inputs and outputs of production. This production function approach also constitutes the basis of mainstream neo-classical economics. Accordingly, the questions posed are those on the optimality in the allocation of resources and the respective incentives of firm behaviour. With respect to industrial innovation processes since the early 1980s a branch of literature (new industrial economics) also analyses the conditions and incentives of firms to engage in R&D co-operation by drawing on a game theoretic framework. The second approach can be traced back to Coase (1937) and does no longer focus on immediate production processes but on transactions of economic processes. For Coase and his followers the main reason for the existence of firms are costs which arise by using the price mechanism of markets. Therefore, firms come into being because the costs of co-ordinating the transactions via markets are higher than the costs of a hierarchical organisation within a firm, in other words, there are incentives for cost saving. These considerations where later transferred on networks by Williamson (1975) and others. In this perspective, networks are an intermediate co-ordination form between the originally supposed dichotomy of hierarchy and markets. The third strand of literature, the knowledge-based approach, differs sharply from these incentive-based approaches. Early proponents of this theory are Marshall (1920) who recognises knowledge as the decisive fact in production and Penrose (1959) who
identifies the knowledge base of a firm as its main asset. In the early 1980s this approach is taken up by evolutionary economics. Here, the role of knowledge for economic development and the success of firms is explicitly recognised and constitutes the cornerstone of economic analysis. In the evolutionary perspective networks are seen as a central determinant in the industrial creation of novelty, and are therefore a decisive co-ordination mechanism. In networks new technological opportunities are created via technological complementarities and synergies by bringing together different technological and economic competencies. In the following sections first the incentivebased approaches of explaining networks are discussed, before the knowledge-based approach of evolutionary economics is introduced in detail. Finally, the different forms of innovation networks and the expectations with and advantages of this mode of industrial co-ordination are discussed.
The incentive-based approaches The transactions costs approach and the production function approach of neo-classical new industrial economics both draw on a marginalist perspective by comparing the marginal costs and benefits of different alternatives. As chronologically the transaction costs theory offers an earlier explanation of economic and innovation networks we start with this branch of literature. Transaction costs analysis According to the prevailing theories of industrial organisation up to the 1980s the phenomenon of innovation networks was a surprising stylised fact. These theories predict that transactions would occur either in markets or in hierarchically structured organisations, i.e. firms. It was Williamson (1975) who introduced a theoretical explanation in terms of transaction costs, which explains that growing firms move increasingly away from an atomistic competition thereby internalising the different functions and stages of production which are characterised by a high degree of uncertainty and/or specificity of assets. In these cases, bounded rationality and opportunistic behaviour necessitates an integration of the
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respective functions within the firms. An institutional configuration aiming at an organisation in networks, in the first place was seen as unstable and inefficient because of incurring higher transaction costs. However, with this approach the growing frequency of collaborative networks in industrial reality was not explainable. To resolve the problems two answers are possible (Coombs et al., 1996, p. 6): either networks are no more than a temporary deviation from normal behaviour (markets or hierarchies) which do not last long or, networks present an additional form of industrial organisation, thereby adding a new alternative to the supposed dichotomy of markets and hierarchy. In his 1985 book Williamson admits to the latter: Whereas I was earlier of the view that transactions of the middle kind were very difficult to organise and hence were unstable, on which account the bimodal distribution was more accurately descriptive (Williamson, 1975), I'm now persuaded that transactions in the middle range are much more common (Williamson, 1985).
According to this view, firms are assumed to engage in co-operative relationships in order to minimise their transaction costs. By this, transaction costs economics is now drawing on a kind of a continuum of possible co-ordination mechanisms with pure market transaction on one end of the spectrum and the hierarchically organised firm on the other. In between these two extremes so-called hybrid forms are located. Which specific organisational form is chosen depends on the frequency of transactions, the importance of asset specificity as well as on uncertainty and opportunism. In this continuum perspective, one can move from the market pole, where all necessary information is captured by market prices, towards putting-out systems, different kinds of repeated exchange, and subcontracting arrangements. Contractual relationships, either joint ventures or networks are located close to the hierarchy pole (see OECD, 1992, p. 77). With respect to the analysis of innovation networks the following points are of crucial importance within transaction costs economics (see DeBresson and Amesse, 1991, p. 365; Teece, 1990): system interdependence, indivisibilities, asset specificity, tacitness of knowledge, market and technological uncertainties, and inappropriability. With
respect to the last two points Figure 1 shows the way transaction costs economics deals with innovation networks (see also DeBresson and Amesse, 1991). In the lower left corner, when on the one hand, technology is quite stable and, on the other hand, well-defined property rights exist, we are in a situation where markets are most efficient in co-ordinating the transactions, coming close to textbook perfect competition. However, it is clear that this situation has nothing to do with innovation processes, characterised by change and contingencies. In the upper right corner, which is the other extreme with no possibilities of appropriate innovation rents and a high degree of technological uncertainty, hierarchically structured organisations i.e. firms seem to be well-suited. In a firm all technological interactions (i.e. creation and transfer of know-how) take place within the organisation and are therefore perfectly internalised and appropriated. However, there are many in between cases which offer the possibilities of innovation networks to emerge and, the real existence of this kind of network points to the fact that specific forms of inter-organisational linkages are also well-suited for innovation processes and the respective transactions. However, with this perspective transaction costs economics focuses only on costreductions and neglects the idea-creating aspects as the emergence of novelties via the organisation of R&D in innovation networks. So, for example in an empirical investigation of the information technology sector Hagedoorn and Schakenraad (1992) also identified innovation networks as a frequent organisational form in knowledge intensive sectors where high uncertainty and only low appropriability prevails (the right upper corner in Figure 1). Therefore, the criticism as well as further developments of the transaction costs approach concentrate on the assumption of opportunistic behaviour which does not allow something like mutual trust in a co-operative relationship to develop. In this light, any kind of control mechanism in a network of firms is considered as detrimental to innovation (Mytelka, 1991). Nooteboom (1999) in his dynamic transaction costs approach, where he is also introducing elements of evolutionary economics (see below), therefore, correctly states, that in a dynamic perspective firms have to consider their reputation as a reliable partner in an
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Figure 1 Typology of transactions
industry. Opportunistic behaviour would lead to a significant bad reputation isolating a firm more and more in the course of time. New industrial economics In the field of New Industrial Economics since the early 1980s co-operation in innovation moved in the centre of interest because of two reasons: on the one hand, new industrial economics by its very nature moved away from the idea of perfect competition by invoking the structure-conduct-performanceapproach, where besides prices other means of competition, i.e. marketing, R&D etc. play a role for determining firm behaviour; and with the arrival of game-theory as a formal tool of analysis, additionally the explicit investigation of firm interactions becomes possible. On the other hand, the discussion was inspired by new decisions and policies concerning the possible outcomes of allowing firms to collaborate in so-called pre-competitive R&D despite strong anti-trust regulation. The majority of theoretical models analyses questions with respect to the conditions and incentives necessary for firms to engage in cooperation in R&D and the welfare properties of the different possible solutions. Building on either so-called non-tournament models, where firms are engaged in either Cournot- or Bertrand-competition and continuously innovate (e.g. D'Aspremont and Jacquemin,
1988) or on so-called patent races, where firms compete for a single stochastically distributed innovation and the respective patent (e.g. Katsoulacos, 1988) innovation and competition are analysed on two- or morestage games comparing situations of pure competition in markets and hierarchies, with collaboration only in R&D, and collaboration in R&D as well as on the markets. According to these models collaboration in R&D seems to improve the performance of firms as well as social welfare in situations where technological appropriability is low and technological spillovers reduce the incentives of firms to invest in costly R&D processes. Therefore, cooperative R&D is considered as a means to restore reduced R&D incentives due to low appropriability. Another strand of literature immediately deals with co-operative know-how exchange as a possible explanation of the empirically phenomenon of imperfect appropriability conditions i.e. technological spillovers despite of appropriability means as patents, secrecy etc. The authors also draw on game-theoretic models, in particular on the class of behavioural co-operative games. Von Hippel (1989) and Schrader (1989) invoke the classical prisoner-dilemma to model the empirical phenomenon of free know-how exchange between firms which they labelled informal know-how trading.
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Von Hippel (1989, p. 158) motivates his approach as follows: When required know-how is not available inhouse, an engineer typically cannot find what he needs in publications either: Much is very specialised and not published anywhere. He must either develop it himself or learn what he needs to know by talking to other specialists. Since in-house development can be timeconsuming and expensive, there can be a high incentive to seek the needed information from professional colleagues. And often, logically enough, engineers in firms which make similar products or use similar processes are the people most likely to have the needed information.
And indeed he finds informal know-how exchange to be wide-spread in the sectors he is investigating. An engineer at an aerospace firm was having trouble manufacturing a part from a novel composite material with needed precision. He called a professional colleague he knew at a rival firm and asked for advice. As it happens, that competitor had solved the problem by experimenting and developing some processknow-how involving mold design and processing temperatures, and the colleague willingly passed along this information (Von Hippel, 1989, p. 168).
