Introduction
Motivating knowledge workers to innovate: a model integrating motivation dynamics and antecedents
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Introduction
Motivating knowledge workers to innovate: a model integrating motivation dynamics and antecedents
Managers have known all along that value creation is, and will continue to be, the raison d’eˆtre or the primary reason for the survival of all productive organizations. However, under new work conditions, to create value, every organization has to seek, generate, distribute, and apply knowledge, a function that instead of being driven by capital, emerges from an environment in which the human spirit is enthused. Only those knowledge firms that develop a work environment that motivates their employees to engage in a behavior consistent with this goal will succeed. These organizations will be able to recognize and solve contemporary problems and bring solutions to the marketplace sooner than their competitors who fail to develop such an environment. Since productive knowledge in organizations is ultimately a product of the human mind, it cannot be manipulated like sophisticated machines, fancy systems, or efficient controls. Organizations that desire to use knowledge in their products, processes, and services, have to know how to engage the human mind in their operations. Hauschild et al.’s (2001) study states that much of an organization’s most valuable knowledge is embedded in the minds of its employees. That knowledge, in turn, can be managed only through buoyancy that excites the deepest parts of the employees’ minds. Therefore, understanding the theory and application of motivation is very important in managing human resource in making these new organizations succeed. The question surrounding how to motivate employees has intrigued behaviorists for over a century. This interest started when the large corporation became the economy’s most dominant player. A lot of knowledge on human motivation has developed since then (Alderfer, 1972; Herzberg et al., 1959; Maslow, 1943; McClelland, 1971; Porter, 1961; Vroom, 1964). However, in light of the changes that have taken place in the work environment over the last decade or so, understanding what makes knowledge employees click in organizations has taken on a special significance among managers. The motivation that attracts, retains, and engages younger employees, who are the potential source of newer and untapped knowledge (Strempel, 2003), is quite different from that of their predecessor generations. Thus, what motivates the new employees is quite different
A.D. Amar
The author A.D. Amar is Professor and Chair of Management at the Stillman School of Business, Seton Hall University, South Orange, New Jersey, USA.
Keywords Motivation (psychology), Workplace, Knowledge management, Organizational behaviour
Abstract Grounding in the premise that motivation in a knowledge work environment is an outcome of the existence of certain antecedents that are responsive to the dynamics of motivation in this environment, this work develops a conceptual model synthesizing motivations “what” and “how” that will bring human creativity in organizations which thrive on innovation. The presented model embodies these dynamics into five drivers of motivation practice in the knowledge work environment and then leads to three sources of motivation into which its antecedents should be loaded to motivate knowledge employees for innovation.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
The author conveys his special thanks to Mr Januj A. Juneja, Graduate student of the Stillman School of Business, Seton Hall University, for his assistance in the library research and the rewrite of the final version of this paper.
European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 89-101 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534366
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Theorizing knowledge work motivation
from what motivated the generation before them. Some of these differences have already been documented (Loughlin and Barling, 2001; Wallace, 2001; Wolburg and Pokrywczynski, 2001). For example, whereas, climbing the corporate ladder was very important to employees of the yesteryears, it is not so to Generation Y[1]. Thus, it has become very important for organizations to know how to motivate their employees. It is for this reason that, even though a lot has been said and done on the topic of motivation, the subject is being taken afresh by practicing managers, especially those in a knowledge organization.
While most of the established theory of motivation is grounded in the works of the first 75 years of the last century and seems to have been fixated there, the practice of motivation has remained quite dynamic. Unlike motivation researchers, practicing managers have been revising unworkable motivation theories. This involves the theories applicable to the real-life situations they faced and inventing their own brands of applications to fit the requirements of the work, the employees, and the organization. They also shared with each other the benefits of the experiences they gained in answering the “what” and “how” of motivation as it concerned them. However, the tale of these two groups has created quite a visible dichotomy between established theory and application of motivation in knowledge organizations. It is for this reason that researchers may succeed in having a better handle on motivation content and process. This work takes a step in that direction. It synthesizes and theorizes the practice of motivation in the knowledge-based work environment through a conceptual model that generalizes and abstracts what is successfully being done in practice in exciting employees about their work and the organization, and inciting their minds to think creatively about their jobs, processes, and employers’ products and services. It is an attempt to relate theory to what has been learned from what occurred in practice. The basic premise of this model is that the dynamic nature of the motivation content and process requires a frequent periodical, if not perpetual, understanding of the changes in factors that explain the motivation process, and, then, either adjusting the existing motivators or making new ones that are responsive to these changes. The factors that explain the dynamism of motivation process are termed the motivating behavior drivers since they drive the design of motivators. The actual motivator designing and selecting part of the practice is done in the second section of the model, in which, first, the motivation sources are designated and, then, management loads the motivators-motivation antecedents – into them.
Dynamics of motivation and the knowledge work environment Since the organization is a living entity, it is constantly evolving and hence changing its characteristics, the approach to understanding human motivation at work requires a dynamic perspective. Such emphasis is further strengthened by the dynamic nature of human psychology and sociology and their impact on behavior at work. These dynamics set the guidelines for rediscovering, adapting, or updating the theory and practice of motivation. The question now becomes: How does one excite employees about their work and their employer’s goals considering the dynamics of motivation in a knowledge work environment? There are a number of succinct factors present in the contemporary organizational environment that have opened up and are forcing a review of the motivation theory and its practice, which, until now, had been considered as formulated, empirically tested, and established. These factors affect both content and process of motivation. That is why these are the drivers of motivation in the knowledge work environment. It becomes important for managers to decide how to motivate their employees only after considering these factors as they apply to their organizational environment and, preferably, after making some adaptations specific to each department, section, and employee. There could be so many variations due to these drivers that there is no one-way to motivate all employees. To be effective in exciting knowledge workers, managers have to do the following. First, develop a working understanding of the mind and behavior of their employees and, then, work according to a model that updates their own practice based on the results of the dynamics of their specific motivation system.
Drivers of motivating behavior in the knowledge work environment Motivation is a term associated with the forces acting on a person causing him to act in a certain way. Therefore, understanding dynamics of motivation is a requisite for identifying what drives people to act in certain ways. Motivation is inferred in terms of behavioral changes brought in by internal or external stimuli. In this case, those
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stimuli are deduced with respect to the knowledge work environment. Additionally, an individual’s motivation may change based upon certain factors. These factors are identified as the drivers of motivation and can be used to understand what drives motivation among workers in the knowledge-based work environment. Combining evolutions in work and the work environment reported by several recent authors (Amar, 2002a, b; Brenner, 1999; Cunningham, 2001; Kubo and Saka, 2002; Linz, 2002; Loughlin and Barling, 2001; Maccoby, 1995; Mui, 2001; Patterson, 2001; Peters and Waterman, 1982; Smith, 2001; Strempel, 2003; Wallace, 2001; Wolburg and Pokrywczynski, 2001), and their reinforcements from observations in the industry by the authors of this work, a total of five motivating behavior drivers have been recognized. They help the manager to understand the dynamics of the motivation process so that an appropriate response to the changes can be incorporated into the organizational motivation system. These drivers: sociological, psychological, generational, work, and cultural, are explained in the following paragraphs. Typically, motivating behavior drivers of knowledge workers is the work itself – the assignments or projects they get: In their perception, how important is the work that they would be doing? Is it exciting? Is it challenging? Would they succeed at it? This assignment will result in working with whom? For example, would it result in being surrounded by the best of the best? Would the assignment be in an organization where there is respect, trust, fairness, and good management? And, what would the experience bring as outcomes, such as rewards, recognition, career advancement, learning, and satisfaction? Answer to the above questions helps managers understand the drivers of motivating behavior of knowledge workers. The whole spectrum of these drivers is classified into the following five groups: (1) The sociological driver. Sociology has always been important in the understanding of any aspect of human behavior, such as work motivation. Motivation theory and practice considers this; however, human sociology that had largely remained constant for a long time started to experience revolutionary changes in the later parts of the second half of the twentieth century. New modes on how humans group and relate to each other emerged during this period, giving a new meaning to what is important to knowledge workers. They are marrying later, even though taking on responsibilities and becoming responsible adults at a younger age (Wolburg and Pokrywczynski, 2001). It is common to hear them say, “I can always get another job, but I only have
one family” (Maccoby, 1995). Changes, such as this one, have evolved a new value system centered on the self and family. In this new sociology, many do not see work as a means of livelihood as was done by others before them. For example, many go to work to satisfy their sociology – to be in the company of those whom they like. The work sociology has been influenced by the big changes in worker demography as well (Patterson, 2001). Women and minorities came to work bringing with them a behavior that emphasized the importance of family and other personal relationships – sometimes putting them ahead of their work priorities (Linz, 2002). For them, the job did not occupy a central position in their life as it had done for the workers of the past. Subsequently, their other colleagues at work, who led their lives following the old work ethics, discovered this new balance between job and personal life and decided to adopt this, giving a new importance to family in work. The role of sociology in establishing the application of motivation theory to knowledge work has made it an important driver of how motivation works in organizations. (2) The psychological driver. Work motivation theory applicable to traditional work is based on human behavior that has its roots in positive reinforcement – primarily, in money (Kubo and Saka, 2002). Its practices carry a premise that given proper incentives, all workers would give their best to their employers. This forms the basis for learning, training, and behavior modification in traditional organizations. However, the drastic changes in the behavior of knowledge workers shake up this notion (Smith, 2001). In the knowledge work environment, instead of money, self has become the prime positive reinforcer. For example, some managers who have strategically used self-esteem in assigning jobs to their employees have succeeded in motivating them to innovate and give higher productivity. This concept has been empirically evidenced in some studies: low-paid employees who worked under very tenuous work conditions continued to be highly motivated because their assignments gave them a sense of “self-regard” and “potentiality” in the form of handling business relationships and making deals. These proved to be successful tradeoffs of wages, friendly schedules, and stable jobs in motivating them (Smith, 2001). Motivation of the younger workers, who, through their observation of work habits of their parents, have developed a work ethic that has altered the earlier generations’ behavior of “living to work” to “working to live” (Loughlin and Barling, 2001), cannot be accomplished by continuing to incarnate motivation theories of the
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past. In some cases, organizations may successfully motivate their employees by providing them with simple conveniences, like a good chair to sit at while working (Cunningham, 2001). Understanding worker psychology on a regular basis and making adjustments to the practice of motivation in response to these changes is very essential to success in exciting employees about their assignments. (3) The generational driver. Employers report that younger employees are too keen to take on responsibility, quickly move up the hierarchy and become successful. However, they cannot deduce if it means that they are too interested and motivated to work or simply too impatient to get rich (Mui, 2001). These younger employees are employees of the newer generations – Generations X and Y[1] (Coupland, 1992). Many knowledge workers are likely to fall in this category (Strempel, 2003). The last decade saw their introduction to the workplace. The future of knowledge organizations really belongs to them, in particular, to Generation Y which has about 70 million members, almost as large a demographic group as the Baby Boomers (Wallace, 2001). In the past, employers have successfully brought to work and taught rules of the workplace to newer generations, however, that is not the case with the ones coming to work now. They require special attention. This importance draws from the following two factors relating to them. First, a number of work skills in demand by knowledge organizations are monopolized by employees from these generations. Second, even though, currently, they constitute a relatively small part of the workforce, and are yet working in low-to-mid-level positions in organizations, their psychology and sociology are so different from the rest of the workforce that they demand a critical understanding of their own behavior. They are nothing like their predecessor Baby Boomers of 20 or 30 years back (Wolburg and Pokrywczynski, 2001). The changes that organizations will face due to Generation Y in the workplace will be far greater, due to its sheer size – 70 million versus only 41 million for Generation X (Wallace, 2001). It is for these reasons that developing a new understanding on human motivation at work without giving meaningful consideration to Generations X and Y would not result in a durable theory of knowledge worker motivation. Versions of existing motivation theories that adapt, and revise them to suit these generations, and the totally new theories specifically devised pursuant to their characteristics and personalities are the essential first step to learn how to motivate them. Nevertheless, dwelling for too long on the understanding of sociology and psychology of new
generations of employees will not be germane to this work. A lot has been written on their characteristics and personalities (Amar, 2002a, b) from where an interested motivation researcher and manager can develop a better understanding on them before arriving at correct motivators in their case. (4) The knowledge work driver. During the later part of the twentieth century, we saw a change in work dimensions and demands due to the induction of the technology, not only in the workplace but in every sphere of human life. In some form, science and technology have been incorporated into almost all jobs in almost all organizations, a process expected to continue into the future (Brenner, 1999). The rise of technology has also resulted in a new large breed of organizations whose primary input, output, or both, are dependent on scientific or technological knowledge typically possessed by individuals rather than owned by an organization (Amar, 2002a, b). Over time, these organizations came to be known as knowledge organizations. These organizations depend exclusively on the knowledge of their employees for their survival and success. Innovation is their main competitive advantage. Their phenomenal financial success and contribution to the enhancement of the quality of human life have made them very important and visible in every society. Organizational success that previously depended on job-relevant skills in the long term and experienced employees of the firm shifted to explicit and tacit knowledge (Nonaka and Takeuchi, 1995) – the scientific and technical knowledge that employees mostly acquired through university education and training which might have nothing to do with age, experience, or years on the job, and innate knowledge – making younger, newer employees with appropriate work knowledge more important to organizations. As early as the 1980s, organizations had started to realize that employees should be better used as sources of ideas (Peters and Waterman, 1982) and knowledge (Drucker, 1988) rather than providers of hands, muscles or required motor functions. This change made managers of all kinds of contemporary organizations realize that human knowledge had become an essential critical dimension of work and an important input factor for their firms to succeed. In response to the above, all employers are making innovation a high priority in their work. Every new job is being designed to incorporate the use of human knowledge to innovate what is done and how it is done. In a survey reported last year, 89 percent of America’s top executives said that, compared to 5 years back, employers were more proactively promoting
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creativity among their employees (Messmer, 2001). Employees’ ideas and their exploitation have become an essential currency in the new economy (Newman, 2000). Criticality of the knowledge component in work requires a new understanding of designing and managing jobs from the motivation perspective. It needs a new look at the measures of performance used to monitor and enhance employee motivation, because the two variables on which they rely: inputs that employees brought to work, such as their skills, experience, and effort, and mundane quantitative outputs they produced, such as the ones measurable against wellunderstood standards, become invalid as measures of performance in the knowledge environment. There are so many performance unknowns in the knowledge environment that no absolute reliable standards can be set. Hence, managers simply look for employees who have the useful knowledge and are motivated to apply it for the benefit of their organization. Next, they create an environment that encourages creativity. The change in work and workplace brought in by the technology has been so revolutionary and sudden that it caught many managers and motivation researchers off-guard. These resultant dramatic changes in the basic character of work are not incorporated in the established theory and practice of motivation. (5) The cultural driver. Another important change that organizations have experienced during the last couple of decades is the spread of globalization throughout the world. During this period, the European Community further perforated its boundaries to include the free labor movement all over its member states. The USA experienced a surge of immigrants like it never had in the past. A large number of these new immigrants are knowledge workers, not bluecollar, skilled labor. Furthermore, what makes this pattern of American immigration more interesting from the motivation perspective is the variety of regions of the world from where these workers have emigrated to the USA. The lands from where these new immigrants have come have cultures that are quite different from the cultures of the American immigrant workers of the first half of the twentieth century who came predominantly from Europe. Their value systems and religious and spiritual beliefs are not Euro-centered – the systems known to America based on which the past motivation theory and practice were formulated. Work culture, not only in America but also in many other parts of both developed and developing worlds, has been seriously impacted by the revolution in the integration of advancements and efficiencies in computing and
telecommunication technologies into work processes. This made it possible for the workers physically away from work, in many cases, far, far away – like in a different country – to impact, through their work etiquettes, the culture of their organization as do those physically present there. These cultural changes put a special emphasis on revising our understanding of how to enhance the motivation of workers since none of the traditional motivation theories is formulated considering the dynamics of these variables.
Responding to the drivers: the motivation antecedents model All contemporary organizations, particularly their divisions employing human knowledge in their operations, are genuinely engaged in understanding the dynamics of work motivation, and are working to understand and devise organizational policies and practices that excite employees about their work in ways that will result in a funneling of their minds and efforts towards the goals of the organization. In the knowledge environment, the involving of employees’ minds in their work has become more important than winning the commitment of their effort. It draws from the importance of human knowledge in contemporary work. As the role of knowledge in work increases, the emphasis on engaging employees’ minds in its execution will increase. The linkage draws from the earlier stated fact that knowledge is a product and function of mind. Some organizations, in some form, have made from small, yet meaningful, to revolutionary changes in response to the drivers of motivating behavior throughout their organizations to create a workplace that motivates. They have successfully altered, adapted, and reinvented their operations. However, most are still struggling through the maze of the new work environment. In the latter case, mostly, where the work, workplace, and work environment have changed, the organizational practices have not. This is because the organizations are not sure what they should change. They do not know what will work and what will backfire. Some of them are experimenting with whatever appears promising in enhancing employee motivation – even if at a substantial cost. Nevertheless, experimentation in this area continues as does the work on understanding knowledge organizations. There is still no theory on how to motivate employees to use their knowledge to innovate and continue to be productive in this
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environment. They have not established how to objectively reward appropriate behavior, and punish to avoid the occurrence of an inappropriate one so that the resultant learning helps the organization achieve its goals. It requires revisiting available theories and practices for establishing, enhancing, and perpetuating productive association between knowledge employees and their employers – and, in particular, their immediate superiors.
(1) Job antecedents. (2) The outcomes antecedents. (3) Organizational system antecedents.
Job antecedents The characteristics embedded in a knowledge job with the specific aim of motivating its doer and increasing the pleasure it may bring him or her are called the job antecedents of knowledge work motivation. That pleasure is brought about by executing the job. A number of job antecedents may come from the job content; however, they also include the job’s environmental factors. In the knowledge environment, the job itself has to be the first important motivator. Although the job has been an important motivator traditionally as well, it has never been as important as it is with the new generation of workers. Having a job that excites them is a necessary condition to keep these employees motivated. A knowledge worker’s job is the first place from where one receives either attraction or repulsion. If one has a job from which one wants to run away, there is no way a manager can do anything to keep him or her motivated to do well in it in the longrun. The most the manager can do in such a case is to keep the employee in the job. However, expecting from the employee a performance in line with the high expectations from jobs in knowledge organizations would be quite unrealistic. The scope and variety of knowledge job antecedents could be very wide, and, also, very specific. Each organization has to come up with job antecedents that suit it and the employees who are expected to take the knowledge jobs. There can be three types of job antecedents in the knowledge environment: (1) The first ones are the organization wide antecedents. These are equally attractive to almost all employees in the firm. (2) Then, there are certain other job antecedents that only knowledge employees in a particular department may find attractive. (3) In addition to these, organizations may provide each knowledge employee the flexibility to load one’s own job with antecedents important to him or her.
The motivation antecedents Our starting point in developing a model explaining how motivation works in the knowledge environment begins with learning from what is happening out in the real world, such as: How are the firms adapting their behavior in a knowledge environment to motivate their employees? Is this behavior successful? Once successful, how are they perpetuating motivation in their employees? A refined understanding of the answers to these questions is then used to deduce an understanding of motivation. The model so derived incorporates a number of successful linkages from specific areas to help researchers establish some starting points for further investigation and theorization of the motivation research. Every organization has some sources from where employee motivation sprouts. It may depend on how management loads these sources with the factors that energize, direct, and maintain appropriate work behavior in them. These are not what we have earlier known as contents of motivation, which are mostly a simple and general compilation of employee needs. In contrast to aiming at the fulfillment of employees’ cognitive needs, these factors connect with their psyches. They jolt up their psyches, buoying creativity in their minds and releasing energy in their bodies. Because the presence of these factors will cause motivation in employees, we call them the antecedents of motivation. Their successful connection with the employees will excite and energize them rather than create or recognize a need-deficit and then fulfill it, or simply fulfill a preexisting need. In fact, the presence of these antecedents will give the employees what is needed to motivate them to innovate. It does not work only at a conscious level, as explain content theories of motivation. It works their minds. Knowledge employee motivation can be achieved by the presence of the right antecedents. If they connect with the employees, i.e. if employees find them exciting, they get motivated. In the alternative, they do not. There are three broad classifications of these antecedents based on the source from where they emerge:
Common job antecedents that knowledge organizations employ to motivate their employees are given in the applications section below. A complete list of job antecedents could be extremely large and firm-specific. Job antecedent applications The most important job antecedent is its ability to attract and retain employees. While designing a knowledge job, management can include factors
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that will glue the employee’s mind and effort into the job. The main purpose of loading this job antecedent is to develop a bond between the job and its doer – making the job so inviting and engrossing that its doer would not like to part with it even for a short period of time. Many employers design unique and responsive factors in jobs to recruit, retain, and keep employees motivated; while others would let their employees rediscover and redesign their jobs after their recruitment with the aim of letting them construct the job antecedents important to them. These are the jobs in which workers voluntarily take work home with them after their work hours. Unattractive jobs have low amounts of this antecedent. The dynamics of motivating behavior drivers in knowledge employees is revealing strange and unimaginable job antecedents. In a study on what is important in a job to those in their 20s and 30s – the people making up the Generations X and Y categories – it is reported that to about 50 percent of them altruism was a factor in choosing a job. They value the ability their jobs offer them to help the society or local communities (Smith, 2000). Another important job antecedent is its fit with the family requirements. Family is very important to the new employees. A total of 84 percent of them consider a job favorably if it comes with a familyfriendly work schedule. It has been a very popular job antecedent and most organizations have successfully motivated their employees with it. Since the 1980s, jobs with this antecedent, even with lower financial rewards, have been preferred by a number of employees (CEO Sound-off, 1997). Some other examples of popular job antecedents include the employee’s ability to exercise some control over what is important to a good performance on the job, the availability of some travel, the meaningfulness of the work they do, the visibility of job accomplishments, the use of up-to-date technology, the ability to select teammates, and the broader work assignments. In an attempt to incorporate the last antecedent, organizations are redesigning jobs allowing their holders the opportunity to participate in projects and assignments that are not directly connected with their jobs – in effect, achieving what is being termed lateral mobility. In the knowledge work environment, a narrowly defined job is confining and an anti-motivator. Enlarged involvement in various facets of an organization satisfies employees and allows them the opportunity to proliferate their talents, some of which could be latent in their regular jobs. The lateral mobility does not only motivate but also enriches their skills to do their regular jobs better. The practice, at times, may satisfy their desire for the upward move, which organizations find hard to provide.
New generations and new cultures in the workplace setting require designing new and unique job antecedents to motivate knowledge employees. An effort in understanding which job antecedents will motivate most of them and which specific ones will motivate certain individuals or groups of employees will prove to be a worthwhile effort. The outcomes antecedents Once knowledge jobs have been loaded with the job antecedents discussed above, the question of outcomes from it to its holder follows. It covers all types of extrinsic and intrinsic, real or potential rewards. As it is important from a job motivating perspective to have a job that is well designed, it is as important to so design outcomes from the job that its doer values them. An exciting and inviting job is only one part of the comprehensive motivation system and is not enough by itself to motivate an employee for a long time. If the work system does not have outcomes that motivate, there will be no long-term motivation among employees. The first question is what type of outcomes will excite employees. In this context, we should know that the concept of rewards from the job is dynamic. Employees’ expectations from their jobs continue to change. The generational and sociological changes of the last few decades have changed these expectations. For the earlier generations, the underlining outcome from a job began with wages. It later expanded to job security, then added benefits, working conditions, and recognition, in that order. However, the outcomes that new generations working in knowledge environment expect from their jobs require a new comprehension because their Baby Boomer managers cannot project their own sense of job outcomes on them. To motivate knowledge employees, organizations have to continue to reinvent employee outcomes from jobs and devise new ways to administer them. The outcomes should be redone to precisely serve the purpose of motivating their receivers to engage in acts that will help the organization to achieve its goals. Success at motivating them will come from how these outcomes and their administration meet their expectations. Outcomes from jobs should be designed to suit the specific needs of each group or individual employee. Any broad generalization across employees in the design and administration of rewards will come with some compromise in motivation. There could be almost infinite outcomes antecedents. The ones more relevant to the knowledge work environment are discussed below.
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The outcomes antecedent applications Money – primarily in the form of wages – had been the obvious and most important outcome from employment and, until a couple of decades back, was the only outcome that employers assured to their employees. However, in knowledge work environment, money has not remained as good a motivator as it had been in the past. The efficiency of money as a motivator of knowledge work is quite low. Hays (1999), referring to jobs in contemporary organizations, states that if managers reward performance with only money, in many ways, they lose the war, because there are other more powerful motivators of knowledge workers, such as the freedom and flexibility in the workplace. The use of money as a motivator in the knowledge work environment would depend on how it is deployed. Whereas a part of money has to be an obvious outcome from every job, the capacity of money as an antecedent of motivation will have to be designed into the work system to maneuver human behavior in a required direction. Although the latter use of money is not new to managers, its use as a motivation antecedent needs to be perpetually reinforced in their minds. A number of studies suggest doing just that on a regular basis, reminding managers of the deployment of money only as a contingent incentive in organizations (Stajkovic and Luthans, 2001). Money can become a good antecedent of motivation if bonus plans are so designed that they establish a clear linkage between what management wants and what its employees can do in their jobs that is within their control (Inc Magazine, 2001). It should empower employees while at the same time give the organization what it wants. Such monetary motivators should be designed as a barter system or as a transactional system of clear give-and-take. If employees give the company what it wants, the company will give the employees what it promised to them in return. It works exactly as a business – a price is paid for what the company gets from its employees. It should look at the areas in which the company is weak, set improvement goals where employees can contribute, compute its potential financial gain and how much of this it can share with its employees, and make its plans public. For example, if a company finds low inventory turnover as a hurdle to its performance, it should announce certain goals for improvement in inventory turns and then reward employees for completing those goals. Outcome antecedents of this kind keep employees motivated and stay involved.
To be effective motivators of employees in the knowledge work environment, Karp et al. (1999) suggest that the repertoire of rewards that firms offer their employees should be expanded to include non-financial incentives. Some examples of these outcomes that firms can give are work/life benefits, and training opportunities. Other motivation antecedents that belong to this source include the amount of new learning that comes from completing a job. Once the learning that an employee is having from his or her job stops, he or she starts to feel monotony and loses motivation. The extent to which a job offers its doer the upward mobility or advancement and the fulfillment of personal or developmental goals becomes the extent to which an outcomes motivation antecedent is effective. In an attempt to keep knowledge employees motivated in their jobs, the manager has to select, and periodically review motivation antecedents from outcomes and let employees know of the availability of the new outcomes from their jobs and other jobs in the organization. It is common for organizations to offer tailormade outcomes antecedents after seriously taking into account any suggestions that their employees make. The organizational system antecedents The third source of knowledge work motivation antecedents is the organizational system. For an organization, it includes its work environment, policies and practices, management philosophies, organizational culture, image and the position in its markets and the industry, financial conditions, economic situation as it applies to its products and services, and all other organizational factors that have direct or indirect consequence on workers and work. Like the other two sources in which management loads antecedents of motivation, this source creates a sense of buoyancy that makes workers put their minds and efforts into whatever they do for their organization. In the knowledge work context, Messmer (2001) says that a manager has to create an environment in which employees can make a difference and convey to them that their ideas count. Operationalization of this concept amounts to loading into the organizational system some relevant motivation antecedents. For example, if the organizational system offers a work environment in which employees feel free and belonging, they will be motivated and would be more likely to innovate. To motivate knowledge employees, management can engage in a number of acts to cause the existence of antecedents of motivation throughout the organizational system. Some of the replicable antecedents from different management initiatives taken in different organizations at
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different levels of hierarchy are synthesized below. Nevertheless, any organization can recognize and invent a number of them through studying its specific organizational system for any antecedents that could motivate employees to take independent initiatives and put in the extra effort to make their employers successful.
codes, and to how much money employees can make from their jobs, giving them the ability to adjust their work inputs so they can make as high or as low money as they want, and to reset their monetary goals as frequently as they desire (Hays, 1999). Because, when it comes to the younger generations, the association between money and motivation is not an open-ended, monotone linear function – sometimes, some may like to make a lot and others may not, whereas, at other times, the opposite may be true. The organizational system has to allow the occurrence of this flexibility by lifting controls that regulate the amount of money knowledge workers can make. The removal of controls becomes especially important when they are such that they hold an employee responsible for something that is not really in his/her control. Employees get highly demotivated in such a work environment – an antithesis of the empowerment concept. An application of this antecedent comes from customer relationship management (CRM). Djokevich (2002) states that CRM sales and other plans that motivate are those that do not hold employees accountable for what they do not control. Another application of organizational system antecedent draws from the sense of job security an organization offers to its employees. Job security was a highly coveted employment condition to the Baby Boomers. At present, it has different valence to different employees, based mainly on the generation to which they belong. Job security is not a motivation antecedent for Generations X and Y. Their expectations in the workplace do not include long-term employment. They see job security in new ways. To them it can come in the form of positive feedback. They are looking for a daily proof that their work matters. This is how they create for themselves a sense of security everyday. They deduce that if they are doing a good job, they are secure, if not with this employer, maybe with a new one. Sharing is another important organizational system antecedent of motivation in the knowledge work environment. Organizations, since 1980s, gave employees’ ability to share work (i.e. work in teams) a special consideration at the time of recruiting, training, and promoting them. To be able to prove the ability to work in teams has been a requisite for employment in many of the top 100 best employers for several years (Martin, 1998). However, the concept of sharing in knowledge organizations goes beyond the financial sharing schemes of the old days. The new employees want to share in the management of their organizations, just as they want to share in their employers’ financial successes. They believe that they have the
The organizational system antecedent applications With proper organizational system antecedents, an organization can inspire its employees and encourage them to take initiatives – go out of their way to improve their performance and contribution in the interest of their employers. On the contrary, an environment that leaves employees with a feeling of helplessness works against their work motivation. To reduce or eliminate this feeling, management has to load the organizational system with the motivation antecedents that do not allow helplessness to last for too long in the organization. The negative effect of helplessness on motivation came in limelight after the World Trade Center attack of 11 September 2001. A sense of generalized helplessness that followed among Americans after the attack also inflicted those whose jobs could not have done anything to avert the tragedy or do anything afterwards to help in the arduous task of rescue and cleanup, or the defense and security of the USA. As a consequence of this helplessness, their work commitment and output also trailed (Rigsbee, 2001). This was truly a case of feeling helpless – a state of mind, rather than being helpless – an outcome of social controls. In organizations, helplessness among workers could have more severe consequences when workers are not afforded the opportunity to make a difference, because most believe that they can do something to help their employers. In contemporary organizations, managers are busy removing controls in the form of hurdles, obstacles, and barriers to take away the feeling of helplessness from their employees. One antecedent that managers could load all over their organizations to get a positive effect on their employees’ motivation is to reduce control exercised on them. While it is true that management has to place controls to guide and monitor activity in an organization, it must also recognize that controls can, and mostly do go against motivation and impede creativity (Amar, 1998). Reduced – or a lack of – controls can free employees and give them a sense of empowerment. For example, the biggest motivator of the younger generations is a lack of control on them. This lack of control frees their minds, which allows them to engage in activities that bring about innovation. In some organizations, management extends the lack of control concept to dress and behavior
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ability to make a difference in the running of their companies and expect their employers to give them the opportunities to put their talent to work. This is how they can be part of what concerns them. They want to somehow influence their work environment. The contemporary concept of sharing requires managers to share information, clearly stating what they want so that the employees can set their goals and engage in activities that will help the organization to achieve them. This is how employees feel important, in control, and motivated. They are willing to forgo financial rewards and job security to gain this ability. Based on their experiences with the employees who are coming out of college, managers say that they lack motivation, not because they are lazy, but because they are either not getting the right opportunities or not being asked to use their abilities (CEO Sound-off, 1997). If managers give them the opportunities to use their talents, they work really hard. The habit of sharing information initiated by management filters down to the employee hierarchy and it soon becomes a norm for behavior at the firm. Employees become accustomed to sharing. They share knowledge among each other which fires up the motivation to produce and innovate in the organization. Organizations load this antecedent in their organizational system by engaging in data creating and tracking to keep employees involved and motivated. They believe that data tracking not only provides fast insight but also stokes performance. To share their goals with employees, companies post their goals for all employees, thus allowing them to contribute as well. In return, employees post their goals on the company’s intranet for all interested employees to see, monitor, and regulate each other’s actions. Additionally, to perpetually keep employees involved and motivated, firms update their posted goals in response to the changes in the economy and re-posts them, giving insight to their employees about making changes in their goals if necessary (Hawn, 2002). The crux of sharing is to treat employees as de facto partners – resulting in an environment that lets them so function in such a way that they can participate in the management of their organization, and share in all the consequences – successes, failures, rewards, and punishments. The sense of collaborating spreads in all employees allowing the sharing process to be facilitated in a time-oriented manner. This motivates everyone in the organization and develops a culture, to promulgate which most firms hire outside consultants (Newman, 2000). Through the wide spread sharing in organizations, managers can
build empathy with, and among their employees, especially in times when they feel guilt, fear, paranoia, or destructive emotions (Emmerich, 2001). Empathy unfreezes the preceding feelings all of which are anti-motivation and unleashes the desire and the action in employees to help their organization achieve its goals. The behavior of Generations X and Y employees is quite different from their predecessors. Their sociology has a great impact on their motivation. The sociological bonds motivate them to take on heroic actions to benefit those with whom they have established bonds – a colleague, a superior, or even an organization. It is common for them to trade material rewards for the sociological ones. Firms are establishing these bonds with their employees early in their affiliation with them by undertaking a number of unique initiatives that reflect their commitment to their employees. In an effort to build lasting bonds with their employees, they engage in deeds that convey their commitment to them. This commitment is conveyed in rewards administered in anticipation of the act, or a priori of the act. These may come in the form of investiture, inauguration, invocation, initiation, and induction, etc. (Amar, 2002b). In contrast, rewards administered after the effect – called a posteriori rewards – are fancy entropies of wages. Their function as motivator is too dubious. The practice of a priori rewards as a way to win employee commitment and to motivate one to give one’s best to one’s organization has been quite common in the knowledge industry. Management can be quite creative in setting a priori rewards. However, they must meet the following two conditions: (1) The reward is executed before the employee to whom it is to be bestowed reflects the intended behavior targeted by the reward. (2) It makes its recipient feel important and special because of the exhibition of the rewarding behavior by the management (Amar, 2002a, b). In the last two decades, knowledge organizations have loaded motivation antecedents into their organizational systems in so many different forms, from very simple to very innovative, such as holding picnics and softball games for their employees, letting employees self-select their coworkers, changing employment practices to encourage the hiring of current employees’ relatives, and taking care of their employees’ personal responsibilities, which include dependent care, grocery shopping, and laundry pickups. In this context, it is also important to know that because the basic nature of work in knowledge
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from where motivation will emerge. Its dynamic links recommend taking regular readings on the updated environmental factors because ignoring dynamics for a long time will leave management with outdated and ineffective motivators of knowledge workers. According to this model, to successfully motivate their knowledge workers, organizations should do the following: . put in assertive, deliberate effort in dynamically studying the drivers of their employees’ motivating behavior; . respond to the resultant changes in these drivers by devising responsive motivation antecedents; and . load these antecedents into major sources from where motivation can emanate.