Within the game-theoretic framework the authors are able to show that under certain circumstances informal know-exchange could become a Nash-equilibrium if the game is repeated infinitely. By drawing on the work of Schelling (1973) other authors (Foray, 1995; Pyka, 1999) show that similar results can be expected when more than two players are engaged in this game, thereby transferring the results of bi-lateral co-operation on multilateral cases.
The knowledge-based approaches In the following sections first the traditional approaches are criticised and building on this, the knowledge-based perspective of innovation processes is introduced. Finally, the significance and consequences of this evolutionary perspective for the investigation of innovation networks are stressed. Criticism on the traditional theories Both the neo-classical approach of new industrial economics and transaction costs analysis are controversially discussed according to what they can contribute to the analysis of innovation networks. Mainly out of
this criticism more recent approaches draw on a knowledge-based foundation in their reasoning. Here, the future benefits from the synergetic creation of knowledge through interaction within heterogeneous actors, dynamic technological accumulation and learning are seen as the major issues of networks in innovation processes. Whereas the criticism on the transaction cost theory focuses on a significant shortcoming of this approach, namely the neglect of these technological complementarities, the criticism on the models of new industrial economics aims at the basic assumptions underlying this theory, which are in a fundamentally invariance with innovation processes. It is beyond the scope of this paper to discuss in detail the criticism made by evolutionary economics with respect to assumptions underlying the neo-classical reasoning[1]. For our purposes it is sufficient to mention three major points, evolutionary economists claim to be of outstanding importance in the discussion of economic development processes and which are incompatible with neo-classical theory. First of all, evolutionary theory wants to explain how novelties emerge and diffuse. A specific characteristic in these processes is uncertainty, which cannot be treated adequately by drawing on stochastically distributions referring to the concept of risk. Therefore, the assumption of perfect rationality, underlying neo-classical models cannot be maintained, instead the concepts of bounded and procedural rationality are invoked. Consequently, actors in evolutionary models are characterised by incomplete knowledge bases and capabilities. Closely connected, the second point concerns the important role heterogeneity and variety plays in development processes. Due to the assumption of perfect rationality, in neoclassical models usually homogeneous actors and technologies are analysed. Heterogeneity as a source of novelty is by and large neglected, or treated as an only temporary deviation. Finally, the third point deals with the time dimension in which learning and the emergence of novelties take place. By their very nature, these processes are truly dynamic, meaning that they occur in historical time. The possibility of irreversibility, however, does not exist in the mainstream approaches, relying on linearity and equilibrium. As we will see below, these
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critical points emphasised by the knowledgebased approach, constitute the basis for an innovation process, characterised as an evolutionary development. With respect to the criticism on the transaction cost approaches for analysing innovation networks there exists a quite heterogeneous literature, which, however, as a common basis, shows a considerable dissatisfaction with the market/hierarchy dichotomy placing networks simply as an intermediate case between the two extremes. According to this strand of literature (e.g. Chesnais, 1996; Foray, 1991) networking should not be explained primarily in terms of transaction costs, but should rather be examined in terms of strategic behaviour, appropriability and technological complementarity. This criticism can be traced back already to Richardson (1972), who states that: . . . firms are not islands of planned co-ordination in a sea of market relations but are linked together in patterns of co-operation and affiliation. Planned co-ordination does not stop at the frontiers of the individual firm but can be affected through co-operation between firms. The dichotomy between firm and market, between directed and spontaneous co-ordination is misleading; it ignores the institutional fact of interfirm co-operation and assumes away the distinct method of co-ordination this can provide.
The crucial problem of traditional transaction costs analysis is the interpretation of organisational dynamics in terms of marginal costs (see Foray, 1991, p. 395). By focusing on transaction costs only, as a consequence of the marginalist perspective adopted, an (implicit) perfect substitutability between internal and external knowledge sources is assumed. In this light, the characteristic features of innovation processes like true uncertainty, variety and irreversibility are totally ignored. Thus, the incentive-based approaches, with their focus on cost-based and rational decisions, are excluding crucial aspects of firms' strategies, which are influenced by a couple of factors lying by their very nature beyond the scope of these approaches. Also, of course cost-benefit calculations (with respect to innovation itself a problematic activity) play an important role, the firms' behaviour is influenced additionally by several other factors such as learning, individual and collective motivation, mutual trust etc. It is
the role of these factors the knowledge-based approach of evolutionary economics explicitly takes into account. Innovation processes in a knowledge-based perspective By switching from the incentive-based perspective to the knowledge-based perspective the evolutionary approaches have realised a decisive change in the analysis of innovation processes. In this light innovation processes mutate from optimal cost-benefit considerations to collective experimental and problem solving processes (Dosi, 1988). The knowledge-base of a firm is no longer perfect, instead a gap between the competencies of a firm and difficulties which are to be mastered opens up (C-D gap, Heiner, 1983). There are two reasons responsible for this C-D gap in innovation processes: on the one hand, technological uncertainty introduces errors and surprises in firm behaviour. On the other hand, the very nature of technological knowledge avoids an unrestricted access. Knowledge in general, and new technological know-how in particular, are no longer considered as freely available, but as local (technology specific), tacit (firm specific), and complex (based on a variety of technology and scientific fields). To understand and use the respective know-how specific competencies are necessary, which have to be built up in a cumulative process in the course of time. Thus, the technological opportunity space is restricted by the specific competencies bundled within a firm. It is clear that this opportunity will be restricted to the extent a firm does not see opportunities for expansion, is unwilling to react upon them, or is unable to respond to them (Penrose, 1959, p. 32).
Moreover, despite the possibility to exploit the technological opportunities of a specific technology in the case of mastering the necessary competencies, this opportunity space is not unrestricted, but cumulatively depleted, i.e. further progress along this specific technological trajectory (Dosi, 1982) becomes increasingly difficult to achieve due to technological bottlenecks and scientific restrictions. This, however, does not imply that progress comes to rest whenever these specific opportunities are depleted. The different technological trajectories and their technological opportunities do not coexist
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unrelatedly but are connected by several influencing devices and feedback mechanisms. Therefore, a single technology cannot be explained in isolation but should be understood in a broader framework. Improvements in one technology can create totally different applications in other technologies or even totally new technological opportunities. Behind these processes of a mutual stimulation and pressing ahead of technical progress so-called cross-fertilization effects of different technologies (Mokyr, 1990; Kodama, 1986) are identified. It is obvious that a so characterised innovation process demands certain prerequisites to be fulfilled, if a firm wants to participate successfully. Due to the increased complexity of modern innovation processes a firm has to master a great number of different knowledge fields. In order to have the necessary access to external knowledge sources, firms, besides their specific competencies, have to provide for an additional broad knowledge base, the socalled absorptive capacity (Cohen and Levinthal, 1989; Cantner and Pyka, 1998) or receiver competence (Eliasson, 1990) which allows them to flexibly react on external developments and external knowledge. Malerba (1992) states in this respect: This complexity has meant that multidisciplinary knowledge has become necessary for the generation and development of new products. In the computer industry, for example, the disciplines involved in the innovation process may range from solid state physics to mathematics, and from language theory to management science.
So-called go-it-alone strategies or conservative strategies which mean that a firm relies only on its own R&D endeavours, cannot be successful in such a complex environment. Because of the systemic character (Imai and Baba, 1991) of presentday technological solutions, technological development necessarily becomes a complex interactive process involving many different ideas, and their specific interrelationships. Innovation networks in the knowledgebased approach Obviously, the above characterisation of innovation processes has significant impacts on the analysis of innovation networks. These networks need to be understood not only in terms of transaction costs considerations, but
also in the terms of learning, path dependencies, technological opportunities, and complementary assets[2]. Networks do not only influence the co-ordination of resources but also insert a significant impact on their creation. This has to be seen in a twofold perspective: First, the pooling of different competencies in the network of firms of course enhances this process of resource creation by exploiting complementary effects. However, additionally, the co-operation in networks also creates a real surplus or synergy in this process (Brousseau, 1993). How can networks influence and contribute to the process of organisational learning? Drawing on the above features of technological knowledge (tacit, local and complex) it becomes clear, that know-how characterised this way cannot be exchanged via markets (even if the ``right'' incentives exist). Without a common knowledge-base and shared experience a simple know-how transfer is not possible. What is required here, is the common development of this kind of knowledge. In this light networks represent a mechanism for innovation diffusion through collaboration and the interactive relationship becomes not only a co-ordination device to create resources, but an essential enabling factor of technical progress (Zuscovitch and Justman, 1995).
Here it is not enough just to know what others are doing, but the firms also need to know how the respective technologies function and work together. And to support this inter-firm learning of often long-range cumulative, tacit and local know-how a stable and long lasting collaborative environment is necessary[3]. Clark and Juma (1987) introduce the notion ``evolutionary articulation'', characterised by an essentially resonating feature: In order to achieve the status of useful knowledge it [the information] needs to undergo a process of evolutionary articulation between supplier and recipient.
In transaction costs analysis so-called asset specificities are considered as a reason for a non-market co-ordination e.g. in innovation networks or in a hierarchical organisation. The evolutionary approach based on its knowledge foundation goes even a step further by emphasising that a firms whole opportunity space is determined by what has been done in the past. Because learning is local, history matters, i.e. the technological trajectory a firm follows is strongly path-
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dependent. However, firms following different technological paths and engaged in innovation networks can also experience a kind of path convergence with important consequences for their technological opportunities. This way innovation networks offer a possibility to overcome the restrictions of the irreversibilities and instead build on different specific knowledge-bases. With the fusion of different technological capabilities the exploration of new opportunities becomes possible ± the cross-fertilization effects. In this respect, the essential dynamic properties of innovation networks become obvious (see e.g. Imai and Itami, 1984). The technological as well as organisational boundaries of the firms participating in a network have to be seen in an evolutionary manner. Besides this creation of new so-called extensive opportunities (Coombs, 1988) which constitutes the synergetic or surplus effect of innovation networks, above also the complementary effects were mentioned. In this respect, it is helpful to recall that the variety of assets and competencies which a firm needs access to in order to successfully commercialise a new technology is likely to be quite large even for only modest complex technologies (Teece, 1986). Here, innovation networks show to be a promising alternative co-ordination mechanism which allows firm to have access to the complementary assets, which otherwise have to be built up alone ± an extremely expansive and time-consuming endeavour, confronting at least small and medium sized firms with often insurmountable difficulties[4]. Successful innovation requires complex forms of business organisation. Innovating organisations must form linkages to others, upstream and downstream, lateral and horizontal. Advanced technological systems do not, and cannot, get created in splendid isolation. The communication and co-ordination requirements are often stupendous, and in practice the price system alone does not suffice to achieve the necessary co-ordination (Teece, 1986, p. 416).
Innovation networks represent such a flexible organisational device. To summarise, within the knowledge-based approach innovation networks thus are considered to have three major implications: First, they are seen as an important coordination device enabling and supporting inter-firm learning by accelerating and supporting the diffusion of new technological know-how. Second, within innovation
networks the exploitation of complementarities becomes possible, which is a crucial prerequisite to master modern technological solutions characterised by complexity and a multitude of involved knowledge fields. Third, innovation networks constitute an organisational setting which opens the possibility of the exploration of synergies by the amalgamation of different technological competencies. By this, innovation processes are fed with new extensive technological opportunities, which otherwise would not exist, or whose existence would at least be delayed.
Functions and forms of innovation networks In this final section we first look at the motives underlying firms' behaviour in their decisions to participate in innovation networks. Second, the most important theoretical classifications of networks are briefly introduced. Firms' motives We have seen that the knowledge-based approach is supposing quite different functions of innovation networks compared to the incentive-based approaches. Whereas the latter claims for a co-ordination of innovation processes in networks due to costconsiderations, the former emphasises knowledge creating attributes of innovation networks. With respect to the different functions it is revealing to ask for the motives of firms to share co-operative agreements in R&D. Hagedoorn and Schakenraad (1989) list the motives of firms participating in innovation networks which are discussed in literature. In particular they mention the following six motives: (1) the extremely high costs and risks of R&D in high tech industries; (2) quick pre-emption strategies on a world scale which are preferable despite a ``loss'' of potential monopoly profit; (3) shortening of period between discovery and market introduction; (4) exploration of new markets and new market niches; (5) technology transfer and technology complementarity; and (6) monitoring the evolution of technologies and opportunities.
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This list is comprehensive in the sense that with motives (1), (2) and (3) the reasons for networking of the incentive-based approaches can be subsumed, whereas motives (4), (5) and (6) stand for the knowledge-based approach. In Hagedoorn and Schakenraad (1990) an empirical analysis for different network forms and sectors (information technologies, biotechnology and new materials) is performed, which can serve as an indicator for the relevance of these different motives. Summarising their results, Hagedoorn and Schakenraad (1990, p. 13) state: So far we have seen that only a relatively small number of motives matter for co-operation in these core technologies. Motives have a different bearing for different modes of co-operation, but in general the search for new markets and entry, the reduction of the period innovation, the technology complementarity of partners and monitoring technological opportunities are the major motives we have come across. Sharing of costs and risks which are often associated with inter-firm collaboration apparently play a negligible role.
This empirical study impressingly supports the relevance of the knowledge-based approach in explaining and analysing innovation networks. Classifying innovation networks Up to now, we discussed the different theoretical approaches to explain the existence and necessity of a network organisation in innovation processes. However, the specific forms of innovation networks were not yet the subject of this survey. This final section is dedicated to introduce the most prominent concepts of classifying innovation networks in the theoretical literature. In particular, we focus on national and regional systems of innovation and formal and informal networks. National and regional systems of innovation An important strand of literature focuses from a national angle on the institutional setting within which innovation processes and the specific interactions between the different actors involved take place. They coined the notions of national systems of innovation (Lundvall, 1988; Nelson, 1993) and development blocs (DahmeÁn, 1989; Carlsson and Stankiewicz, 1991). These scholars build on different theoretical foundations and accordingly focus on a variety of institutions, which may affect the industrial development
processes in a single country. As a common basis, however, a national system of innovation can be understood as a system of structured interactions between agents who are involved in the process of generating technological progress. Their interaction is structured in the sense that relations are often repeated, and thus institutionalised, and in the sense that formal and informal institutions exert an important influence on innovative performance (see McKelvey, 1996). Within this framework, not only the role of industry firms, but also of public research institutions like universities etc. is acknowledged. This way, also the linear-sequential innovation process is substituted by a more realistic multi-linked concept of innovation processes (Forrest, 1991; Kline, 1985; Rothwell, 1994). Starting from empirical observations that the innovative capacity of regions are sharply differing, another strand of literature is focusing on so-called regional innovation systems (e.g. Camagni, 1991; Cooke and Morgan, 1994). However, this is not to be seen as inconsistent to the national innovation systems, as the literature on regional innovation networks is concerned not so much with institutional settings but on positive externalities and inter-firm economies of scale. Most famous examples of outstanding innovative regions are Silicon Valley, Route 128, Wissenschaftsstadt Ulm and Emilia-Romangna to name but a few. Recent approaches to explain regional agglomeration advantages claim that it is the clustering of resources and capabilities which lead to regional technological spillovers which are the factors responsible for innovative and economic success of firms in these regions. On the one hand, the localised pattern of development spurs the process of collective learning, in the sense that new know-how is diffusing faster, thereby enhancing the creative capacity of the firms and institutions in the region. On the other hand, also the dynamic uncertainty of innovation processes is reduced within the regional agglomeration, allowing the firms a better foundation of their strategic decisions (see Camagni, 1991). Formal and informal networks The design of a specific innovation network can vary on a spectrum between formal contractual agreements and loosely coupled informal networks. Freeman (1991, p. 502) lists the different categories which are relevant from the
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standpoint of innovation. The specific types range from tight contractual arranged cooperative efforts as (1) joint ventures and research corporations or (2) joint R&D agreements to (3) the contractual arranged exchange of R&D results, from financial engagement as (4) direct investment to (5) licensing of technology and (6) subcontracting, from common established (7) research associations, (8) participating government sponsored programs or (9) the building up of a common R&D infrastructure like data-banks etc. to (10) the informal exchange of know-how between firms in a network or the employed scientists and engineers. In the recent literature informal networks increasingly move in centre of interest[5]. According to Freeman (1991) they play a role somewhat analogous to tacit knowledge within firms, so e.g. behind every formal network are usually various informal networks, giving it the breath of life. Meanwhile, the empirical evidence of this form of inter-firm-learning is underlined in several studies, to name but a few e.g. von Hippel (1989), Jagger and Miles (1989), Hakanson and Johanson (1988), Malerba and Torisi (1992). Again Freeman (1991, p. 500), by surveying the empirical literature states: Although rarely measured systematically, informal networks appeared to be most important. Multiple sources of information and pluralistic patterns of collaboration were the rule rather the exception.
In this respect, following Hakanson (1989), also a dynamic component exerts influence: with an increasing duration of formal R&D co-operative relationships, they mutate to informal relationships as mutual trust and confidence between the partners is built up. Formal contracts get increasingly displaced by more flexible informal relationships in the course of time. Accordingly, although the formal arrangements end e.g. after the successful development of a new product, the relationship between the firms or the employed engineers and scientists remains, offering an efficient channel for knowledge flows in the future.
economics to investigate innovation networks. Drawing as a starting point on the theory of the firm it is obvious that the analysis of innovation networks is confronted with the same obstacles as economic innovation theory in general. The difficulties can mainly be traced back to the incentive-based perspective of traditional approaches. Both the production function approach of neo-classical economics as well as transaction costs analysis view innovation networks from a too narrow incentive-based perspective. Because of neglecting basic features of innovation processes and focusing on a cost-perspective only, these approaches do not catch the essential features of present day innovation networks. Without drawing on the knowledge-based perspective of evolutionary economics, the crucial characteristics of innovation networks i.e. inter-firm learning, the exploitation of complementarities, and the creation of synergies cannot be captured. This knowledge-based perspective is supported by the motives the firms cause participating in innovation networks. Here, firms regularly state synergistic partnering as the reason for their engagement in co-operation. Finally, the main concepts are introduced, on which modern economic innovation theory draws upon in the analysis of innovation networks. However, up to now, there exists no clear terminology and several almost similar concepts are competing for their diffusion in literature. Therefore, on the research agenda of evolutionary economics has to be the development of a common framework in the analysis of innovation networks which is also well suited for empirical investigations. The present paper wants to be a first step in this direction.