organizations has changed to a point that it cannot be managed like the manual work in factories of the early-to-mid-twentieth century, organizations have to extend to all employees at all levels, in all sections of their firms, the motivation techniques that they employed in the past to motivate their executives and officers.
The integrative model Explaining what motivates knowledge employees and how the process works in such organizations is quite different from the description that comes from the content and process theories of motivation established during the last century. We recognize that when it comes to understanding the wants and needs of workers a lot has changed due to the shifts in worker demography, culture, work patterns and demands, human sociology, and psychology. These changes are so pronounced that they raise doubts on the validity of the established motivation theories. The observations from the real-life work situations made by practicing managers support this contention (CEO Soundoff, 1997). To connect in a structured fashion all knowledge employee motivation concepts and applications developed in this work, an abstraction is shown in the form of a model shown in Figure 1. It integrates the emergence of motivating behavior in innovation work environment, conceptualizes motivating behavior drivers, identifies the right antecedents of the desired motivation, and then guides management on loading them into sources
The model recognizes that in any organization there are three areas from where motivation emerges – the job, the outcomes from the job, and the organizational system. Managers can load motivation antecedents into these three sources of motivation to keep their employees excited about their work. Figure 1 abstracts the workings of the interrelationships between these drivers and the sources into which motivation antecedents should be loaded. Owing to the dynamic nature of the motivating behavior drivers, without any let-up, management would need to frequently update and revise motivators it employs in continued excitement of their employees about their work and the organization. The static nature of the available content and process models of motivation are set to fail in the dynamic knowledge work environment.
Figure 1 An innovation motivation antecedents model
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Conclusion
Note
The issue of how to excite knowledge employees about their work and the organization has been addressed in this paper. We have looked at what motivates them, and how to create a work environment that makes them take initiatives to benefit their organization. Second, we have looked at what does not work in motivating knowledge employees and how to make it work. After studying these questions, this paper developed a model explaining the workings of motivation in the knowledge-based work environment. The concepts have been incorporated in a model presented here which assumes that cultural, behavioral, social, and work changes that have taken place in knowledge organizations are so great and diverse that work motivation can be effective only if applied in light of the dynamics of these changes. The model provides a framework to complete these tasks through an analysis of five motivating behavior drivers – sociological, psychological, generational, work, and cultural. Each one of these drivers has a unique effect on employees’ motivating behavior, and accordingly directs motivation practice in organizations. Based on the observations regarding what works and what does not in motivating knowledge employees and how to make it work, it is recognized that there are three sources in most organizations from where work motivation could emerge. The first and the most important source of work motivation is the job that the employee is doing. The second source of motivation is the outcomes from the job. The outcomes include all kinds of known and unknown extrinsic and intrinsic rewards and punishments – whatever employees consider having positive and negative effects on their work behavior. The last source of motivation is the organizational system, which includes the usual constituents of the management system, such as organizational policies, practices, culture, etc. and the establishment items, including the firm’s product line, image, position in its industry and market, financial soundness, and all the other related items that can excite employees about their organization as an entity. Since the model presented in this work is a conceptualization of the synthesis of what is or would be successful in practice, it needs to be strengthened and, maybe, refined by further research on this topic. Broad-based or motivation driver specific experimentation and empirical work may be conducted to develop the model into a new useful theory explaining employee work motivation in the new environment.
1 Members of the Generation X are children of the Baby Boomer generation who are born before 1977. The term was coined by Novelist Douglas Coupland (1992) in his novel, Generation X: Tales for an Accelerated Culture. The Generation Y, sometimes also referred to as Nexters, constitutes people born in year 1977 and later – the late offspring of the Baby Boomers.
References Alderfer, C.P. (1972), Human Needs in Organizational Settings, Free Press, New York, NY. Amar, A.D. (1998), “Controls and creativity in organization”, The Mid-Atlantic Journal of Business, Vol. 34, pp. 97-9. Amar, A.D. (2002a), Managing Knowledge Workers: Unleashing Innovation and Productivity, Quorum Books, Westport, CT. Amar, A.D. (2002b), “Reward the psyche to motivate the mind: the formula for higher innovation and productivity from knowledge workers”, Knowledge Board, The European KM Community, available at: www.knowledgeboard.com/ cgi-bin/item.cgi?id ¼ 95710 Brenner, P. (1999), “Motivating knowledge workers: the role of the workplace”, Quality Progress, Vol. 32, pp. 33-7. CEO Sound-off (1997), “What entrepreneurs are telling Inc about employee motivation”, Inc Magazine, Vol. 105. Coupland, D. (1992), Generation X: Tales for an Accelerated Culture, St Martin’s Press, New York, NY. Cunningham, B. (2001), “The art of managing morale”, Columbia Journalism Review, Vol. 40 No. 3, p. 34. Djokevich, P. (2002), “Motivational moolah”, Bank Marketing, Vol. 34 No. 1, pp. 34-8. Drucker, P.F. (1988), “The coming of the new organization”, Harvard Business Review, pp. 45-53. Emmerich, R. (2001), “Motivating employees during tough times”, The CPA Journal, Vol. 71 No. 10, p. 62. Hauschild, S., Licht, T. and Stein, W. (2001), “Creating a knowledge culture”, The McKinsey Quarterly, No. 1, pp. 74-81. Hawn, C. (2002), “The man who sees around corners”, Forbes, pp. 72-8. Hays, S. (1999), “Generations X and Y and the art of the reward”, Workforce, Vol. 78 No. 11, pp. 44-8. Herzberg, F., Mausner, B. and Snyderman, B. (1959), The Motivation to Work, Wiley, New York, NY. Inc Magazine (2001), “No more ‘Etch a sketch’ planning: how the smartest strategist in America is preparing for 2002”, pp. 110-11. Karp, H., Sirias, D. and Arnold, K. (1999), “Teams: why Generations X and Y mark the spot”, The Journal for Quality and Participation, Vol. 22 No. 4, pp. 30-3. Kubo, I. and Saka, A. (2002), “An inquiry into the motivations of knowledge workers in the Japanese financial industry”, Journal of Knowledge Management, Vol. 6 No. 3, pp. 262-72. Linz, S. (2002), “Motivating Russian workers: analysis of age and gender differences”, Business School, University of Michigan, available at: http://eres.bus.umich.edu/docs/ workpap-dav/wp466.pdf, (accessed 25 September 2003). Loughlin, C. and Barling, J. (2001), “Young workers’ work values, attitudes, and behaviors”, Journal of Occupational and Organizational Psychology, Vol. 74, pp. 543-58. McClelland, D.C. (1971), Motivational Trends in Society, General Learning Press, Morristown, NJ.
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Maccoby, M. (1995), Why work? Motivating the New Workforce, Miles River Press, Alexandria, VA. Martin, J. (1998), “So you want to work for the best . . .?”, Fortune, Vol. 137, p. 77. Maslow, A.H. (1943), “A theory of human motivation”, Psychological Review, Vol. 50, pp. 370-96. Messmer, M. (2001), “Encouraging employee creativity”, Strategic Finance, Vol. 83 No. 6,Week, 42, pp. 16-18. Mui, N. (2001), “Here come the kids: Generation Y invades the workplace”, The New York Times, Section 9, p.1. Newman, V. (2000), “Victor Newman asks: ‘Can you embed knowledge-sharing into everyday work?’”, Knowledge Management Review, Vol. 3 No. 1, p. 5. Nonaka, I. and Takeuchi, H. (1995), The Knowledge-Creating Company, Oxford University Press, New York, NY. Patterson, F. (2001), “Developments in work psychology”, Journal of Occupational and Organizational Psychology, Vol. 74, pp. 381-90. Peters, T. and Waterman, R.H. (1982), In Search of Excellence: Lessons from America’s Best Run Companies, Harper and Row, New York, NY. Porter, L.W. (1961), “A study of perceived need satisfaction in bottom and middle management jobs”, Journal of Applied Psychology, Vol. 45, pp. 1-10. Rigsbee, E. (2001), “Motivating employees in turbulent times”, Air Conditioning, Heating, & Refrigeration News, Vol. 214 No. 7, pp. 1-26. Smith, A.K. (2000), “Charting your own course”, U.S. News & World Report, pp. 56-65.
Smith, V. (2001), Crossing the Great Divide: Worker Risk and Opportunity in the New Economy, Cornell University Press, Ithaca, NY. Stajkovic, A.D. and Luthans, F. (2001), “Differential effects of incentive motivators on work performance”, Academy of Management Journal, Vol. 4, pp. 580-90. Strempel, P. (2003), “Towards strategies for managing knowledge workers”, available at: www.peterstrempel. com/resources/papers/knowledge_workers.html, (accessed 25 September). Vroom, V.H. (1964), Work and Motivation, Wiley, New York, NY. Wallace, J. (2001), “After X comes Y”, HR Magazine, Vol. 46, pp. 192-3. Wolburg, J.M. and Pokrywczynski, J. (2001), “A psychographic analysis of Generation Y college students”, Journal of Advertising Research, Vol. 41 No. 5, pp. 33-52.
Further reading Moore, J. (2002), “The value of trust”, Knowledge Board: KM European Forum, available at: www.knowledgeboard. com/cgibin/item.cgi?id ¼ 86659& d ¼ 1&h ¼ 417&f ¼ 418&dateformat ¼ motivation, from Encyclopaedia Brittannica, available at: http://searcheb.com/eb/ article?eu ¼ 115598, (accessed 25 September 2003).
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Introduction
Knowledge sharing in integrated product development Paul Hong William J. Doll Abraham Y. Nahm and Xiao Li The authors Paul Hong is based in the Department of Management, and William J. Doll is based in the Department of International Business, Entrepreneurship & Strategy, both at The University of Toledo, Toledo, Ohio, USA. Abraham Y. Nahm is based at the University of Wisconsin – Eau Claire, Wisconsin, USA. Xiao Li is based at the Department of Management, The University of Toledo, Toledo, Ohio, USA.
Keywords Innovation, Knowledge management, Product development, Performance measurement (quality)
Abstract Although product development is recognized as knowledgeintensive work, we have limited understanding of its impact on product development performance. The mechanisms by which knowledge sharing contributes to strategic imperatives such as time to market and value to customers are also not well understood. Despite increased interest in knowledge sharing in cross-functional teams, there have been few large-scale empirical studies of its efficacy. This paper develops a model that explains how shared knowledge, defined in three types – shared knowledge of customers, suppliers, and internal capabilities – enhances process performance, as well as downstream strategic imperatives of time to market and value to customers. The model is tested using 205 responses on product development projects by US automotive engineers. The results show that shared knowledge of customers, suppliers, and internal capabilities positively affect product development performance, as well as indirectly affect downstream strategic imperatives via enhanced process performance.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 102-112 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534393
Product development is information- and knowledge-intensive work (Clark and Fujimoto, (1991). Developing highly successful new products is possible through the integration of abilities of both upstream (e.g. design engineers) and downstream knowledge workers (e.g. manufacturing engineers). Firms’ superior product development capabilities are derived from their ability to create, distribute and utilize knowledge throughout the product development process. While there is a substantial body of literature on work integration in product development, much less attention has been focused on knowledge integration (knowledge sharing). This study focuses on knowledge sharing in new product development (NPD). Integration in product development takes increasingly complex forms to capture the synergy of intra- and inter-company integration and relationships, such as team integration (i.e. forming a team with members from all appropriate functions), intra-process integration (i.e. managing the entire development project from its concept formulation through market introduction), resource integration (i.e. giving the team the authority and resources to carry out the project), and chain integration (i.e. involvement of customers and the supply chain for product development) (Lambert and Cooper, 2000). Empirical studies of product development have supported the importance of organizational integration for competitive advantage by correlating integrating practices and superior performance (Ettlie, 1995; Moffat, 1998). Such integration efforts have brought noticeable improvements to companies and resulted in good marketplace performances. Cross-functional coordination has improved, but at the expense of in-depth knowledge within functions (Sobek et al., 1998). It is not clear how knowledge integration can actually enhance performance outcomes in NPD. Hoopes and Postrel (1999) propose that this correlation between integrating practices and superior performance results from integration leading to patterns of shared knowledge among firm members, with the shared knowledge constituting a resource underlying product development efforts of a scientific software company. They aim primarily at measuring the importance of the relationship between shared knowledge and performance and focus on project failures and the result of lack of shared knowledge. Their study confirms that shared knowledge is an important resource underlying product development capabilities. They define the “glitches” as costly errors resulting from knowledge not being shared, and measure the influence of
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glitches on firm performance. They also identify a set of “syndromes” that can lead to glitches and measure the relative importance of these syndromes. In view of this prior research, this paper explores the content of knowledge integration and the possible causes of integration-performance correlation in product development. Our study identifies three types of knowledge sharing, they are: (1) Shared knowledge of customers. (2) Shared knowledge of internal capabilities. (3) Shared knowledge of suppliers’ capabilities.