Notes
Summary and conclusions The aim of this paper is to give an overview on the development of theoretical concepts in 161
1 A major discussion can be found among others in Nelson and Winter (1982), Witt (1987), de Bresson (1987), Clark and Juma (1987), Silverberg (1988) and Faber and Proobs (1990). 2 This list of necessary components is taken from Dosi et al. (1992) 3 A point also stressed by Aoki (1986) as crucial for the success of Japanese firms, which are embedded in long term networking relationships with subcontracting firms. 4 This is also stressed by Mowery (1989): ``Technological developments in a number of
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industries also have increased the importance of access to new or unfamiliar technologies . . . Collaboration can provide more rapid access to technological capabilities that are not well developed within a firm and whose development may require a large investment and considerable time. 5 Pyka (1997) models the emergence of informal networks within a self-organisation framework.
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Introduction
Profitability in market-oriented SMEs: does product innovation matter? Helen Salavou
The author Helen Salavou is a Doctoral Researcher, Athens University of Economics and Business, Athens, Greece. Keywords Product innovation, Market orientation, Profitability, Small-to-medium sized enterprises Abstract A significant body of research has focused on the conceptualization of market orientation showing evidence of a positive relationship between market orientation and business performance. However, little attention has been drawn to how innovation could affect this link. Keeping track of limited research on this issue, this study attempts to empirically investigate the moderating effect of product innovation, if any, on the market orientation ± profitability link in SMEs. Drawing upon data collected from the food industry in Greece, the findings suggest that product innovation is partially tied to this relationship. Apart from providing some new evidence, the results lead to managerial implications and reveal considerable scope for further research. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 5 . Number 3 . 2002 . pp. 164±171 # MCB UP Limited . ISSN 1460-1060 DOI 10.1108/14601060210436736
Researchers have pursued extensively an understanding of the relationship between market orientation and business performance, mainly because of its apparent strategic importance. Firms' product-related innovative activity is also assumed to be of strategic nature, constituting a key task of strategic management. However, few studies have tried to address how market orientation and innovation together influence organizational performance. In particular, the role of innovation in the context of market orientation remains empirically weak (Han et al., 1998). Keeping track of limited research on this issue, the present study centres on the moderating role of product innovation in the market orientation ± business profitability link. The purpose of the research is, thus, to investigate how firms' market orientation and product innovation interact, if at all, in affecting their profitability. An empirical study is designed and implemented to investigate whether product innovation plays a moderating role in the relationship between market orientation and profitability in SMEs, whose contribution in promoting innovation has been widely acknowledged in all EU economies. Survey data are collected by personal interviews in 69 food companies throughout Greece. Three regression models are subsequently employed to derive results from this particular investigation. The article is organized as follows. First, the groundwork is laid by presenting the theoretical framework and proposition. The next two sections report the research methodology used and the results obtained by the survey. Finally, a concluding section summarizes the particular findings together with their implications.
Conceptual framework and proposition Not only is the value of being market driven unquestioned in companies today but also current practice dictates that success starts with the thorough investigation of customers' needs and ends with the development of new An earlier version of this paper has been presented in the 30th EMAC Conference (2002).
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products that offer superior value to them (Kumar et al., 2000). Thus, from a strategic perspective, the impact of market orientation on firm's profitability could be better understood if allied with its product-related innovative behaviour. Along this line, the present research investigates whether the inclusion of an innovation construct can contribute in identifying empirical effects in the extensively pursued relationship between market orientation and business performance. Figure 1 depicts the components of this conceptualization, notably the moderating role of innovation in the impact of market orientation on business performance, focusing on profitability. In line with numerous conceptual and empirical studies, market orientation is shown to have a direct influence on business profitability (see Figure 1). This relationship is, however, posited to be contingent upon the degree of the firm's innovative activity manifested through product innovations. In other words, it is argued that market orientation will have a greater influence on the profitability of more innovative firms rather than on less innovative ones. The rationale is that market-responsive firms display a higher commitment towards rapidly evolving customer needs and constantly seek to ensure their satisfaction by offering more radical product innovations. Such a response leads to products with greater value to those customers, thus strengthening the firms' competitive position and ultimately resulting in higher levels of profitability. Drawing upon the existing literature, it is suggested that market orientation may not be that crucial for business profitability unless product-related innovative attitude is taken into account. If this moderating effect exists, wider conclusions could be derived from adjusting the emphasis Figure 1 Conceptual framework
on market orientation. These may help firms to conceive market orientation and innovation as tied ``properties'' in explaining performance outcomes. A more detailed discussion guiding the formulation of the proposition under examination follows below. The literature suggests that several attempts have been made to define market orientation in the recent marketing and management literatures (DeshpandeÂ, 1999). Market orientation is usually defined as a set of specific behaviours and activities, a resource, a basis for decision making, or an aspect of organizational culture (Hurley and Hult, 1998). Although market orientation was first defined to put emphasis on the customer the emphasis then shifted to consider market orientation in terms of an external or outward-looking perspective of a firm; that is, a focus both on customers and on competitors (DeshpandeÂ, 1999). A significant body of research has focused on the association of market orientation with multiple measures of business performance (Han et al., 1998; Slater, 1997). As a result, market orientation is frequently posited to improve performance outcomes (Day, 1994). Market-oriented firms can better satisfy customers, and hence perform at higher levels (Jaworski and Kohli, 1993). Relatively less attention has been paid to the relationship between market orientation and innovation, as the market orientation literature has only recently begun to acknowledge the role of innovation in the context of market orientation (Han et al., 1998). Further investigations are, thus, required on how market orientation and innovation together influence organizational performance (Deshpande et al., 1993; Han et al., 1998; Hurley and Hult, 1998; DeshpandeÂ, 1999). Such investigations could provide significant benefits, as the level of confidence in market orientation would be advanced on both conceptual and strategic grounds. Although little is known about the role of innovation in market orientation ± performance link, the present study argues that the extent to which a firm innovates in products moderates the relationship between market orientation and its profitability. Peters (1984) claims that superior corporate performance is derived from a commitment to total customer satisfaction, which can be brought about by continuous innovation. Thus, a firm's commitment to customer value-focused
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innovation is essential to sustain competitive advantage (Slater, 1997), with which superior yield may be obtained. In a similar vein, Quinn (1986) observed a strong market orientation in innovative businesses. Market-oriented firms may be more innovative because they are more responsive to rapidly evolving customer needs (Narver and Slater, 1990). That is, they are well positioned to anticipate the developing needs of customers and respond to them through the addition of innovative products (Slater and Narver, 1994). Firms' greater understanding of key customer needs results in products with greater value to those customers (Pelham and Wilson, 1996). Hurley and Hult (1998) argue that firms with greater capacity to innovate are able to develop a competitive advantage and achieve higher levels of performance. In this direction, Atuahene-Gima (1995) investigated whether market orientation has a greater influence on the performance of radical innovations than on incremental innovations. Similarly, Deshpande et al. (1993) found performance linked to both market orientation and innovation while Han et al. (1998) empirically provided some evidence that market orientation facilitates an organization's innovativeness, which in turn positively influences performance. The preceding discussion leads to the following proposition, that is: P1. Market orientation will have a greater influence on business profitability for firms with more radical product innovations rather than for firms with less radical (i.e. incremental) product innovations.
Research methodology Sample and data collection The data pertain to one of the most dynamic industries of the Greek economy, i.e. food and beverages, in which the vast majority are SMEs. Following the EU definition of SMEs, the relevant population is defined as all independent firms with less than 250 employees and less than e40 million annual turnover. According to these criteria, a population of 745 SMEs was determined by ICAP (Gallup's subsidiary). Subsequently, 69 firms, which have introduced at least one new product (or new product category) during the last three years (1995-1997), were selected by
random sampling[1]. Data were collected by a structured questionnaire through personal interviews with the top management (42 per cent managing directors, 26 per cent marketing and sales managers, 17 per cent financial managers and 15 per cent others). All interviews were carried out personally by the author during 1998. The estimation dataset included 61 firms that provided complete data for all necessary variables. Measurement of variables Dependent variable Among several measures of business performance, profitability has been employed in many studies (Han et al., 1998; Narver and Slater, 1990; Pelham and Wilson, 1996; Slater and Narver, 1994), especially in those dealing with market-oriented firms because of their long-term focus on profits (Felton, 1959). Taken that many researchers have found consistency between subjective and objective approaches to measuring performance (Greenley, 1995), we used an objective measure, that is average return on assets (ROA). Financial statements for three years (1995-1997) were thereupon obtained, from which the average ROA was calculated. Although a common problem faced by researchers is to obtain objective measures of performance, it is worth mentioning that SMEs were willing to divulge and provide this information[2] during the interviews. Independent variable Market orientation is measured in this study by a version of the multi-item scale developed by Ruekert (1992), which is a similar version of the instruments proposed by Kohli and Jaworski (1990), Narver and Slater (1990) and Shapiro (1988). This modified instrument is defined as a set of specific behaviours and activities reflected by the extent to which a firm understands and responds to customer needs. More specifically, market orientation captures in this study five dimensions, i.e. customer information, market-driven strategy formulation, market-driven product development, customer responsiveness and market-driven pricing policy (see the Appendix). Moderator variable Product innovation is measured by a threeitem scale tapping the degree of the firm's orientation toward product innovations
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during the last three years (1995-1997). This scale (see the Appendix) is adapted from Miller and Friesen (1982).
Analysis and research findings Moderated regression analysis was applied to test P1. This is evident to be a suitable technique for testing hypothesized contingency relationships since it allows interaction effects, which are implied in all contingency relationships, to be directly examined (Arnold, 1982; Darrow and Kahl, 1982; Schoonhoven, 1981). In particular, the statistical significance of interaction effects was tested by regressing the dependent variable (average ROA) on adopted main variables (market orientation dimensions being the independent variables and product innovation being the moderator variable) and the cross-product of those main variables (market orientation dimensions product innovation). Following a procedure outlined by Sharma et al. (1981) for identifying moderator variables, three regression equations were run (see Table I). In particular, Equation 1 reports the standardized coefficients and significance of the five market orientation dimensions as the independent variables and the average ROA as the dependent variable. Additionally, Equation 2 presents the standardized coefficients and significance of the five market orientation dimensions and the product innovation as the independent variables, and the average ROA as the dependent variable. Finally, Equation 3 exhibits the standardized coefficients and significance of the five market orientation dimensions and the interaction terms (each of these dimensions multiplied by product innovation) as the independent variables and the average ROA as the dependent variable. Before regressing average ROA on the exogenous variables, all multi-item scales were factor-analysed to extract factor scores and reassess scale unidimensionality (see the Appendix). The inter-item reliability coefficients of the scales (see the Appendix) are quite acceptable according to the reliability standards suggested by Van de Ven and Ferry (1980). It should be, additionally, mentioned that no multicollinearity problems have been detected, since tolerance values and VIFs for independent variables in all equations are
within the acceptable limits[3], proposed by Cohen and Cohen (1983). Inspection of Table I provides interesting results. Since the addition of the interaction terms (see Equation 3) significantly increases the predictive power of the model in explaining the variance of ROA (from adj. R2 0:16 to adj. R2 0:34), an interaction effect can be said to exist. Specifically, because the regression coefficients of two interaction terms are significantly different from zero, it can be claimed that market orientation in terms of customer responsiveness and market-driven pricing policy, and product innovation interact and, thereby influence business profitability. Furthermore, given that product innovation is a significant determinant of business profitability (see Equation 2), this variable can be considered as a quasi-moderator of the relationship between the aforementioned market orientation dimensions and business profitability, expressed by average ROA. Although empirical results provide partial support for P1, the relationship between market orientation and business profitability is indeed moderated by the degree of the firm's innovative activity manifested through product innovations. However, not all five dimensions of market orientation have been found to exhibit a greater influence on business profitability when moderated by the construct of innovation. Accordingly, it can be argued that: . The negative and significant beta coefficient of the interaction term ``customer responsiveness product innovation'' in Equation 3 suggests that, the positive influence of this market orientation dimension on average ROA (see Equation 1) is greater for companies with less radical (i.e. incremental) product innovations than for companies with more radical product innovations. . The positive and significant beta coefficient of the interaction term ``market-driven pricing policy product innovation'' in Equation 3 implies that, the negative influence of this market orientation dimension on average ROA (see Equation 1) is greater for companies with more radical product innovations than for companies with less radical (i.e. incremental) product innovations.
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Table I Moderated regression analysis of market orientation, product innovation and their interaction with business profitability as the dependent variable Equation 1 Beta sign.
Market orientation Customer information Market-driven strategy formulation Market-driven product development Customer responsiveness Market-driven pricing policy Product innovation (PI)
0.096 ±0.168 ±0.040 0.218 ±0.283
0.448 0.185 0.751 0.084* 0.027**
Equation 2 Beta sign. 0.116 ±0.134 ±0.058 0.180 ±0.314 ±0.300
0.339 0.273 0.625 0.138 0.011*** 0.017**
Interaction terms Customer information PI Market-driven strategy formulation PI Market-driven product development PI Customer responsiveness PI Market-driven pricing policy PI R2 = 0.156; adj. R2 = 0.079; F = 2.029, sign. = 0.089
R2 = 0.241; adj. R2 = 0.157; F = 2.864, sign. = 0.017
Equation 3 Beta sign. 0.221 ±0.100 ±0.058 0.058 ±1.147
0.064* 0.367 0.610 0.619 0.204
0.074 0.004 0.147 ±0.277 0.337
0.554 0.974 0.215 0.054** 0.018**
R2 = 0.453; adj. R2 = 0.343; F = 4.139, sign. = 0.000
Notes: *** Significant at the 0.01 level, ** Significant at the 0.05 level, * Significant at the 0.10 level
Conclusions and implications This study has provided partial support for the argument that the conjunction of market orientation and product innovation is associated with business profitability in SMEs. Empirical results appear to confirm that market orientation, in terms of customer responsiveness and market-driven pricing policy, and product innovation interact in affecting business profitability. In particular, current findings support that the more firms: (1) respond to customer needs while offering less radical (i.e. incremental) product innovations; and (2) do not follow a market-driven pricing policy while offering more radical product innovations, the higher their profitability in terms of average ROA. It is consequently worth mentioning some managerial implications that could be offered. An important managerial implication relates to the first finding (point a above) that customers appear to show preference to firms whose products respond to their evolving needs, even if they result from minor modifications of existing ones. Such a choice appears, however, to enable those firms to achieve higher profitability. Stated differently,
market-oriented firms can become more profitable by responding to customers while avoiding radical product innovations. This may be plausibly justified taking into account that more radical as opposed to less radical product innovations usually require additional funds and resources (Ettlie and Rubenstein, 1987). Moreover, firms understand what product features really provide customer benefits and which ones are merely going to add to product cost without giving customer an additional reason to buy (Slater, 1997). Another substantial managerial implication concerns the second finding (point (2) above) that more innovative firms seem to achieve higher profitability if they do not follow a market-driven pricing policy. This is rational since firms offering more radical product innovations are usually faced with higher expenditures, which result from disposal of extra resources. Thereupon, companies constantly chasing to satisfy the ever-increasing customer needs by offering radical product innovations should preferably follow a pricing policy based on the related investment and not on what competitors do. An apposite explanation lies in the fact that customers are generally willing to pay a higher price if those products
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are perceived either unique among dimensions that are valued by them or superior compared to competitive ones (Day and Wensley, 1988). That means, radical product innovations offered by marketoriented firms should embody a value proposition that is significantly more compelling than the available alternatives in order to induce customers to pay these higher prices. Understanding, thus, customers' perceptions of value could be more beneficial to firms than focusing on numbers. This contradicts, of course, firms' well-accepted, dictum ``higher performance at lower prices''. A final managerial implication stemming from the present study is related to the size of the firms under analysis. The particular findings are in contrast with arguments defending that market orientation is a less critical ingredient of success in small firms because they are more adaptable to marketplace changes (Pelham and Wilson, 1999). On the contrary, it is evident that the alignment between market orientation and product innovation is associated with business profitability in SMEs. Small firms should, therefore, take advantage of their areas of strength, i.e. innovation and flexibility, and combine them with a market orientation in order to achieve superior performance in terms of profitability. Empirical results support indeed that small firms are able to improve profitability by aptly matching customer responsiveness and market-driven pricing policy with product innovation. These results are consistent with Pelham and Wilson (1999) who suggest that small firm managers should be encouraged to focus on innovation allied with a strong market orientation for carefully targeted customers in order to obtain improved profitability. To summarize, firms should take into consideration that the trade-off between more and less radical product innovations relates to how they position themselves to understand the nature of customer value reflected by the market orientation concept. This is of major importance since superior performance is indeed the result of providing customer value (Slater, 1997). The preceding discussion led to some important implications, which must be, in any case, substantiated with additional research. Empirical findings are, nevertheless, building upon limited research on how firms' market orientation and innovation together
influence their performance in terms of profitability, while reveal considerable scope for further research. Consistent with Deshpande et al. (1993), these results support the view that market orientation, innovation and performance are linked and should therefore be examined simultaneously. Moreover, this study reinforce considerations that research on market orientation and performance may benefit from reframing existing models to incorporate innovation more directly (Han et al., 1998; Hurley and Hult, 1998). The specific results are partly in line with Atuahene-Gima (1995), who found that market orientation has a greater influence on performance when the new product is considered less radical (i.e. incremental) by the firm. Any conclusion drawn from this study should, however, be regarded as tentative due to limitations. First, this study was applied to a limited context, drawing upon data from food companies in Greece, making thus the generalizability of the findings limited. It would, therefore, be interesting to further investigate whether similar relations obtain in other industries and/or national contexts. This analysis could be seen, however, as a precursory endeavor within the European setting from the point of view of SMEs in a small country like Greece. Second, this study relied on a single measure to assess business profitability, since its focal point was to investigate the constructs of market orientation, innovation and business profitability simultaneously. However, it would have been preferred to use additional measures to better capture organizational performance.