aspects of knowledge sharing in this stage are about customer requirements, suppliers’ capacities and internal capabilities. Without the critical knowledge integration in the front-end, the quality of concept development is questionable, major flaws are discovered in a later stage and by that time, the majority of costs would have already been committed. Too often, many product development projects fail because of a lack of clear understanding of front-end activities in product development (Khurana and Rosenthal, 1997). So, effective knowledge integration should start at the “fuzzy front-end”. Knowledge sharing impacts not only the front-end stage but also the later stages as well, such as the testing and refinement stage and the manufacturing production stage. Although these impacts need to be properly measured, research in this area is still in its early stage. The impact of shared knowledge in integrated product development (IPD) for manufacturing firms is little understood. Technologically more advanced products take longer to develop than less advanced products. When shortening the product development cycle time, the challenge is not to cut corners, but to carry out the development task faster without sacrificing the quality or eliminating steps (Gupta and Wilemon, 1990; Karlsson and Ahlstrom, 1999). According to Sobek et al. (1999) and Ward et al. (1995) Toyota considers a broader range of possible design options and delays key decisions longer than many other automotive companies, yet has what may be the fastest and most efficient vehicle development cycle in the industry. In doing this, Toyota maps the design and establishes feasibility before making any major commitment to fully develop the product. In brief, Toyota teams generate a great deal of shared knowledge in considering a broader range of possible designs and manufacturing options. How Toyota has created and continues to manage this “highperformance knowledge-sharing network” is well documented by Dyer and Nobeoka (2000). According to Adler et al. (1989) innovations are split into two broad areas, namely an economicsoriented tradition, and an organization-oriented tradition. NPD belongs to the later; NPD focuses on the structures and processes by which individuals create products (Brown and Eisenhardt, 1995). Based on their literature review, Brown and Eisenhardt (1995) proposed an integrated conceptual model, in which process performance and product effectiveness are emphasized. In order to guarantee product effectiveness, the following conditions must be met: . fit with market needs; and . fit with firm competencies.
This research model is based on the pioneering works of Khurana and Rosenthal (1997, 1998), Kim (1993) and Hoopes and Postrel (1999) in regards to the importance of shared learning and knowledge. Empirical studies by Li and Calantone (1998), Madhavan and Grover (1998), and Zander and Kogut (1995) have helped to identify and measure the underlying variables of shared knowledge.
Shared knowledge in integrated product development Shared knowledge is one of the unique, valuable, and critical resources that is central to having a competitive advantage (Nonaka and Takeuchi, 1995; Prahalad and Hamel, 1990). Firms increasingly rely on building and creating a shared knowledge base as an important resource capability (Huber, 1991, 1996; Nonaka, 1994). On a project level, teams share knowledge of individuals in order to solve problems and find innovative solutions (Davenport et al., 1996; Drucker, 1991; Kogut and Zander, 1992). Shared knowledge is viewed as an understanding and appreciation among different functions, and effective shared knowledge is regarded as a synergy between team members (Hoopes and Postrel, 1999). Although there is little doubt that shared knowledge is important in product development, useful shared knowledge is difficult to produce spontaneously because of different cognitive universes among different departments and individuals and “sticky information” constituted by much of what needs to be understood across specialties (Hoopes and Postrel, 1999), especially in the context of NPD. Among the five stages of the product development process – concept development, system design, detail design, testing and refinement, and manufacturing production – front-end activities include concept development and are prior to system design. It is in this stage that knowledge sharing among product development teams needs to occur. Important
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The objectives are maximizing the fit with customer needs, and minimizing time to market. Successful firms are those that can find the match between their new development goals and their internal resources and competencies (Schilling and Hill, 1998). So the essence of NPD is to match the customer needs (i.e. external factors) with a firm’s engineering and manufacturing capabilities (i.e. internal factors). Customers may want some things that the firm cannot produce competitively. The firm may have innovative technologies for products, but the firm’s customers may not be willing to buy these innovative products at a price that will yield the firm a reasonable profit. The matching of complex customer requirements with engineering and manufacturing capabilities is fundamental to the design problem. Collaboration and coordination is greatly facilitated when product development team members share substantial common knowledge of both customer requirements and engineering/ manufacturing capabilities. The match objective can be realized only through the NPD process. So the effectiveness and the efficiency of the NPD process are critical elements; it is the mediator variable between the cause (knowledge sharing) and the effect (product performance). Just as Ettlie (1995) observed firms that successfully introduce new products are focused and better able to understand their customers’ needs, and successful product innovators are more disciplined in their development process. That means productprocess development integration will lead to the ultimate goal – product performance. Based on the above consideration, this study proposes the following framework (Figure 1).
Types of shared knowledge Shared knowledge of customers Shared knowledge of customers refers to the extent of shared understanding of current customers’ needs and future value-to-customer creation of opportunities among product development members (Calantone et al., 1996; Narver and Slater, 1990). The extent of shared knowledge of customers is an indication of continuous intellectual work across the functions of an organization toward creating high customer values. It is regarded as an essential aspect of product development (Deshpande and Webster, 1993). Those who have a high level of contact with customers (e.g. a marketing manager or a chief engineer) may have high degrees of understanding of the changing customer needs, value-to-customer attributes (Slater and Narver, 1994), and levels of customer satisfaction with their products.
Figure 1 Matching customer requirements with engineering and manufacturing capabilities
Shared knowledge of suppliers Shared knowledge of suppliers refers to the extent of shared understanding (i.e. know-why) of suppliers’ design, process, and manufacturing capabilities among product development team members (Hahn et al., 1990). Since suppliers are actively involved in key processes of IPD, the knowledge of suppliers’ capabilities is critical for timely and cost-effective decision-making in IPD (Evans and Lindsay, 1993). Shared knowledge of suppliers allows product development members to improve their product processes (e.g. communication and collaboration among design and manufacturing engineers) and enhance customer values (e.g. fairly assessing costs of raw materials of the product supplied by the suppliers) because a substantial portion or part of their final product depends on suppliers’ work.
Shared knowledge of internal capabilities Knowledge of internal capabilities refers to the extent of shared understanding (i.e. know-why) of the firm’s internal design, process and manufacturing capabilities among product development members (Clark and Wheelwright, 1993). Knowledge of internal capabilities usually resides among design and manufacturing team members. The key is how many different functional specialists (e.g. product design engineers, marketing managers) are aware of the strengths and weaknesses of various aspects of design capabilities, manufacturing processes, facilities, and other manufacturing capabilities.
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Product development performance Product development has evolved from sequential, functional-specific product development to concurrent, cross-functional IPD. In this study, IPD is defined as “cross-functional product development that is to optimize the design, manufacturing and supporting processes to enhance multiple outcomes of product development” (Ettlie, 1995). Loch et al. (1996) state that firms should measure the quality of product development performance. Since the effectiveness of IPD processes can be measured only in relation to product development performance measures, proper identification of these measures is important. In this study, IPD performance measures are classified into two categories: (1) Process outcomes that look at the effectiveness of the IPD process in terms of teamwork and productivity. (2) Product outcomes that look into how the products performed in terms of serving the firms’ strategic initiative, such as value to customers and time to market.
Process performance Getting people to work on cross-functional teams does not necessarily mean that they adequately share the knowledge required for integrated problem solving. So the processes need to be monitored and their performance measured. Process performances measure the effectiveness of the product development process itself. This paper uses teamwork and developmental productivity to measure process performance. Teamwork refers to the degree of collaborative behavior among product development team members. Indicators of a high level of teamwork are: timely conflict resolution (Clark and Fujimoto, 1991), effective decision implementation (Mabert et al., 1992), creative problem solving (Gustafson, 1994), effective communication (Brown and Eisenhardt, 1995), and good coordination of activities. Defining later stage problems (e.g. manufacturing and design problems) is an indication of a high level of teamwork (Clark and Fujimoto, 1991). Developmental productivity refers to the effectiveness of developing new products from product concept to manufacturing. Developmental productivity is about the total costs incurred in all activities of the product development. Developmental productivity is measured by the overall technical and team performance in terms of efficiency, budget, schedule, and innovation (Cooper, 1999;Cooper and Kleinschmidt, 1995).
Time to market Product performance is the ultimate goal for NPD. This research uses time to market and value to customer to measure it. Time to market refers to how fast a firm completes its product development projects from concept generation to market introduction (Clark and Fujimoto, 1991; Dyer et al., 1999). A product development team that values time to market would strive to get products to market ahead of competitors, develop products on schedule (Cohen, 1996), and keep improving on the previous time-to-market performance. Value to customer Value to customer is the customer-perceived worth adjusted for the relative price of the product (Gale, 1994). It is measured in terms of the value of new products in meeting customer needs and expectations in the market place (Clark and Fujimoto, 1991). It is also reflected in the product success in the marketplace and its creation of value to customers in terms of highly perceived product quality (Clark and Wheelwright, 1995). Value to customers is enhanced through shared knowledge of customers (Koen and Kohli, 1998).
Model and hypotheses A conceptual model In this section, the rationale underlying the proposed relationships is depicted. Figure 2 shows the causal relationships of how shared knowledge affects product development process performance (mainly measured by teamwork and development productivity) and the relationship of how process performance influences the downstream strategic imperatives such as time to market. Four hypotheses will be discussed in the subsequent section. Hypotheses A key to product development success is how much other product development team members understand the customer needs, requirements, use, and value attributes in the early stage of product development process (Clark and Wheelwright, 1993). Instead of relying on the experience or insight of particular functional team members, when cross-functional team members meet customers directly in focus groups, common experience may improve the information quality and knowledge content of customers (Brown and Eisenhardt, 1995; Dougherty, 1992). Shared understanding of customer knowledge also enhances the capability of meeting the changing customer needs, coping with internal dynamics on
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Figure 2 Hypothesized model
complex issues quickly and constructively. In that sense, the quality of teamwork will positively affect (i.e. reduce) time to market. In many cases, poor teamwork is the delaying factor for time to market. Effective decision-making is critical for speeding up the product development process. Product development members with a high level of development productivity would get work done quickly, reduce cost and engineering hours, and have a general sense of their productivity (Adler, 1995; Adler et al., 1996; Crawford, 1992). Therefore, H4. The greater the extent of teamwork and development productivity, the greater the extent of time to market.
how customers make their purchase decisions, and assessing characteristics of target customers. Therefore, H1. The greater the extent of shared knowledge of customers, the greater the extent of teamwork and development productivity. Since suppliers are actively involved in key processes of IPD, shared knowledge of suppliers allows product development team members to improve product performance (e.g. its technical and overall performance) and reduce the manufacturing costs (e.g. cost of raw materials supplied by the suppliers) because a substantial portion or part of their final product depends on suppliers’ work. H2. The greater the extent of shared knowledge of suppliers, the greater the extent of teamwork and development productivity. The more knowledge of internal capabilities is shared among product development members, the faster they can start working on their project targets and increase development productivity (e.g. reducing engineering hours). IPD decisions made by a particular function (e.g. that of a design engineer) may affect other functions (e.g. that of a manufacturing engineer). Knowing what other team members can do, enables team members to make better quality decisions that affect different performance outcomes. Therefore, shared knowledge of internal capabilities might affect almost all performance outcomes because ultimately effective problem solving in IPD is the result of the effective decision-making of all team members. Therefore, H3. The greater the extent of shared knowledge of internal capabilities, the greater the extent of teamwork and development productivity. The degree of teamwork among product development teams can resolve conflicts and
Stalk and Webber (1993) argue that firms often pursue speed without considering how faster the product development or increased product turnover contribute to the fulfillment of their customer requirements. A high degree of teamwork among product development teams contributes in considering another important strategic imperative (i.e. value to customer), in that a marketing or quality manager could insist upon value to customer as an important product development outcome. Development productivity does not merely concern time elements or financial elements. Rather, it considers the development efficiency in view of the ultimate value of the product to customers (i.e. the important customer value requirements). H5. The greater the extent of teamwork and development productivity, the greater the extent of value to customer.
Research methods One of the primary goals of this study is to develop valid and reliable scales to measure shared knowledge, process performances, and product performances. These instruments could be used as quick feedback mechanisms for intervention to improve product development performance in organizations. A survey design is employed to empirically test the hypotheses derived from the model. Empirical studies based on good instruments will improve the quality of research in IPD. Pilot study The process of developing measures is based on commonly accepted methods for developing standardized instruments (Churchill, 1979; Nunnally, 1978). An extensive literature review ensures that a research model is grounded in theory. A pilot study was conducted utilizing respondents similar to the target respondents. The
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Volume 7 · Number 2 · 2004 · 102-112
pilot questionnaire was prepared after some modifications suggested by the industry and academic experts. Upon completion, it was sent in the form of a questionnaire to 500 various managers from manufacturing firms. The Society of Automotive Engineers (SAE) provided names and addresses of 500 managers randomly selected from their membership with parameters such as product development managers, position titles, geographical areas, and four industries (i.e. fabricated metal products, industrial machinery/ equipment, electronic/other electrical equipment, and automotive parts and suppliers). These industries are under the standard industrial classification (SIC) codes 34, 35, 36, and 37, respectively. They were primarily drawn from the Midwest (i.e. Ohio, Indiana, Illinois, Michigan, and Pennsylvania). The pilot study responses were later excluded in the large-scale study, and the companies selected to participate in the pilot study were excluded from the large-scale mailing. These steps were taken to insure the above-mentioned desirable measurement characteristics. The instruments entering the large-scale survey are listed in the Appendix. The instruments were measured on five-point Likert type scales.
Data analysis methods Linear structural equation modeling (LISREL) was used to explore the relationship between shared knowledge of customers, suppliers, internal capabilities, process performance, time to market and value to customer. LISREL provides a vigorous method for testing causal models, as it is capable of simultaneously evaluating both measurement and causal components of complex models. Standardized coefficients and t-values of the causal relationship between constructs were used to test the hypothesis stated in the above section.
Sample The mailing list was obtained through SAE. Out of 500 samples, 30 responses were used for a pilot study purpose and 205 responses out of 2,262 samples were used for a large mail survey. The majority of respondents were project managers or senior managers who had experiences in leading cross-functional product development teams. The 205 usable responses were from fabricated metal products (22.93 percent), industrial and commercial machinery (7.32 percent), electronic and electrical equipment and machinery (17.56 percent), transportation equipment (30.12 percent), and miscellaneous (16.32 percent). The respondents’ positions were: CEO/presidents (2.44 percent), senior managers (36.10 percent), project managers (32.68 percent), and others (28.29 percent). More than 70 percent of respondents have had actual experiences in leading and managing cross-functional project teams. The number of employees of the respondents’ firms was as follows: less than 500 (40.00 percent), 500-599 (15.12 percent), 1,000-4,999 (22.44 percent), 5,000-9,999 (8.78 percent) and over 10,000 (12.20 percent). Firms that had more than 1,000 employees account for 43.42 percent of the sample. These sample characteristics were not significantly different from the corresponding population parameters of the original sample that the SAE provided. This implies little difference in characteristics between respondents and non-respondents.