Notes
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1 Given that such a criterion required phone calls to 745 firms and the related cost was extremely high, a sample was randomly selected by the whole population. Firms not meeting this criterion were replaced by others which were not selected in the first run. 2 Financial statements of most Greek SMEs are announced in public. 3 Tolerance values should be higher than 0.19 and VIFs lower than 5.30.
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Appendix. Measures and items Market orientation (Cronbach alpha coefficient for scale: 0.79) To what extent does each of the following statements describe adequately your firm? (see Table AI) (Response format: 1 ``not at all'' to 7 ``very much'') Product innovation (Cronbach alpha coefficient for scale: 0.68) Please indicate the point that represents your opinion by comparing your company with your main competitors, on average for the last three years (1995-1997) for each of the pairs of sentences in Table AII.
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Table AI Market orientation Factor 1
Variables
Customer information Listens to opinions of customers Uses customer information to improve quality of products Company objectives are based mainly on customer needs Market-driven strategy formulation Uses market research data in managing products Personnel has adequate information about customers and competitors Company strategy relies on market research Develops certain strategy for market segments Enough funds are given to improve market position
Factor loadinga Factor Factor Factor 2 3 4
Factor 5
0.86 0.77 0.41 0.85 0.61 0.84 0.59 0.55
Market-driven product development Uses customer information to develop new products Focuses on markets in which we have competitive advantage Company planning is organized by markets rather than products
0.63 0.72 0.66
Customer responsiveness Company values market position more than financial performance Keeps promises made to customers Respond to customer needs in delivery on time
0.53 0.83 0.82
Market-driven pricing policy Prices are determined by market conditions Responds to customer needs in creating terms of sale Responds to customer needs in credit policy
0.74 0.76 0.73
Total variance explained: 63.32 per cent Notes: a Principal components analysis with varimax rotation
Table AII Product innovation Factor loadinga Factor 1
Variable Less new products Changes in products have been mostly of a minor nature (i.e. incremental) There is a strong emphasis on the marketing of true and tried products
1
1
1
2 3
2 3
2 3
4
4
4
5
5
5
6
6
6
7
More new products
0.83
7
Changes in products have usually been radical
0.84
7
There exists a very strong emphasis on the development of new and innovative products
0.72
Total variance explained: 63.70 per cent Note: a Principal components analysis with varimax rotation
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Guiding innovation socially and cognitively: the innovation team model at Skanova Networks Tomas HellstroÈm Merle Jacob and Ulf Malmquist The authors Tomas HellstroÈm and Merle Jacob are both Visiting Professors based at Management, Politics and Philosophy, Copenhagen Business School, Copenhagen, Denmark. Ulf Malmquist is at Skanova Networks and is a PhD Candidate, Department of Innovation Engineering and Management, Chalmers University of Technology, GoÈteborg, Sweden. Keywords Innovation, Teams, Product development, Corporate venturing, Telecommunications Abstract This paper presents a case study describing the development of an innovation team in a large Swedish telecom company, the aim of which is to find, test and promote new product and service concepts. Drawing on experience from the team's first year of operation, it is concluded that certain roles given within the team, especially that of the manager in charge of boundary work vis-aÁ-vis the line organization, actualize a range of issues pertinent to the study of corporate venturing but redress these in a new light. For instance the notion of guiding an innovation through a locally conceived ``innovation space'' is presented, and shown to require a previously under-emphasized measure of social and cognitive engagement on the part of the team. Electronic access Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1460-1060.htm European Journal of Innovation Management Volume 5 . Number 3 . 2002 . pp. 172±180 # MCB UP Limited . ISSN 1460-1060 DOI 10.1108/14601060210436745
Introduction The history of innovation management is littered with analyses of the difficulties that are often confronted by large corporations with respect to fostering and managing innovation (Dougherty, 1992; Dougherty and Heller, 1994; Brown and Eisenhardt, 1995). It should come as no surprise therefore that there is also a burgeoning literature outlining strategies to assist companies out of this impasse (Burgelman, 1984; van de Ven et al., 1989; Claver et al., 1998). Among these strategies, corporate entrepreneurship, a.k.a. corporate venturing and intrapreneurship has emerged as one of the more popular in contemporary management practice. Intrapreneurship research is still an emerging field but a number of results are now regarded as stable, among these is the finding that organically structured venture teams are an effective way of institutionalizing entrepreneurial activities in large established firms (Burgelman, 1984). Moving from an understanding of the elements of successful strategies for corporate entrepreneurship to designing and implementing one such strategy in practice is often one of the most challenging steps in management. It is therefore worthwhile to analyze such practical examples where they can be found with a view to extracting lessons for further improvements. In the light of this, the present paper describes the development of a team-based model for locating, testing and promoting new product and service innovations in a large telecom company in Sweden. The focus is on outlining a functional team based structure for working pro actively with activities such as locating, refining, and anchoring prominent ideas and innovations in business units within a large established firm. This model may be construed as a valuable alternative to, or extension of, existing organizational forms for promoting new innovations, e.g. technology transfer offices, corporate venture capital and business incubators. The paper begins by reviewing a number of pertinent issues and existing solutions to the problem of fostering innovation in large firms, which focus on developing innovationsupporting sub-organizations within the company. This review of the elements of the problem is followed by a description of the methodological steps taken in the study and a
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description of the case in focus, i.e. the innovation team at Skanova Networks. The case description provides background, critical aspects of the development and constitution of the innovation team and the results of a one-year evaluation of work practices for fostering innovation. The final section of the paper will discuss the implications of case in terms of the theory and practice of internal venturing. Elements of the problem Innovation from the point of view of internal corporate venturing has been positively reviewed by a number of authors (cf. Kanter 1985; Garud and Van de Ven 1992; Zahra, 1996). This literature shows that internal corporate venturing encompasses a wide range of issues however this paper focuses in particular on the subset of these issues that are of immediate relevance to the relation or ``fit'' (socially and cognitively) between the new innovative venture and the parent firm, and how that is established, as well as how an innovation team may be able to achieve such a fit. With respect to the former, Thornhill and Amit (2000) have argued that a new innovation should be relationally involved with the parent company (i.e. with respect to structure and culture, as well as economically (i.e. with regard to capital). As to the latter, Galbraith (1983) was among one of the first to suggest concrete procedural ``stages'' for such a corporate innovation process. These were: . proof of principle or prototype; . model shop; . start-up model production; . natural growth; and . strategic maneuvering. However from the point of view of developing desiderata for a process-based team effort, Burgelman's (1984) finding that product championing, organizational championing and innovation selection are key to successful team involvement in corporate venturing and innovation counts as one of the most important early contributions. A key notion in innovation development has been the association of corporate R&D with competitive strategies (e.g. Liao and Greenfield, 2000). Kantrow (1980) argued that all technological decisions must be made in the fullest context of the company's strategic positioning, and Ericksson et al. (1990) as well
as Ransley and Rogers (1994) further underscored this by suggesting that not only should there be substantial communication between R&D and business, but that these two should mutually guide each other in the sense that while business needs guide technological development, technology helps business identify opportunities and threats to which strategy can then respond. This ability reveals itself to be particularly important when viewed from a new venturing perspective (see Spencer and Triont, 1994). In the context of new product development (NPD) thinking, Shepard and Ahmed (2000) has suggested a generic set of components that are necessary for achieving ties between R&D-technology and new product strategy. This encompasses a structured development process where ``rules of the game'' are established; a review board of executives who sets priorities and solves crossproject issues; a ``realization team'' who operates with cross-functional execution; and finally a phase or stage-gate process for guiding resource flows and setting milestones. This list is complementary to the structural enablers for developing a corporate innovation proposed by Galbraith (1983). These are some of the functional utilities that an innovation team would likely have to develop (in some form or the other) in order to attain sustainable innovation. In the course of achieving corporate innovation within the processes depicted above, an innovation team must work with its access to market and to technological knowledge within as well as outside of the company. This process may be referred to as a boundary spanning activity (Tushman, 1977) aimed at enhancing the team's as well as the innovation system's absorptive capacity for new ideas (Cohen and Levinthal, 1990). Boundary spanning activities are needed in order to promote the general ``architectural competence'' of the team, and also of the business units who are to eventually disseminate an innovation (Hendersson and Cockburn, 1994). The architectural competence hence represents the ability of the team to access new knowledge from outside the boundaries of its own organization and to integrate this knowledge across the boundaries of the company. Such competence is likely central to a successful innovation team (e.g. Rosenkopf and Nerkar, 2001). In summary, we may conclude that the above review of the literature highlights at
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least three broad critical challenges to the successful innovation team: (1) organizational fit with respect to social and cognitive factors in the innovating organization at large; (2) integrative capacities between R&Dtechnology and strategy; and (3) boundary spanning capacities in terms of architectural competence in the team. It will be a key task of this paper to test these requirements against the model described in the case study in order to add to or qualify some of them. Methodological approaches taken in this study This paper is based on three methodological approaches, which relate to different parts of the case study below. First, we gathered and analyzed documentation about the initial decision to form, staff and locate the innovation team. These documents were made accessible to us through personal contacts with the executive founders of the team. Second, we assembled data about the team's practical creation, its relationships to the rest of the organization and its formal as well as informal work practices through a combination of deep interviews and reviewing of policy documents. These interviews were made with key personnel both on a strategic level at the mother organization, as well as on the operative level in the innovation team. Altogether 33 persons were interviewed for an average duration of one hour each. Questions pertained to the rationale, conduct and goals of the company at large. Third, the part of the study which relates to the evaluation of work practices in the light of the literature was built on a focus group exercise with the authors and the innovation team. The focus group exercise lasted for half a day, and included all the ten members of the team. The guiding question for the focus group was ``how can we develop and improve our work practices and our way to relate to the organization at large, in order to secure success in innovation project X?''.
The innovation team at Skanova networks The following is a case description of the development of a special team structure for
finding, fostering and disseminating innovation at a large Swedish telecom company. It builds foremost on documentation and interviews, as well as an evaluative focus group study conducted after one year of operation. Organizational background The Telia Group (Telia from hereon) is a large telecom operator, network and service provider, which is active in Sweden, Central Europe as well as in the USA. The major part of the group's operations are however located in Sweden. In the autumn of 2000, Telia Carrier and Networks (C&N) changed its name to Skanova Networks as part of a general effort to make the business area more distinct vis-aÁ-vis other operators in the market. Skanova Networks is the division within Telia that handles the wholesaling of the network part of the company. In this capacity, Skanova is responsible for delivering network capacity, not only to other units in Telia, but also to operators on Sweden's deregulated telecom market. Telia is a major investor in Swedish infrastructure and service development with an approximate investment of US$1 billion annually; most of which is made within Skanova's core business. Skanova's business is expanding and investments are being made in Sweden as well as in the rest of Scandinavia, Central Europe and the USA. Skanova has gone through a change process the last five years with a drastic reduction of personnel. The reduction has been conducted mostly by dividing Skanova's business organization into smaller units, which have then either been transferred to other business areas of the Telia Group, or turned into independent, company owned subsidiaries, or again in other cases been dissolved or outsourced. This process has been one part of a general Telia strategy to concentrate on core businesses. The idea of setting up an innovation team within the field of technical R&D was not new at Telia, or at C&N. In 1999, Telia was contemplating a merger with its Norwegian counterpart Telenor and in preparation for this organizational change, top-management of both companies decided to coordinate their innovation activities first, by mutually reviewing their respective R&D departments. The review team consisted of ten people, equally distributed between the two companies. The team worked through the
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summer and autumn of 1999 all the way to the termination of the plans for a fusion in mid-December 1999. During that period about 64 persons who played a central role in the innovation process of the companies had given their view on how the R&D process could best provide for and drive the fusion of business goals of the two companies. The people contributing to this process were technical and business specialists from Telia and Telenor, as well as management representatives, consultants and academic researchers from both Sweden and Norway. This inclusive process managed to bridge some shared misconceptions at an early stage. One example of this was the assumptions nurtured by employees at Telia and Telenor that their respective R&D process was inefficient. After the first set of straightforward discussions of how their respective R&D process work, and what results the process had achieved, these previously mentioned misconceptions were cleared, and a constructive dialog around how to arrange a state-of-the-art R&D supported innovation process began. After the plans for the fusion were shelved in the end of 1999, much of the results of this initial team effort was picked up and re-arranged to the specific needs of C&N. The Swedish leader of the Telia-Telenor team started to anchor ideas for organizing a new department within C&N which would perform somewhat the same investigatory, initiating and supporting role for innovation as the embryo of the joint Telia-Telenor team had been showing promises of. In April 2000 this person was given the responsibility to set up a department called Telia C&N Innovation, or what later became known as ``the innovation team''. The realization of the innovation team at Skanova Networks The rationale of the innovation team The aim of the innovation team was to, in the first instance, pick up on internally and externally generated ideas for new products and services, to test and prototype these when needed, and then to act as a ``gap-manager'' between the innovation and the line organization (business units) who would take over and produce the product/service. In other words, the role of the innovation team was that of an ``innovation broker'' within the company. It was forecast that during the first year as many as 80 per cent of the ideas were
going to come from within the company, through co-workers at the different departments of Telia and Skanova. It was also recognized that many interesting and concrete concepts had been generated during the years, but that the line-organization had been unable to realize and transform them into commercial products and services. There was therefore a need for a catalyst for these sometimes already patented concepts, and a clear route past the heavy processes of various project-planning routines, which risked choking the enthusiasm of the innovators as well as discouraging external innovators from approaching Telia and Skanova. A key role of the team then was to be a catalyst for ideas, to provide a space and a quick process where these could be analyzed and tested, and finally processed and industrialized by the means of a smooth deliverance to the line-organization through the ``gap-function''. As a result of deliberations with key individuals in the Skanova innovation process, six different team roles were eventually identified as particularly desirable for the composition of such a team. These are further described below: (1) One ``team leader'', who is responsible for the overall innovation development process from a technology and business perspective, and who supervises the members of the team. The team leader anchors and picks up on processes in the outside organization of Telia and Skanova and facilitates the political viability of the innovation team in these contexts. (2) One ``innovation coach'', who supports the team leader in managing the team and is responsible for the development of ideas and suggestions on new ways of working, as well as systems for stimulation/incentives to achieve technology development from a business perspective. This person is the team leader's eyes and ears in the team and facilitates knowledge flow upwards and downwards given that the team leader also has an overarching political responsibility. (3) Two ``scouts'' for capturing new ideas at an early stage. These persons show a high degree of creativity and curiosity within the fields of technology/market/customer needs/business and new ways of working. The scout's main responsibility is to find
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the ``unknown'' brewing areas in the core business of C&N, and inventions in becoming, inside and outside of the company. They also continuously communicate business and technology intelligence to the innovation team. (4) Two ``innovation strategists'' who are responsible for the analysis of new ideas and trends, and who develop decisionsupporting documents for testing and prototyping of the ideas. A task of the two innovation strategists is to hand the concept over to the entrepreneur coach for prototyping, as well as to communicate grounded innovation concepts to Skanova's managers, decision-makers and partners. (5) One ``entrepreneur coach'' who is responsible for finding and supporting potential innovators/entrepreneurs within current strategic areas. The entrepreneur coach is foremost responsible for the establishment of test sites for prototyping, the verification of innovative ideas and the development of evaluation models. This includes sourcing of technological prototyping. (6) Two ``gap-managers'' who have the responsibility to ``mind the gap to the business units and bridge it''. This means initiating and creating solutions for eliminating/solving responsibility issues, and creating external ownership of a concept in order to transfer innovative ideas and ``innovations in the making'' primarily to other units at Telia and Skanova. First however there is a need to describe the staffing process for the team, i.e. how it came about and the human resource challenges associated with this process. Staffing the innovation team A staffing process began within Telia, and a recruitment consultant was hired from one of the major recruitment agencies. The five Swedish members of the original team all had to re-apply to the innovation team, and there were around 40 others from the Telia Group who applied for the different roles within the team. The recruitment consultant not only had the responsibility to recruit the best possible candidates but also to put together the best combination of cross-disciplinary skills and the best mix of personalities for synergy effects and multidimensional
thinking. The recruitment process generated candidates for the six identified roles of the innovation team. It was decided that the members of the innovation team had to have the ability to cooperate as a team in the sense that each member should be able to enter the different fields and roles of the other team members, at least temporarily. One of the core points of the team was to nurture a multi-disciplinary setting, where competencies in the field of business, technology and general way of work were communicated and mixed. An effort was also made to achieve an even composition of age and gender among the recruited. The recruiter by and large managed to fulfill these desiderata. The functional constitution of the innovation team The innovation team has, at the time of writing, been functioning practically for about one year, during which time it has initiated and successfully pursued two major innovation processes, and practically employed all of the general team functions described above, as well as the specific member functions described in the list above. Within the ambit of Telia, the team may certainly be described as a unit of a whole new character: an innovation in its own right. The idea has been to create and facilitate opportunities for Telia and Skanova's future technology-based business. Even though the key tasks of the team have been to initiate and manage concepts and projects in their start up phases, other activities have developed spontaneously. For instance, the innovation team has had the responsibility for the macroenvironmental analysis and technology scouting necessary to pinpoint the ``innovative unknown'' in terms of catching, analyzing, evaluating and giving priority to relevant new ideas and trends. Another responsibility has been to formulate the strategies for Telia and the Skanova division, to be responsible for a business driven analysis of technology strategy and to stimulate the creation of new business opportunities, products and ways to work. The constitution of the innovation team described above has also made it especially suited for peripheral knowledge management tasks, such as communicating ideas, trends, innovations, and changes both internally to the division and to the rest of the Telia
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Group, as well as feeding back weak signals from the external market with a special effort given to optimal timing. In this regard the team identifies and selects what will be communicated in terms of business and technology to strengthen the Telia/Skanova's future market position. The basic fundament for conceiving of the future business is ``technology pull'' rather than ``push'', combined with an ability to demonstrate and sell such ``unknown'' technology pull possibilities to the rest of the Telia/Skanova organization. The team has defined its respective roles in the light of the problems and issues faced, and has, in this process, been given the opportunity to discuss and adjust internal interfaces both among the team members and among other parts and departments of Telia/C&N. This interaction has contributed to influencing the formation of the team and its tasks. The following roles shown above have been successfully employed within the ambit of this process. From structure to process The roles and interfaces discussed are not completely fixed, but heuristic and situation specific, that is they are continuously discussed and adjusted to the situation at hand. The process of specialization is combined with one of role taking. It carries an element unique to each innovation, as the process of developing an innovation in the innovation team builds on a consecutive chain of combinations of those different abilities that are found most suitable for the specific situation. Even so the process may be seen as somewhat linear, in that it is accepted that for different stages of the innovation there will be a predominant need for specialization and focus. As can be seen in Figure 1, however, the process encapsulates many feedback loops between the different stages of the innovation cycle, as well as an orchestrated feedback from market into the innovation team domain. The process of innovation governed by the innovation team is shown in Figure 1 in grey. To complement the explanations of roles with a process description, we can see in Figure 1 how once a new concept has been ``scouted'' it is decided on the basis of business and technology strategy whether to continue development or not. If there is a godecision, the entrepreneur coach takes over and initiates a testing/prototyping phase,
which is often outsourced. After this phase the idea can be discarded or, if deemed useful, handed over to the line organization for further industrialization and commercialization. This last part, the handing over phase, is the task of the gap-manager. However, as can be gleaned from Figure 1, there is a constant feedback between the gapmanager and the scouts, and the gap-function is hence present throughout the whole of the team process. In the beginning the emphasis is more on establishing a demand outside as well as within the organization by scouting, and towards the end it is more about internal marketing and anchoring. The two curled arrows from gap-function to line organization and sales force indicate that the innovation team must keep at least two steps ahead of the innovation after it has left its own process. The team leader and the innovation coach are omitted from the figure as they have the general function of overlooking the whole process. The feedback from market is grounded in that the whole team has a continuous responsibility to conduct foresight activities and market intelligence as part of the respective role designations of the individual members.