Results To test the hypothesized relationships, confirmatory factor analysis (CFA) was adopted in this study. Much of the recent literature on CFA has been based on Jo¨reskog and So¨rbom’s (1993) LISREL terminology and modeling. The covariance structure model consists of two parts: the measurement model and the structure model. The measurement model specifies how hypothetical constructs (latent) are measured in terms of observed variables. Unidimensionality has been defined as the existence of one latent trait of construct underlying a set of measures. Based on an evaluation of the fit of a one-dimensional model for each variable, iterative modifications were undertaken in the spirit of a specification search. Modifications were made to improve the model fit, as well as to derive parameters that have real significance and substantive meaning. Table I shows the parameters for measurement items. The larger the factor loadings or coefficients, as compared with their standard errors and expressed by the corresponding t-values, the stronger the evidence that the measured variables or factors represent the underlying constructs. In general, if these t-values are greater than 2 or 2.576, they are considered significant at the 0.05 and 0.01 level, respectively. In Table I, we find that all the t-values exceed 2.576. Thus, all indicators are significantly related to their specified constructs. The factor loadings are all over 0.5, which means all the items are well loaded upon their respective constructs. R2 values refer to item reliability. R2 values above 0.5 – meaning less than 50 percent of its variance would be error variance – provide evidence of acceptable reliability. In Table I, most of the items’ R2 values are over 0.50. R2 values and t-values provide evidence of convergent validity (Koufteros, 1999). Table II shows the correlation matrix for each construct, as well as Cronbach’s a values in the diagonal. The reliabilities of all constructs are above 0.80. According to Nunnally (1978), reliabilities above 0.70 are considered adequate. Discriminant
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Table I Research model: parameter estimates for measurement items (n ¼ 205) Items
Factor loading
t-value
Completely standardized factor loading
Uniqueness/error term
R2 (reliability)
0.61 0.75 0.86 0.88
0.62 0.44 0.25 0.20
0.58 0.56 0.75 0.77
0.79 0.77 0.69 0.75 0.74
0.30 0.40 0.52 0.44 0.45
0.62 0.60 0.48 0.56 0.55
0.81 0.78 0.62 0.59
0.35 0.40 0.62 0.65
0.65 0.60 0.58 0.35
0.67 0.66
0.24 0.23
0.67 0.77
0.95 0.63 0.84
0.09 0.60 0.30
0.91 0.40 0.70
0.74 0.85 0.83 0.82
0.46 0.20 0.31 0.32
0.54 0.72 0.69 0.68
Shared knowledge of customers A1D 1.00a A2D 1.36 8.01 A2K 1.56 9.42 A3D 1.54 9.10 Shared knowledge of suppliers A1G 1.00a A1K 1.06 11.17 A2C 0.91 9.90 A2J 1.05 10.81 A3A 1.04 10.70 Shared knowledge of internal capabilities A1F 1.00a A1I 0.99 10.66 A3E 0.76 8.52 A3H 0.77 8.05 Process performance TEAMWK 0.90 15.78 DEVPRO 1.00a Time to market C1E 1.00a C1I 0.68 10.25 C1K 0.90 15.34 Value to customer C2A 1.00a C2C 1.30 11.86 C2K 1.14 11.64 C2M 1.30 11.53
Note: aIndicates a parameter fixed at 1.0 in the original solution
Table II Reliability, correlation, and discriminant validity of constructs [1] [1] Shared knowledge of customers [2] Shared knowledge of suppliers
[2]
[3]
[4]
[5]
[6]
a
0.86 0.21b 0.82
[3] Shared knowledge of internal capability
374.47c 0.52
0.44
[4] Process performance
163.28 0.68
171.15 0.41
0.64
[5] Time to market
192.87 0.47
371.88 0.28
135.00 0.44
0.69
[6] Value to customer
252.74 0.54
282.51 0.33
157.79 0.51
171.61 0.80
0.55
Mean SD
217.98 3.92 0.08
336.21 3.10 0.80
151.68 3.79 0.64
164.11 3.52 0.73
215.74 3.57 0.97
0.85
0.90
0.88
0.91 3.77 0.92
Note: areliability (Cronbach’s a) are on the diagonal, bcorrelation between each constructs in the conceptual model, and cdifference in x2 between unconstrained and constrained models
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validity is achieved when a x2 difference at df ¼ 1 between an unconstrained and constrained model is significant. As shown in Table II, chi-square values are all at a significant level. With these results, the testing of the proposed models was conducted using LISREL. Structural equations analysis (Jo¨reskog and So¨rbom, 1993) was used to test the proposed model. The results are shown in Figure 3. To assess the overall data-to-model fit, x2, degree of freedom, comparative fit index (CFI) and Bonnet non-normed fit index (NNFI) were utilized (Bentler, 1990; Koufteros, 1999). In terms of CFI and NNFI, values between 0.80 and 0.89 represent a good data-to-model fit while values of 0.90 or better represent a very good fit. These indices range from 0.0 (no fit) to 1.0 (perfect fit). Root mean square error of approximation (RMSEA) is relatively independent of sample size and is regarded as a measure of model misfit per degree of freedom (Browne and Cudeck, 1992). An RMSEA less than 0.05 is indicative of close data-to-model fit. As shown in Figure 3, the structural model produced the covariance matrix very well ðx2 ¼ 298:71; df ¼ 201; NNFI ¼ 0:96; CFI ¼ 0:96; and RMSEA ¼ 0:049Þ: Because the structural model has a reasonable model-to-data fit, an examination of path coefficients may commence (Marsch and Hocevar, 1985). H1-H3 predicted that shared knowledge of customers, suppliers, and internal capabilities would be directly related to process performance outcomes. As seen in Figure 3, the maximumlikelihood estimates for the path from shared knowledge of customers, suppliers, and internal capabilities to process performance were significant and positive (standardized coefficients of 0.48, 0.17, and 0.35, respectively, with t-values of 5.71, 2.58, and 3.79, respectively). This indicates that project teams working with high levels of shared knowledge in customers, suppliers,
and internal capabilities were significantly higher in their process performance outcomes than those teams with low levels of shared knowledge. H4 and H5 predicted that the extent of IPD process performance (i.e. teamwork and development productivity) would be directly related to product performance outcomes (i.e. time to market and value to customer). As seen in Figure 3, the maximum-likelihood estimates for the path from process performance to time to market and value to customer were significant and positive (standardized coefficients of 0.69 and 0.80, respectively, with t-values of 10.45 and 9.81, respectively). This indicates that higher levels of teamwork and development productivity lead to realizing shorter time to market and providing greater value to customers.
Figure 3 Standardized coefficient
Discussion The purpose of this study was to develop and test a model of team-level constructs likely to explain how three types of shared knowledge (i.e. of customers, suppliers, and internal capabilities) are related to the process performance (i.e. teamwork and development productivity) and product performance (time to market and value to customers). This research fills the gap and contributes to the understanding of the role of shared knowledge in IPD in a number of ways. First, a major contribution of this research has been the development of a reliable instrument to measure the degree of shared knowledge in the NPD arena, which can be used to support future research. Increasingly, knowledge generation or management is regarded as a prerequisite for creating successful and innovative organizations (Cardinal and Hatfield, 2000; Grover and Davenport, 2001). The findings of this research encourage management researchers to apply the theory of knowledge management into applied fields such as NPD, e-commerce, or marketing. Knowledge sharing should receive greater research attention from scholars in the areas of NPD. Second, as hypothesized, three components of shared knowledge (i.e. of customers, suppliers, and international capabilities) were positively related to process performances of NPD. The impact of knowledge sharing has been discussed in other contexts, such as for IS group performance (Nelson and Cooprider, 1996), IS outsourcing success (Lee, 2001), and building product development capability (Hoopes and Postrel, 1999). This study shows how specific knowledge sharing components enhance NPD processes (i.e. teamwork and development productivity) and strategic outcomes (i.e. time to market and value
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Paul Hong, William J. Doll, Abraham Y. Nahm and Xiao Li
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to customer). This research argues that when project teams operate in an environment that encourages shared knowledge of customers, suppliers and internal capabilities, the process performance (teamwork and development productivity) mediates the impact of knowledge sharing on strategic imperatives of time to market and value to customers. The research findings suggest that knowledge sharing should be adequately shared among team members in guiding product and process design efforts. For achieving process goals, the research findings help managers to focus on how to improve teamwork and development productivity through active knowledge sharing among team members. Third, if time to market and value to customer are strategic imperatives, knowledge sharing is a key driver. Knowledge sharing may also be a key driver for other strategic imperatives such as manufacturability. The extent of knowledge sharing for any strategic imperative provides the overall competitiveness for project managers. Improving overall product development may require strategic thinking on how critical components of knowledge should be shared among cross-functional team members. Finally, for effective IPD implementation, integration has to occur primarily at the conceptual level because product development is knowledge-intensive work. The results of this study lend support to the five hypotheses. This study provides better understanding of the underlying constructs of shared knowledge in IPD, and provides supporting evidence for the previously untested statements regarding knowledge integration constructs.
Calantone, R.J., Schmidt, J. and Song, X.M. (1996), “Controllable factors of new product success: a cross national comparison”, Marketing Science, Vol. 15 No. 4, pp. 341-58. Cardinal, L.B. and Hatfield, D.E. (2000), “Internal knowledge generation: the research laboratory and innovative productivity in the pharmaceutical industry”, Journal of Engineering Technology Management, Vol. 17, pp. 247-71. Churchill, G.A. (1979), “A paradigm for developing better measures of marketing constructs”, Journal of Marketing Research, Vol. 16, pp. 64-73. Clark, K.B. and Fujimoto, T. (1991), Product Development Performance: Strategy, Organization, and Management in the World Auto Industry, Harvard Business School, Boston, MA. Clark, K.B. and Wheelwright, S.C. (1993), Managing New Product and Process Development: Text and Cases, The Free Press, New York, NY. Clark, K.B. and Wheelwright, S.C. (1995), Leading Product Development, The Free Press, New York, NY. Cohen, M.A. (1996), “New product development: the performance and time to market trade-off”, Management Science, Vol. 42 No. 12, pp. 1753-5. Cooper, R.G. (1999), “The invisible success factors in product innovation”, Journal of Product Innovation Management, Vol. 16, pp. 115-33. Cooper, R.G. and Kleinschmidt, E.J. (1995), “Benchmarking the firm’s critical success factors in new product development”, Journal of Product Innovation Management, Vol. 12, pp. 374-91. Crawford, C.M. (1992), “The hidden costs of accelerated product development”, Journal of Product Innovation Management, Vol. 9 No. 3, pp. 188-99. Davenport, T., Jarvenpaa, S. and Beers, M. (1996), “Improving knowledge work processes”, Sloan Management Review, Vol. 37, pp. 53-66. Deshpande, R. and Webster, F.E. Jr (1993), “Corporate culture, customer orientation, and innovativeness in Japanese firms: a quadrad analysis”, Journal of Marketing, Vol. 57, pp. 23-7. Dougherty, D. (1992), “Interpretative barriers to successful product innovation in large firms”, Organizational Science, Vol. 3, pp. 179-202. Drucker, P.F. (1991), “The new productivity challenge”, Harvard Business Review, Vol. 69, pp. 69-76. Dyer, B., Gupta, A.K. and Wilemon, D. (1999), “What first-tomarket companies do differently”, Research Technology Management, Vol. 42 No. 2, pp. 15-21. Dyer, J.H. and Nobeoka, K. (2000), “Creating and managing a high-performance knowledge-sharing network: the Toyota case”, Strategic Management Journal, Vol. 23 No. 3, pp. 345-67. Ettlie, J.E. (1995), “Product-process development integration in manufacturing”, Management Science, Vol. 41 No. 7, pp. 1224-37. Evans, J.R. and Lindsay, W.L. (1993), The Management and Control of Quality, West Publishing Company, New York, NY. Gale, B. (1994), Managing Customer Value, The Free Press, New York, NY. Grover, V. and Davenport, T.H. (2001), “General perspectives on knowledge management: fostering a research agenda”, Journal of Management Information Systems, Vol. 18 No. 1, pp. 5-21. Gupta, A.K. and Wilemon, D.L. (1990), “Accelerating the development of technology-based new products”, California Management Review, Vol. 32 No. 2, pp. 24-44.
References Adler, P.S. (1995), “From project to process management: an empirically based framework for analyzing product development time”, Management Science, Vol. 41 No. 3, pp. 458-84. Adler, P.S., Riggs, H.E. and Wheelwright, S.C. (1989), “Product development know-how: trading tactics for strategy”, Sloan Management Review, Vol. 31 No. 1, pp. 7-17. Adler, P.S., Mandelbaum, A., Ngyyen, V. and Schwerer, E. (1996), “Getting the most out of your product development process”, Harvard Business Review, Vol. 74 No. 2, pp. 134-52. Bentler, P.M. (1990), “Comparative fit indexes in structural models”, Psychological Bulletin, Vol. 107 No. 2, pp. 238-46. Brown, W. and Eisenhardt, K.M. (1995), “Product development: past research, present findings, and future directions”, Academy of Management Review, Vol. 20, pp. 343-78. Browne, M.W. and Cudeck, R. (1992), “Alternative ways of assessing model fit”, Sociological Methods and Research, Vol. 21 No. 2, pp. 230-58.
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Gustafson, K. (1994), “New development in team building”, Industrial and Commercial Training, Vol. 26 No. 9, pp. 17-22. Hahn, C.K., Watts, C.A. and Kim, K.Y. (1990), “The supplier development program: a conceptual model”, Journal of Purchasing and Materials Management, Vol. 26 No. 2, pp. 2-7. Hoopes, D.G. and Postrel, S. (1999), “Shared knowledge, glitches, and product development performance”, Strategic Management Journal, Vol. 20, pp. 837-65. Huber, G.P. (1991), “Organizational learning: the contributing processes and the literatures”, Organizational Science, Vol. 2, pp. 88-115. Huber, G.P. (1996), “Organizational learning: a guide for executives in technology-critical organizations”, International Journal of Technology Management, Vol. 11 No. 7, pp. 8, 821-32. Jo¨reskog, K.G. and So¨rbom, D. (1993), LISREL 8: Structural Equation Modeling with the SIMPLIS Command Language, Scientific Software, Inc., Chicago, IL. Karlsson, C. and Ahlstrom, P. (1999), “Technological level and product development time”, Journal of Product Innovation Management, Vol. 16, pp. 352-62. Khurana, A. and Rosenthal, S.R. (1997), “Integrating the fuzzy front end of new product development”, Sloan Management Review, Vol. 38 No. 2, pp. 103-20. Khurana, A. and Rosenthal, S.R. (1998), “Towards holistic front ends in new product development”, Journal of Product Innovation Management, Vol. 15, pp. 57-74. Kim, D. (1993), “The link between individual and organizational learning”, Sloan Management Review, Vol. 35 No. 1, pp. 37-50. Koen, P.A. and Kohli, P. (1998), “Idea generation: who has the most profitable ideas?”, Engineering Management Journal, Vol. 10 No. 4, pp. 35-40. Kogut, B. and Zander, C. (1992), “Knowledge of the firm, combinative capabilities, and the replication of technology”, Organization Science, Vol. 3, pp. 383-97. Koufteros, X.A. (1999), “Testing a model of pull production: a paradigm for manufacturing research using structural equation modeling”, Journal of Operation Management, Vol. 17, pp. 467-88. Lambert, D.M. and Cooper, M.C. (2000), “Issues in supply chain management”, Industrial Marketing Management, Vol. 29, pp. 65-83. Lee, J.N. (2001), “The impact of knowledge sharing, organizational capability, and partnership quality on IS outsourcing success”, Information and Management, Vol. 38, pp. 323-35. Li, T. and Calantone, R.J. (1998), “The impact of market knowledge competence on new product advantage: conceptualization and empirical examination”, Journal of Marketing, Vol. 62, pp. 13-29. Loch, C., Stein, L. and Terwiesch, C. (1996), “Measuring development performance in the electronics industry”, Journal of Product Innovation Management, Vol. 13 No. 1, pp. 3-20. Mabert, V.A., Muth, J.F. and Schmenner, R.W. (1992), “Collapsing new product development times: six case studies”, Journal of Product Innovation Management, Vol. 9 No. 3, pp. 200-12. Madhavan, R. and Grover, R. (1998), “From embedded knowledge to embodied knowledge: new product development as knowledge management”, Journal of Marketing, Vol. 62 No. 4, pp. 1-12. Marsch, H.W. and Hocevar, D. (1985), “Application of confirmatory factor analysis of the study of self-concept:
first and higher order factor models and their invariance across groups”, Psychological Bulletin, Vol. 97 No. 3, pp. 562-82. Moffat, L.K. (1998), “Tools and teams: competing models of IPD project performance”, Journal of Engineering Technology Management, Vol. 15, pp. 55-85. Narver, J.C. and Slater, S.F. (1990), “The effect of a market orientation on business profitability”, Journal of Marketing, Vol. 54, pp. 20-35. Nelson, K.M. and Cooprider, J.G. (1996), “The contribution of shared knowledge to IS group performance”, MIS Quarterly, Vol. 20 No. 4, pp. 409-29. Nonaka, I. (1994), “A dynamic theory of organizational knowledge creation”, Organizational Science, Vol. 5, pp. 14-37. Nonaka, I. and Takeuchi, H. (1995), The Knowledge-Creating Company, Oxford University Press, New York, NY. Nunnally, J.C. (1978), Psychometric Methods, McGraw-Hill, New York, NY. Prahalad, C.K. and Hamel, G. (1990), “The core competence of the corporation”, Harvard Business Review, Vol. 68 No. 3, pp. 79-91. Schilling, M.A. and Hill, C.W.L. (1998), “Managing the new product development process: strategic imperatives”, Academy of Management Executive, Vol. 12 No. 3, pp. 67-81. Slater, S.F. and Narver, J.C. (1994), “Does competitive environment moderate the market-orientationperformance relationship?”, Journal of Marketing, Vol. 58, pp. 46-57. Sobek, D.K. II, Liker, J.K. and Ward, A.C. (1998), “Another look at how Toyota integrates product development”, Harvard Business Review, Vol. 76 No. 4, pp. 36-49. Sobek, D.K. II, Ward, A.C. and Liker, J.K. (1999), “Toyota’s principles of set-based concurrent engineering”, Sloan Management Review, Vol. 40 No. 2, pp. 67-83. Stalk, G. and Webber, A.W. (1993), “Japan’s dark side of time”, Harvard Business Review, Vol. 71 No. 4, pp. 93-102. Ward, A., Liker, J.K., Cristiano, J.J. and Sobek, D.K. II (1995), “The second Toyota paradox: how delaying decisions can make better cars faster”, Sloan Management Review, Vol. 36 No. 3, pp. 43-61. Zander, U. and Kogut, B. (1995), “Knowledge and the speed of the transfer and imitation of organizational capabilities: an empirical test”, Organizational Science, Vol. 6, pp. 76-91.
Further reading Akao, Y. (Ed.) (1990), Quality Functional Deployment: Integrating Customer Requirements into Product Design, Productivity Press, Cambridge, MA. Cohen, M.A. and Levinthal, D.A. (1990), “Absorptive capacity: a new perspective on learning and innovation”, Administrative Science Quarterly, Vol. 35, pp. 128-52. Conner, K.R. (1991), “A historical comparison of resource-based theory and five schools of thought within industrial organization economics: do we have a new theory of the firm?”, Journal of Management, Vol. 17, pp. 121-54. Hauser, J.R. and Clausing, D. (1988), “The house of quality”, Harvard Business Review, Vol. 66 No. 3, pp. 63-73.
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Appendix
Table AI Measurement items entering large-scale survey (final items) Constructs
Shared knowledge of customers
Shared knowledge of suppliers
Shared knowledge of internal capabilities
Teamwork
Development productivity
Time to market
Value to customer
Measurement items This product development team shared knowledge about. . . A1D Customer requirements Which features were most A2D valued by target customers A2K Current customer needs A3D What our customers want A1G Our suppliers’ process capabilities Our suppliers’ capabilities to meet cost A1K targets A2C Our suppliers’ design capabilities Our suppliers’ capabilities to meet time A2J requirements Our suppliers’ capabilities to meet quality A3A requirements The capabilities of our A1F engineering staff The strengths of our A1I engineering design capabilities The strengths of our A3E manufacturing facilities The capabilities of the A3H process technologies we used This product development team. . . C1C Worked well together C1H Coordinated activities well C1M Implemented decisions effectively C1N Communicated clearly C1D Was productive CIG Used financial resources sensibly Used all product development CIJ resources rationally Used product engineering hours C1L efficiently Met its deadline for C1B market introduction C1E Developed product on schedule Reduced the product development C1I time This product had a C2A high quality This product exceeded customer C2C expectations This product created a C2K high customer value This product was successful C2M in the marketplace
112
Mean
SD
4.18
0.84
3.93 3.93 4.02 3.11
0.94 0.94 0.91 0.92
3.03 2.98
0.99 0.95
3.29
1.01
3.17
1.02
3.95
0.80
3.91
0.82
3.73
0.79
3.61
0.84
3.82 3.51 3.57 3.53 3.97 3.58
0.92 0.98 0.95 0.97 0.85 0.90
3.33
0.98
3.32
0.95
3.69 3.60
1.18 1.11
3.29
1.13
4.00
0.94
3.57
1.06
3.91
0.95
3.79
1.10
The ASP phenomenon: an example of solution innovation that liberates organization from technology or captures it? Nada K. Kakabadse Andrew Kakabadse Pervaiz K. Ahmed and Alexander Kouzmin The authors Nada K. Kakabadse is Professor in Management and Business Research, based at the Northampton Business School, Northampton, UK. Andrew Kakabadse is Professor of International Management Development, based at the Cranfield School of Management, Cranfield, Bedford, UK. Pervaiz K. Ahmed is Professor in Management, based at the Wolverhampton Business School, Telford, UK. Alexander Kouzmin is based at the Cranfield School of Management, Cranfield, Bedford, UK.
Keywords Information systems, Outsourcing, Information modelling
Abstract Improved integration, centralized databases, access through Web browsers and application service providers (ASPs) are some of the current trends impacting on organizational decisions regarding IS/ IT outsourcing. Web-based technology liberated the client/server IT model from the limits of geographical boundaries delimited by a local area network. Partnering with the right ASPs could provide organizations with the new synergy required for competitive advantage. This paper outlines the development of a “solutions” innovation business model of rental-based sourcing, charters current ASPs and the differences in IS/IT provision and offers an audit of the benefits and costs of ASPs to businesses and other stakeholders. Future challenges are mapped out for consideration as are strategic choices associated with continued outsourcing, as distinct from in-sourcing, of IS/IT.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 113-127 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534410
Introduction Improved integration, centralized databases, access through Web browsers and application service providers (ASPs) are some of the current trends impacting on organizational decisions regarding IS/IT sourcing. Web-based technology liberated the client/server IT model from the limits of the geographical boundaries delimited by a local area network. Currently, seamless and real-time use of relational databases, client/servers and Webbased applications are offered by ASPs (Barnet, 2000). Partnering with the right ASP could provide organizations with the new synergy required for competitive advantage (Cameron, 2001) in increasingly global markets characterized by shorter product lifecycles, high rates of technical obsolescence and increasingly sophisticated customers’ needs and tastes. These characteristics are particularly acute in the electronic information industry (Shepherd and Ahmed, 2000). However, with approximately 700 USA-based and two dozen or so UK ASPs with a variety of service models, choices are many (Whalen, 2000). The Gartner Group estimates the ASP market for 2001 at US$3.5 billion, with a rise to US$25 billion by 2004 (Paul, 2001a, b). While some believe that the year 2001 would be the time when ASPs would “cross the chasm” in the USA and start to become a mass-market phenomena, the statistics of 2000 however, showed that the year was disuniting for European ASPs, with little revenue and few customers (Taylor et al., 2001). Increasingly, businesses, and in particular ebusiness enterprises, are no longer seeking specific technology “fixes”. Instead, they are concerned with end-to-end e-business solutions that can completely transform their business models so that they can compete in the Digital Economy. Hence, the move from a focus on product/service and process innovation to solutions innovation, i.e. the introduction of new solutions that combine product and process supported by the required skills, competencies and capabilities (Shepherd and Ahmed, 2000). As a result, enterprises are focusing on their Internet strategy and technologies and debate whether they should outsource a particular IS activity and to whom. Organizations are aligning themselves with business partners to carry out those services that are performed more efficiently outside the host organization. These relationships are forged in the belief that by doing so, they enable an enterprise to focus on core competencies and the fundamental drivers of the business – products, brands and customers (Cameron, 2001). To better serve their needs, e-business architects are expanding their hosted or outsourced services way beyond technology to incorporate an overall
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business strategy with industry expertise. Both established and emerging organizations are partnering with ASPs to manage the strategic functions of their business. Many companies are already using ASPs for their routine or packaged (pre-developed, solution-based, software normally available for use via licensing) products, such as Microsoft suite, at the one end, to Web hosting and large and critical applications, such as enterprise resource planning (ERP) and risk analysis applications, at the other end (Bennett and Timbrell, 2000; Ebbesen, 2000; Kakabadse, A. and Kakabadse, N., 2002b). Customer organizations have the choice between purchasing, implementing and maintaining package application software, such as Microsoft Office, SAP, Oracle Fanatical, Peoplesoft, or renting a general or customized implementation of the software from an ASP (Bennett and Timbrell, 2000). Most commonly, hosted applications, starting from simple and routine technology to the complex and critical, are as follows (Ebbesen, 2000): . personal applications – such as Microsoft Office, consumer’s applications, “edutainment”; . collaborative applications – such as GroupWare (team collaborative applications, group calendaring and scheduling), e-mail and conference applications; . commercial applications – include Internet computer sales and marketing, procurement, customer service and support applications; . customer relationship management (CRM) applications – include sales, marketing, customer-support and call-centre software; . enterprise resource management applications – such as accounting, human resource management and payroll, materials management, project management and maintenance management software; . service and product-supply chains or vertical applications – such as industry-specific applications, exemplified by the MRP, CAD, CAE in manufacturing, billing in health care and claim processing in the insurance industry; and . analytical applications – include any applications constricted to analyze a business problem, such as financial analysis, customer analysis, Web site analysis, business performance measurements and risk analysis.
Kakabadse, N. and Kakabadse, A., 2002). Organizations are shifting their focus from technology to understanding how to successfully choose and manage partners who will provide IT services and, ultimately, help enhance organizational growth, value and profit. The move to “solutions” innovation initiates a new business model requiring new organizational competencies such as partnering and a clear articulation of the solution offering, the components of which can be provided either internally or sourced externally and delivered to wherever the customers site may be (Shepherd and Ahmed, 2000, p. 103).
Organizations are no longer merely procuring IT products; they are buying e-services or selecting “one-stop shop” solutions that will unburden them from purchasing routine and well established software packages, hosting, implanting, configuring and provision of ongoing support (Kakabadse, A. and Kakabadse, N., 2002b;
Why ASPs or rental-based sourcing? It has become increasingly important for firms not only to focus on core competencies but also to introduce innovation and flexibility (Peters, 1987). Moreover, to leverage an organization’s potential resources, management needs to develop a proactive framework in which innovation can be planned and managed (Prahalad, 1993). Through the specific configuration of the different components within the enterprise’s service package (core competency), enterprises communicate added value to the customer. Such components need to be architecturally compliant to facilitate integration using industry standard technology (Shepherd and Ahmed, 2000). From the basic premises of the Resource Based Theory (RBT), the firm’s success is not defined by the industry within which the firm competes (Rumpelt, 1991), but through a process of resource accumulation, and deployment; leading to an idiosyncratic endowment of proprietary assets (Collis and Montgomery, 1995; Peteraf, 1993; Wennerfelt, 1984). In addition to the traditional concept of resources, RBT extends the concept to include capital and people; structure; processes; skills, competencies; knowledge and relationships. RBT views each organization as a collection of unique resources and capabilities that provide the basis for organizational strategy and the primary source of profitability (Grant, 1991). Hence, competencies represent an organization’s capacity to deploy and integrate resources, usually in combination, using original processes to effect the desired results. They are the “skills and knowledge set” embedded in organizational systems (Quinn and Himler, 1994). These “tacit” competencies and internal process are held to be more enduring because they are harder to copy by competitors (Christensen, 2001). Hence, the emerging consensus in the management literature suggests that a firm’s competitive advantage rests within the firm’s
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capabilities or core competencies (Prahalad, 1993; Stalk et al., 1992; Teece and Pisano, 1994). A firm’s core competence is dependent on its capacity to creatively combine core skills (Prahalad, 1993) not only from within but also from outside the organization. RBT emphasizes that resources may not be highly movable across firms and that firms may not be able to easily duplicate the way resources are used within other firms to form the basis of competitive advantage (Grant, 1991). Every competitive advantage is predicated upon a particular set of conditions that exist within a particular context and point in time. The creative bundling of a firm’s core competencies (Prahalad, 1993) needs to focus on the factors that signal value to the customer and effective allocation of the firm’s resources – hence, the alternative ways of sourcing the firm’s products or services, such as strategies of outsourcing, alliances, partnerships and ASPs. Whilst, vertical integration is used to provide economies of scale and enable large organizations to amortise fixed costs over greater volumes, innovation and technological advance have contributed to substantial flattening of the scale economics in automobile, steel, electric-power generation and computer industries (Christensen, 2001). Economies of scale and scope are rooted in market positions (Christensen, 2001). In an era of rapid change and mass availability of established technologies, vertical integration appears to slow a company down. Hence, there is an increased trend towards outsourcing, alliances and partnership. For example, Cisco and other vertically nonintegrated companies outsource much of their manufacturing and product development to partners or start-up companies which they subsequently acquire (Christensen, 2001). However, when a company is competing for the business of customers whose needs have not yet been satisfied by the functionality of available products or services, or when the necessary and sufficient information does not exist at the critical interface, vertical integration is still imperative (Christensen, 2001). The cost of attracting new clients to ASPs is still very high for each individual provider, paralleling the experience of Internet companies. Even the world’s largest Internet-only bank, Egg, with 1.5 million online customers and 500,000 transactions per month, has to spend US$200 in marketing to woo each new customer (Harald, 2001).
distributed computing architectures and the Internet, can be traced to time-sharing computing of the 1960s, when very expensive mainframe computers and applications were rented on a timesharing basis via remote data entry and printing (Marshall, 2001). Providers of these services were running IT service bureaus for early adopters of IT services; exemplified by the Payroll Bureau Service provided by Ross Perot’s Electronic Data System to Frito Lay, Blue Cross and others in 1963. Moreover, the concept of multiple large-scale computer systems connected by telephone wires to terminals in offices and homes throughout a city and a time-shared operating system running continuously with a vast file system of shared programs and data, although it never materialized, was born in 1963 by a group of engineers from MIT/GE (Corbato and Vyssotsky, 1965). With the growth of the IT industry and the decline in hardware and software costs, IT services moved into organizations as internally-provided functions, often with specialized and supporting staff. With increased complexity and rapid IT development, businesses in almost every industry question the need to maintain a full-scale application, and its computer/networking support, and embraced the IT outsourcing initiative that emerged in the 1980s. Technological advances, improved robustness of client/server and other component technology, increased uptake of the Internet, and Web-based applications enhanced the idea of hosting centre software as it emerged in the 1997. The Internet became the largest data and computing service delivery infrastructure and a new platform for network-centric computing (Tao, 2000). The World Wide Web enabled the widespread growth of electronic commerce (ecommerce) and the Web browser became the universal GUI for Internet-based services. Component technologies have made it possible to produce a number of reliable, distributed software applications that can be hosted (housed and run) geographically distant from its users, enabling greater specialization and great economies of scale (Bennet and Timbrell, 2000; Tao, 2000). The separation of IT resources, such as hardware, networks and software applications from information services, led to the emergence of ASPs providing hosting and access to predominately packaged software by a third party and associated services on a rental basis (Bennet and Timbrell, 2000). The separation of IT resources from computer services (electronic data and information storage, access and processing) can find analogies in public utilities such as electricity and gas. For example, with electricity, electrical power is the resource and light bulbs and other electrical gadgets, such as
ASP history Although only in existence since 1997, the ASP concept, less the graphic user interface (GUI), the
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heaters, are examples of electrical application devices that transform the electrical resource into light and heat. Similarly, computer hardware produces computing resources in forms of processor time, data and data access bandwidth. Whilst, application software consumes these resources and delivers services to users (Tao, 2000), computer hardware, networks and applications software are the only means to get computer services. Similarly, for telecommunications, virtual channels are the resource and telephone and fax machines are examples of telecommunications application devices, using resources to deliver phone-calls and faxing services. For computing based on the Internet, the Internet bandwidth, as well as hardware and data on Web and application servers, are the resources. Web-server software and server-based software embodied in Web pages are applications. Users can get services by accessing data stored on remote servers (data centres) or running applications housed (hosted) on remote servers by using the Internet as an “extension cord” between the server machines (hardware) and the user input/output devices such as terminals and printers (Tao, 2000). Since processor time cannot easily be delivered on a network, the computing applications are usually hosted on servers (dedicated machines with highprocessing capabilities), thus liberating users from the technological resources in exchange for the payment for service delivered on a “pay-as-yougo” basis. Service providers offer enterprise-level software and charge customers monthly per-use fees, which include all installation, upgrades and maintenance as in other utilities – hence, the emergence of utility computing. Where, initially, ASP’s housed basic software applications such as e-mail, by 2000, they started providing Web development, CRM, collaboration, data management, ERP, management information systems, networking and telecommunications services. At the end of May 2000, in the USA, the top five IT outsourced services were Internet access (29.9 per cent), Web hosting (25.5 per cent), IT consultancy (17.0 per cent), software systems integration (9.0 per cent) and application service provision (APS) (7.3 per cent) (Duval, 2000).