Discussion ± evaluating and drawing lessons One year hence it is possible to make a number of tentative evaluative reflections on how the innovation team process has worked, and to relate these to some of the received wisdom of the corporate innovation/venturing literature. One of the main discussions in the innovation team is now about how to enable the gap-managers in the best way. A pressing issue in this regard is determining what is the best procedure for delivering tested prototypes to line-managers in the business units. This was also one of the key questions raised during the review of the original team. The role of the gap-manager, as described above, is to work as a political agent during the first phases of the innovation process and to anchor results and ideas that the innovation team generates in the line organization. This is done by, for instance, continuously setting up meetings and sharing information with different departments, mostly with one or several of the Telia/Skanova business units or with other departments. This is to make a
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Figure 1 The innovation team process (in grey)
smooth delivery of tested concepts and information, but also, intersecting with the team leader's role, to minimize internal political issues and generate acceptance for the non-conventional process of the team within the Telia/Skanova organization as a whole. In so far as the role of kicking things through with the line organization has been a discernable task, the literature has usually designated this role ``heavy weight project leader'' (Clark and Fujimoto, 1992), or more informally ``project champions'' (e.g. Wheelwright and Clark, 1992) or ``technological gatekeepers'' (Allen, 1977). However, in this case we see two aspects not found in the above accounts: (1) Unlike the heavy-weight project leader, the gap-manager does not keep a strong position in the line organization, but has to negotiate through ``the back'' by instigating various forms of communicative tricks, e.g. strategic information bartering, vision mongering and risk reduction through taking over traditional line responsibilities such as market intelligence. (2) The gap-manager is a designated task, so unlike the technological gatekeeper he/ she cannot work informally in this capacity, but will be on an ``official mission'' to the business units. This actualizes a kind of tension between interactive principles of the market, e.g. free movement and informal bartering, and the principles of the hierarchy, e.g. strict role designation, command and control, and working by the book (HellstroÈm et al., 2001). This tension is
somewhat reduced in the innovation team by transferring the ``heavy weight qualities'' to the team leader, and letting the gap-managers become ``equal-level communicators/participants'' in the innovation process. One key question pertaining to the political and necessarily strategic side of this process which has been an important concern in meetings with other units at Telia/Skanova, has been the interface between the innovation team and the strategy work of the business units. All of the units interacted with so far have put a very strong emphasis on the strategy question, i.e. the issue of strategygoal autonomy, and all have made clear statements about where they perceive the innovation team's responsibility to begin and end in this regard. Because of the foresight function of the team, and the fact that most of the projects are what Wheelwright and Clark (1992) refer to as ``R&D projects'' with an explorative, speculative, future dimension to them, this necessarily puts in question where strategy is being (should be) formulated. As it turns out, the connection between the concept formation represented in the (linebased) team, and the strategy of the (linebased) business unit, is just as complicated and contestable as the traditional connection between the corporate R&D and the business units (see for instance Souder (1977) for an outline of this classical problem). Nevertheless, the experience of the team is that literature's oft sounded suggestions to ``align technology to the goals of the entire company'' (e.g. Faust and Ackerman, 1974;
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Ericksson et al., 1990) has little to do with the reality of anchoring new concepts with accountable managers in the business line. The case of the innovation team rather suggests that the question of creating an organizational fit between the innovation and the company must be conceived not only on the level of strategy but also on the level of social and cognitive factors. For instance, the team experienced that when the question of strategic alignment was discussed in mutual understanding of the respective goals of the team and the business unit, these meetings become starting points for respectful relationships. Rather than the all encompassing ``R&D to strategy alignment'' advocated by previous authors, the present case suggests that this alignment is a contested process on a local, socio-cognitive level, and that it has to be backed by a constant process of personal negotiation and mutual learning. With respect to learning in particular it is important to note the potential political role of this type of team. For instance the interviewed team members indicated that there were different political agendas at work in meetings aimed at ``closing the gap'' on different innovation processes. These agendas could in some instances be given a historic explanation in terms of previous organization charts and personal networks. The experience of political agendas was stressed both by the team leader as well as by the members of the team, and was thought to only further emphasize the importance of working gapmanagers and an increasing understanding of their conditions and possibilities. The role of the team was sometimes to facilitate a kind of conceptual, experimental learning (e.g. Lei et al., 1996) in the meeting with the business units, or to ``pull people out of their places'' by projecting ideas and concepts. The interviewees perceived the reason why other teams similar to this one had failed in the past, to be stemming from a lack of facilitative learning: learning which, if in place, could help in anchoring new ideas in the line organization. This is essentially about using boundary spanning activities and learning to create an ``innovation space''. The team in this regard helps the business unit to go from a prior mode of mainly ``acquisitive'', ``onedirectional learning", (Zahra et al., 1999) to conceptual experimental learning which
encompasses new takes on strategy and new product and service horizons.
Conclusion We will now briefly return to some of the issues touched upon in the introduction, and use the innovation team case to draw a number of conclusions. The following three areas of activity where identified in the introductory literature overview as being of special relevance to the success of a team of this kind: (1) organizational fit with respect to social and cognitive factors in the innovating organization at large; (2) integrative capacities between R&Dtechnology and strategy; and (3) boundary spanning capacities in terms of architectural competence in the team. Acknowledge the need for complementary roles in the contact with the business units The political power of the heavy-weight project leader and the ``street-level'' influence of the technological gate-keeper should not substitute for each other in an innovation team, but have to be combined, since they fill essentially different roles vis-aÁ-vis the business and strategy sides of the company. In the innovation team case these roles are designated team leader and gap-manager respectively. These roles speak to the insight that innovation needs to be fitted into the line-organization both on a social-political level as well as on the level of cognition and values. Reinforce a local, experimental tie between R&D and strategy Rather than attempting to sell a concept to the business units on the basis of preformulated strategic alignment, it is important to create such an alignment locally through personal interaction and mutual engagement. This process may take on the form of experimental rather than acquisitional learning, the latter of which would be the case if top-down strategy were allowed to facilitate the brokering of a new innovation too much. The link between strategy and R&D must be in place, but is only going to be effective in so far as this tie is given a local interpretation.
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Conduct boundary spanning exploration of an innovation space The above two points may be interpreted in the sense that boundary spanning behavior on the part of the innovation team is important in so far as it manages to create an organizational space for a given innovation to evolve and be ``incubated'' within. Much of the boundary work, and much of the architectural competence of the team should be developed and applied with such an innovation space in mind: how should it look, who should be in there, how will it stay open, and how will members of our company as well as the external market benefit from it?
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