Rysavy, 2001). Service purchasers gain access to enterprise applications, ranging from accounting and human resources to commerce and customer services. However, in its broader sense, a variety of service providers fit the ASP generic category – exemplified by management service providers, network service providers, storage service providers, enterprise ASPs, and other ASPs, as they are all able to deliver value over the Net or value can be supported by a dedicated, leased line, virtual private network or wireless technology. In addition, they all provide externally-managed services where the product (hardware and/or software) is owned/leased and managed remotely at the provider’s facility, allowing the service provider to centralize support for the service and allowing economies of scale to come into play (Bennet and Timbrell, 2000). Moreover, the ASP model provides one-to-many services, usually with standardized offerings to many clients or customizing offerings to a group of clients in particular markets – exemplified by the government or financial sector. The other feature of the ASP model is a service-based-fee on an annuity-pricing model such as transactional, peruser or per-seat – the basic nature of the payment being over time rather than upfront or balloonstyle payments (Whalen, 2000). The common elements of ASP offerings are network, systems infrastructure, development environment, application, content, process support, process execution, and consultancy. Many suppliers provide all or some of these elements. Currently, there are four generic models of ASPs sourcing: (1) Web-sourcing (or browser-based computing or Web-based computing), (2) Wireless sourcing. (3) Application hosting. (4) Application outsourcing.
Who are the ASPs? The ASP terminology, in its narrow sense, refers to any third party whose main business is to provide a software-based service to multiple customers over a wide area of network, Internet or wireless in return for payment (Marshall, 2001; Naden, 2000;
Web-sourcing Web-sourcing refers to the provision of services via the World Wide Web. Web-native applications imply that the software and data exist on the Web and, generally, require high-speed Internet access. Web-sourcing started out as Web-sited Internet destinations offering static content, such as words and images and then grew into applications providing dynamic, interactive experiences, or “stickiness”, that kept users returning to the site. A new generation of software vendors are bringing their applications to market as Web-based services that can be accessed directly over the Internet. The provision of sophisticated, online applications, alongside relevant content from a Web site, catering to the specific needs of a special interest group, is exemplified by specialized business needs or vertical
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industry markets. For example, service providers create enterprise-level software and usually charge customers a monthly per-user service fee that includes all installations, upgrades and maintenance. There are a number of significant categories of providers, such as network-based application vendors, Internet business services, vertical industry Web sites and Internet marketplaces. Increasingly, e-commerce businesses offer some kind of Web-sourced application, exemplified by the ancillary services such as logo design or printing though Web sites. Examples of Web-sourcing can be found in Intuit and E*Trade sites and Web-based tax preparation services.
server hosting, e-business services and Internet infrastructure services. In a way, the Internet service providers (ISPs) are pioneers of ASPs to the extent that the provision of hosted mail and Web services is an application service. For example, if an enterprise has the desire to have a Web site, but does not have its own Web server then the enterprise is most likely to use an ISP to host its Web site. Web hosting is a huge business, easily representing the majority of the current ASP market. However, over time, the ISP industry has split into those who provide access and connective services and those who offer hosting services. Those who provide hosting services have been joined by a new class of application software vendors using the hosted model to provide Internet-based applications and services. These hosting services offering services for sophisticated e-commerce, messaging and other complex Webhosting services are, effectively, ASPs. For example, the launch of the TalkingNetsm, the enterprises’ wholesale telephony ASP model, which employs a soft-switch network to deliver carrier-class, voice-over IP applications to data services providers, is a solution for traditional data service providers who want to add voice to their portfolios, but face several constraints – including regulatory hurdles, lack of in-house telephony expertise and capital limitations (Meyers, 2000).
Wireless sourcing Wireless sourcing refers to services provided over wireless Web, usually to mobile devices such as cellular phones and hand-held computers. Currently, wireless or mobile commerce applications are extensions of Web-based, e-commerce solutions (Rysavy, 2001). International Data Corporation predicts that by 2004, US$21 million worth of mobile commerce will take place, whilst, the Gartner Group predicts that 40 per cent of business to consumers e-commerce will occur in the same year over wireless connections (Rysavy, 2001). Since users, typically, pay airtime for wireless Web use, they are unlikely to spend much time browsing or tolerating banner ads or other “distracting” messaging without their permission. The “wireline” Web and “wireless” Web use different development languages. The wireline Web employs HTML technology while the wireless Web uses two development languages, HDML (handheld device mark-up language) and WML (wireless mark-up language). These languages work with different browsers installed on mobile phones so it is important to understand what language one’s device uses. According to McKinsey & Co., within 2 years, e-commerce over mobile devices will be between US$10 billion and US$15 billion, worldwide (Berry, 2001). Some e-commerce players such as Amazon.com and Yahoo are already offering mobile options (Rysavy, 2001). Currently, wireless Web application mobility fills the gap when the PC is not available. However, within few years, wireless sourcing will be the way ahead (Ante and Borrus, 2001). Application hosting An application host is perhaps the most common form of sourcing via ASPs. Although the Internet industry uses the term application hosting, it differs only in name from other forms of application services. There are several distinct sub-categories, namely Internet Web server hosting, application
Application outsourcing Increasingly, the IT industry is utilizing outsourcing of certain applications. It is a wellacknowledged fact that the actual cost of an application software represents less than a third of the total cost of installation and maintenance (Marshall, 2001). The necessary hardware, networks, support personnel and other related activities are easily the largest part of an application’s total cost of ownership. For example, an implementation of a large-scale application such as SAP R/3 often runs into the tens of millions of dollars (Marshall, 2001), pointing the way to the outsourcing option! Outsourcing options have prospered in the last two decades with a specific boost in the IT industry by the multi-billion dollar IT outsourcing deals struck by General Motors with EDS and Eastman Kodak with IBM. However, instead of handing over their complete IT infrastructure to an outside provider, organizations have selectively outsourced specific parts of IT, ranging from data networks all the way through to application management, which followed the trend towards fixed per-user pricing in the form of a monthly subscription. As a result, several ASP propositions emerged – such as selective application outsourcing, whole-
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environment outsourcing and subscription computing. Application outsourcing presents a breadth of applications being outsourced, although a relatively small portion of those arrangements use the ASP option. The most popular applications being outsourced via ASPs are ERP programs, such as SAP R/3 (Marshall, 2001), whose goal is to integrate company’s functional areas into a single computer system (Conference Board, 2000). According to the survey results from 117 firms, in 17 countries, 87 per cent had adopted an ERP system (Conference Board, 2000). Most of the ERP software companies are offering an ASP option, either directly or in partnership. Because of the tangibility of the e-market place and associated costs, companies are increasingly looking to intermediaries to be the “hosters” of ERP functionality (Conference Board, 2000). For example, SAP was an early adopter of an ASP option when it partnered with Intel to form Panadisc. The idea was to broaden the size of the company to take advantage of ERPs to include smaller companies where the large installation costs were not economical or feasible. For example, in the USA, within the wholesale sector, Prophet 21 has introduced an ASP option for a flat monthly fee, partner Sales Systems provides system administration and a complete and secure infrastructure with a predictable and economical cost to Prophet 21 customers. Customers enjoy a cost-effective alternative to internal maintenance without incurring significant hardware, software or implementation investments (Marshall, 2001). Vendors also believe that, over time, they will sell much of their hardware to service providers, ASPs and ISPs. There will be a shift in buying power from customers to ASPs as customers buying services will not care what products are running those services. However, until that shift occurs, many ASPs need the brand recognition provided by big-name vendors (Torodo, 2000). Some ASPs need the investment whilst others need the brand and marketing power of highprofile vendors (Torodo, 2000). Yet, other ASPs are using vendor brand recognition via comarketing deals in lieu of investments.
last few years, ASPs are emerging from seven separate trends as: (1) Start-ups/Dot-coms. (2) System/software integrators. (3) Network services or bandwidth and hosting providers (AT&T, MCI, Sprint and Bell). (4) Wireless ASPs (WASPs) (GoAmerica, Geni). (5) Solution providers. (6) Software vendors (IBM, Microsoft, Oracle, PeopleSoft, SAP). (7) Hardware vendors (Cisco, Comaq).
Who are the providers? The field of ASP players is rapidly growing. Many enterprises in the marketplace describe themselves as ASPs, but there are variations. There are fullservice ASPs and there are also application infrastructure providers (AIPs), independent software vendors (ISVs) and many more. In the
The commonality between these different players can be summarized as all having made the transition from delivering the products as discrete sales to delivering the product as a service to customers. In addition, they deliver their service over the Net (Internet, private-liaised lines, wireless application protocol (WAP)) and, as such, provide externally managed services from one central place to many clients (one-to-many). These services are provided on a user-fee-base. Hence, the fundamental value being offered under this wide ASP umbrella of service providers are management of service, network service or storage service.
Start-ups Notwithstanding the fact that start-up/Dot-com businesses are failing, the percentage of commerce via the Web continues to grow (Rysavy, 2001). According to the Gartner Group, projecting that the ASP market will grow rapidly, by 2004, only 20 of the original 480 ASPs will remain (Paul, 2001a). For example, Pandesic, the ASP formed by the joint venture of Intel Corporation and SAP AG was an early casualty (Paul, 2001a). Moreover, in December 2000, the KPMG Consulting Group sold its 49 per cent stake in the ASP, Qwest Cyber.Solution LLC, that started in June 1999, back to joint venture partner Qwest Communication International Inc., after it lost US$65 million by September 2000 (Greenemeier, 2001). Start-up ASPs are those enterprises that have created an image of expertise on the outside. However, these often can be a modern version of a “Trojan horse” on the inside. The most common model for these start-up providers is to identify with a vertical industry, generate some templates that fit that industry and then add some services for the target market. Initial clients are often provided by venture capitalists having interests in both the ASP and client. Successful Dot-com start-ups could become take-over targets as the ASP market continues to mature. Success of many start-ups depends on the sound business plan, “public offering” and/or “acquisition”.
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Systems integrators ASP system integrators or aggregators promote a model of integrating multiple and diverse groups of hosted applications and offer this to customers under one umbrella (Follett, 2001). These services are mostly offered on a sign-on subscriber’s basis, with a single bill for all services. Some see aggregators as the wave of the future, becoming the one-stop shop for customers seeking a board range of applications and a single point of contact to handle business relationships (Follett, 2001). However, some systems integrators can also be the clever disguise of an organization that previously handled the implementation of half a dozen enterprise-wide packages. The vertical focus of these firms typically simplifies the initial integration and seeks to maximize the value of the ASP’s in-house industry-specific expertise.
Solution providers To some the solution providers are the true ASPs, packaging the software and business professional services to create complete service products to present to end customers. A typical scenario is that an ASP, via an Internet connection, pushes clientcustomized installations for virtually any application subscribed-customers choose, often tailored to the particular needs of the business. They also provide local copies of the application that are available to online or off-line users. When subscribers are online, they also get added features such as automated back-ups and the ability to access shared databases. The ASP also provides technical services for provided applications. Typically, end-users will only deal with one provider, who will provide a solution for the subscribed customer made up from several components originating from several different layers of providers (Tao, 2000). Among these hidden layers there might be a company that, even though a major contributor within the solution, has never had a direct relationship with the end customer (Tao, 2000). This stratification is a consequence of the multi-tired architecture that enables the ASP model to comprise various elements of the solution performed on separate specialized servers – each element can be catered for by a separate specialized provider, whilst the end-user has a seamless solution dealing only with one provider. Some ASPs favour a vertically integrated model in which they own and control every element from top to bottom, achieving tighter integration and more assured control. Other ASPs promote the merits of outsourcing to best-of-bred providers, benefiting from a greater economy of scale. The majority of ASPs outsource at least some elements of the solution to third parties (Paul, 2001b; Tao, 2000). For example, many ASPs outsource the networks they use to deliver applications to their clients.
Network services or bandwidth and hosting providers Bandwidth providers, who continue to experience profit-margin pressure from an increase in competition, are also jumping into the “ASP game” – where their profit margins can be much larger. Organizations such as AT&T, MCI and Sprint and Bell have either partnered with, or are setting up their own, ASP services – a trend that is likely to continue. At the network layer sit the providers of basic communications, service centre resources and value-added IP services. Communication includes the physical connections, the routers that handle the IP traffic and the associated performance, reliability and security applications. Server centre resources typically provide the provision of collection space, protected electricity supplies, physical security and maintenance services. Value-added IP services include virtual private networking, network coaching, streaming media, freeways and directory services (Tao, 2000).
WASPs Currently, there are over 10,000 WAP sites in more than 95 countries (Berry, 2001). There are a growing number of platforms that can also be hosted by an ISP, such as Go America, OminiSky Corp (Rysavy, 2001), Genie, the portal of BT Cellnet or GPRS, the Deutsche Telekom portal (Taylor et al., 2001). For example, the San Francisco-based Neomar Inc. lets enterprise users access applications and information from remote devices such as pagers, WAP-enabled cell phones and other PDAs – all of which use public-key infrastructure and WML technology.
Software vendors Increasingly, hardware and software vendors are entering the arena of ASPs. Many vendors and investors are realizing that ASPs could represent a significant opportunity for them. Equally, they also recognize that ASPs are an emerging niche market, with unique customers, risks and challenges in a highly fragmented and competitive wider market. In an effort to hedge potential losses and secure market share, mega-vendors from all IT areas, including IBM, Microsoft, Oracle, PeopleSoft, SAP, British Telecom, EMC, Sun, Digex, Dell and many others, have unveiled ASP migration programs. These programs are packages of services and products creatively designed to assist ASPs as they enter the market and prepare to grow
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their business in return for their loyalty in the form of exclusive agreements to build services using their technology (Rooney, 2001; Torodo, 2001; Whalen, 2000). These vendors have crafted ASP migration programs – offerings packaged with the ASPs unique needs in mind. For example, IBM has launched a program that assists IBM partners through the process of developing a business plan up to the actual launch of a new business or service (Torodo, 2001). The programs aim to encourage ASPs and AlPs to work together with the vendor’s traditional partners who have invested in technical skills and, as such, can act as a sales channel for ASPs, ISVs and AlPs. In return for IBM’s efforts, partners that go through the program sign an exclusive agreement to build services using IBM’s technology (Torodo, 2001). Similarly, in order to sell its Dot-net (.Net) strategy, Microsoft needs applications. Hence, Microsoft created partnerships with ASPs who, in return, exclusively use Net server lines (Rooney, 2001). Vendors are also reshaping license agreements to exert more control over the product, as the end customer requires service regardless of who provides the product. Some vendors are seeking a tighter association with their customers and maximization of their base of application users who typically drive their entry decision. Others are leveraging their considerable sales and professional-services organizations to enter the ASP market. Some, exemplified by IBM and Cisco, are laying the foundation for the next-generation of data centres. Yet, others such as AT&T, are trying to make a claim as an ASP hosting platform, whilst others, such as Progress Software, are trying to carve a niche as infrastructure systems software providers (Whalen, 2000). For an ASP to get the most from these vendor offerings, it is crucial to find the right program, understand the various key vendors components of the offering and fully take advantage of the resources they offer (Whalen, 2000). In addition, major consultancy companies, such as PriceWaterhouseCoopers, have established ASP services (Bennett and Timbrell, 2000).
the Internet on a pay-by-use basis. Even the major hardware vendors such as Cisco, Compaq and IBM have entered the ASP market.
Benefits of ASPs Benefits of ASPs stem from the fact that software applications are distributed over multiple servers (dedicated machines) rather than dispersed over multiple “clients” (individual personal computers (PCs)) (Tao, 2000; Wainewright, 2000). However, there are several questions that need to be resolved, such as which sort of software or computing intelligence should reside in a user’s computer, known as “clients”, and which on a server that resides at the service providers? There is also the question as to whether companies should host applications themselves or outsource them to a service provider? If the choice is the latter, then, which model of ASP should carry the day? Increased benefits are achievable from the combination of a service rental model, componentbased application architecture and a computing environment for customers based on the “fat server” and “thin client” model (Tao, 2000, Wainewright, 2000). Purchasers and providers of ASP sourcing arrangements, as well as investors, have the potential to achieve a number of benefits. These benefits are structured in three broad categories – economic, business and technical (Baldwin et al., 2001; Lacity and Hirschheim, 1995; Lacity et al., 1996; Timbrell et al., 1998).
Benefits for software vendors and ASPs Economic benefits .
.
.
.
Hardware vendors Increasingly, hardware vendors start offering verification hardware on a pay-as-you-use basis. This alternative offers escape from the up-front investment for purchasing; for example, rapid prototype systems required for modelling behaviour of the chip prior to manufacture. In addition, many vendors see benefits from leasing spare capacities. Whilst, traditionally hardware vendors made their products for sale, but currently they make it as a service available for delivery over
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Predicable/constant user base, which leads to a predicable cash flow. Potentially constant and predicable revenue streams. No distribution costs of software, manuals and stock keeping. Savings – ASPs usually get discounts from vendors of 30-40 per cent on the software through resellers’ agreements with the vendor or a volume discount. They also attract up to 40 per cent discount on hardware components. Alternatively, ASPs may outsource the operation of the hardware to a third party paying a flat fee or each client company. Using standardized offerings and pre-configured template, where possible, ASPs can reduce up to 50 per cent the cost and time of implementation of the application. In addition, the ASP is typically a Web-based offering using
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browser interfaces as the front-end of applications. Using common-user interfaces, such as a browser, the front end of an application provides standardization and, as such, keeps the cost of both infrastructure and technical support lower for the customer (Bennett and Timbrell, 2000).
Business benefits .
.
. . .
.
.
.
Fewer illicit copying of software (software runs on the ASP server only). Improved resource allocation of its own IS/IT staff. Increased customer database. Potential for cross-selling of services. Moving-up the value chain towards highermargin and less-competitive markets (many core markets have come under pressure). Economies of scale – ASPs maintain their economies of scale by providing standard offerings, hence the use of pre-configured templates, where possible, which may be industry specific. To compete for new ASP clients, they must constantly offer the latest version of the software which, for their existing client base, is viewed as a “free” upgrade. Moreover, ASPs identify which component can be reused across their client base and thus, can be clear about which part of the system will or will not customize. In order to achieve economies of scale through reduced maintenance cost in supporting multiple clients, the ASP will seek to keep conformity of systems across multiple customers (Bennett and Timbrell, 2000; Tao, 2000). Attracting technical talent – by developing and investing in work routines and technical tools, ASPs have an opportunity to provide an attractive technical environment for ERP implementation and maintenance of technical staff by leveraging their expertise over multiple clients; hence achieving core technical capabilities in these areas and gaining competitive advantages as a result (Andreu and Ciborra, 1996). Critical mass – for ASPs to provide lower cost alternatives to clients, the ASP must attain a critical mass of clients thereby enabling it to minimize its cost base. This critical mass will vary according to the type of the software package offered (Bennet and Timbrell, 2000).
.
.
However, in order to establish, evaluate and deliver tailored solutions to meet clients needs, solution providers require a comprehensive set of competencies in order to be effective. Shepherd and Ahmed (2000, p. 104) suggest that there is a need for balance amongst four critical sets of competencies, namely: (1) Technical competencies that relate to skills, knowledge and experience in portfolio of hardware, software and network products that provide a technical base of offered solutions. (2) Integration competencies that encompass both technical integration of compactness and an ability to identify valuable business processes and organizational business opportunities. (3) Market/business competencies, or an ability to bring relevant and complete information to bear around an industry, technology and customer. (4) Customer partnering competencies – which enable the forging of partnerships with clients and component suppliers.
Benefits to ASP subscribers Economic benefits .
.
Technical benefits .
No installation of software is needed at user sites.
Instant and centralized upgrades of software (only at the ASP server) – which means that there are no different versions of software that require support. Ease of clients’ usage monitoring from the central point (at the ASP server).
.
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Restructuring the IT budget by changing to smaller, monthly cash-outflows of a predictable nature, presented by rental payment as an alternative to up-front investments in infrastructure and implementation costs – thereby converting capital outflow (purchase of software infrastructure) into operation outflow. ASP sourcing provides an opportunity to liquefy the firm’s IT assets, thus strengthening the balance sheet and avoiding a stream of sporadic, capital investment in the future. Improves IT cost control. Service level agreements and predictable fixed charges provide control of user demands and over-use of IT staff for unnecessary software changes. Costs are allocated more directly according to usage. Predicable ongoing costs on the monthly basis. No need for upfront capital expenditure for purchasing of software and/or licensing.
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Minimizes capital expenditure, both initially and through application updates. .
Business benefits . .
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Liberation from complex technology, regardless of organizational size or geographical location – hence, focus is on core capabilities and running the business. In vertical markets, even applications that support competitive advantage activities can be sourced safely by the specialized ASP who understands that sector. A wide choice – the Internet gives user access to every renewable application that is available online. Easy benchmarking – ASPs’ level service agreements are easy to benchmark. Moreover, ASPs centrally support the software, methodology and database needed to facilitate global benchmarking so that compilation of metrics and the analysis of best practices are fast, adhering to definitional standards that are needed to ensure quality benchmarking (Barnet, 2000). Management of a single supplier relationship – the relationship may be through a variety of supplying organizations operating with a common link to the customer. Clear delineation of responsibilities amongst IT suppliers (client deals with only one supplier instead of negotiating who is responsible for the fault in the IT supply chain – software, hardware supplier or communications supplier). Ease of service for new entrants to the market – start-ups are using ASPs to deploy scalable site-maps based on industry templates more quickly and cheaply. Accessibility of seamless and real-time service from anywhere and any time.
Technical benefits .
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Access to new technologies – automatic updates of the software are immediately available at the Web site. ASPs upgrade complex systems, such as ERP, more efficiently and timely through the use of routines and templates. No software installation hassle – once an agreement is signed the software is ready to be used. No burden of software and hardware compatibility issues – users do need to worry about compatibility between various software
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packages as well between software and hardware. Rapid implementation of the selected system – 3 months for the large-scale ERP system if the business case for ASP is to succeed (Bennet and Timbrell, 2000). Access to technical competencies – ASPs provide technical support to clients as a part of the LSA. Scalability of services – ease of adding or reducing the number of users, as well as the use of applications in the business portfolio. The customer can be of any size, from one user to an integrated delivery network and needs only a PC with an Internet connection. Improves technical service and reduced downtime – support services with sufficient expertise to provide a predictable, timely service sensitive to customer-satisfaction levels. Certified ASPs are backed up by the software vendor’s expertise. Most online ASPs support 365/24/7 service, which is often higher than in-house services for most small and medium-sized enterprises (SMEs) or on par for corporate in-house services. Although an ASP solution does not eliminate wide-area network issues, it does significantly reduce them by using common Internet technologies and access. Improves resource allocation of existing IS/IT staff – hence maintenance staff can do new development work. Overcomes the problem of IS/IT skill shortage – there is no need for technical support overheads such as database and software administrators and technical support staff.
A successful adoption of APS sourcing needs to achieve business objectives. Hence, the purchaser needs to become self-sufficient in the use of the technologies, business processes and performance metrics (Naden, 2000). Moreover, the implementation of ASP sourcing needs to be achieved in a reasonable amount of time, with the costs that make sense and give the magnitude of anticipated business benefits (Naden, 2000). For an organization that already has established IS/IT systems in house, the reasons for undertaking ASP sourcing include replacement of antiquated IT systems, standardizing best practice or achieving specific results. SMEs may have different reasons, such as having minimal or no IS/ IT systems in place, a lack of large initial capital investment or a lack of expertise. Thus, the implementation of a solution-based business model will require a number of organizational adjustments whereby effort and resources are refocused (Shepherd and Ahmed, 2000). In particular, the alignment of key organizational
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Volume 7 · Number 2 · 2004 · 113-127
processes and reward/compensation schemas need to reflect the nature of the solution rather than the product as do the establishment of the measurements of effectiveness of the new model in operation (Shepherd and Ahmed, 2000).
Investor benefits
(2)
Some of the potential financial benefits to investors are (Tao, 2000): . a high percentage of predictable, recurring revenue through competitive ASP operations; . leverage generated from a one-to-many solution model; . high-switching cost for customers in an immature ASP market, thus a captured audience of existing customers and predicable income; . high returns on investment through leveraging fixed costs; . an expansion of the addressable market for IT; and . ability to sell higher-margin, value-added services into the customer base.
(3)
However, during start-up or in the transition from being a product/service provider to solutions provider, the company may possess only certain competencies that the purchaser may require, and although this shortfall can be compensated for by partnering and outsouring, difficulties can arise if their shortfall lies in partnering skills (Sheperd and Ahmed, 2000).
ASP challenges
(4)
(5)
(6)
The number of challenges that ASPs face are as follows: (1) Architecture of the applications for delivery of IT services via the Net has proved to be a challenge for the pioneering ASPs. Considering the short history of the Internet and Web technologies, the majority of existing applications cannot easily migrate to the ASP market – they may not be suitable for ASP hosting that run applications on the “fat” server and “thin” client basis instead of on the “fat” client and “thin” server basis (Taylor et al., 2001). To fully benefit from the ASPlayered infrastructure, ASP applications must be designed to run on component technologies. However, for those who believe that time-to-market is more important than quality of service, there are some technologies to support fast-tracking adaptation of existing client/server applications for ASP hosting by
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(7)
logically extending the cord between the ASP server, a client’s PCs and other input/output devices. Although newly developed software will be designed for running on component technologies, given the current rate of investment within the IT industry and business absorption, current applicants may run for another 5-7 years. Limited performance due to limited bandwidth of the Internet (Tao, 2000). The bandwidth inefficiency will persist over the next 2-3 years. Network infrastructure limitations – slower rate of the adoption than anticipated, bottlenecks at the network peering nodes, ongoing switching to fibre optic and connections will be challenges for the next couple of years (Whalen, 2000). The balance between integration and customization is difficult as customization can reduce benefits for economy of scale and profits – hence, maintaining enough constancy across clients to gain economies in the maintenance and support process (Bennett and Timbrell, 2000; Whalen, 2000). Reliability and support structure of 365/24/7 service can be expensive and difficult to achieve for newcomers. Most ASP service providers operate 24 h a day, 7 days a week with 99.99 per cent availability, hence usually exceeding the average company’s internal experience. However, Internet introduces several potential failures such as server failures and attacks (Tao, 2000). Pricing methodology – annuity-based pricing induces many changes in business; from the way the business is perceived to the way it compensates its employees (Whalen, 2000). Micropayment – an online billing mechanism that supports the collection of very small sums, as well as large ones, so that clients can pay-as-they-go and not be deterred by complicated payment overheads, is complicated as ASP service is implemented by integration of distributed components from several ASP providers which do not necessarily support API standards. High start-up costs – being an ASP requires high expenditure with telecommunications, cost for managing hardware, storage, servers, databases, operating systems and end-user applications. The ownership of end-user software is also an expensive up-front cost. Running licensed software and partnering with vendors can significantly reduce up-front costs, but also will reduce margins as there will be multiple layers of suppliers, all reducing the margin. Gross margins for ASPs in the USA are typically 10-20 per cent, whilst, in the
The ASP phenomenon: an example of solution innovation
European Journal of Innovation Management
Nada K. Kakabadse et al.
Volume 7 · Number 2 · 2004 · 113-127
software industry they are generally in the 8095 per cent range (Taylor et al., 2001). In the UK, typical ASP margins are 15-20 per cent whilst in the software industry it is 60-80 per cent. (8) Privacy – potential users of ASP services have a real concern about the privacy and security of their data. Although ASPs are increasingly adopting “military-grade network security” – an advanced high-level security system that is currently able to differentiate between secure and non-secure providers and which will, in the future, be considered to be the norm (Hall, 2001). Currently, malicious server attacks in the form of viruses, such as “mafiaboy’s” attack in 2000 on major Web servers in America by exponential number of HTTP page requests paralysing the Web servers, are unpreventable. Most Web servers crash themselves and the underlying operating system when concurrent client connections exceed the capacity of their scalability (Tao, 2000). However, private lines, exemplified by B2B, have significantly lower risks. (9) Balancing the requisite set of skills in a rapidly changing market (Shepherd and Ahmed, 2000). Countering the concerns of most potential ASP users is the significant investment in the support of infrastructure, as well as in staff needed to maintain a computer system. These issues are magnified if the ASP has several offices and must create and support a wide area network to allow them to share information. Some have data synchronization capabilities to address the multiple-office issue. Synchronization tends to be very complex to set-up and maintain and it is very often the source of many support problems. Equally significant are the difficulties in hiring and keeping the skilful staff to support the ASP’s computer system. For example, many Dot-com companies are using ASPs simply because they cannot hire competent IT skills fast enough to grow with their business (Table I). Figure 1 shows the concern of ASP users relating to long-term costs. After year 3, the costs
Figure 1 Accumulated cost of ASP provision
for the ASP model rise higher than would have been incurred through the ownership model. The accumulated cost is measured in terms of software, network, hardware, implementation, maintenance and support.
Issues for consideration by purchasers of ASP services Many SMEs consider outsourcing as their e-business model so that they can concentrate on their core competencies. Additionally, many of the SMEs need to install the next significant upgrade of their software which often requires hardware upgrades to support new upgrades of software. As a result, these enterprises are most likely to look at the ASP as a provider of solutions that could fit their needs and budget. According to the European Commission in the 15 EU societies, enterprises with fewer than 49 employees represent 99 per cent of ASP customers, 53 per cent of employees and 37 per cent of revenues (Taylor et al., 2001). SMEs often have no IT
Table I Cost of running ERP software by an SME organization in the vertical automotive industry market: ownership versus ASP rental Expense type ERP software/50 users Network (dedicated line) Hardware Implementation – one off Maintenance/year Support staff: 0.5@ 30,000/year (index each year by 2.5)
Ownership model
ASP rental model
£50,000 (not necessary) £50,000 £30,000 £ 8,000
£75/user/month (includes maintenance and support) £5,000/connection fee (one off) and £10,000/year – £30,000 –
£15,000
(not necessary)
Source: Compiled by the authors
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departments, no access to the latest software and technologies but, however, require easy, scalable and fast solutions – hence, the appeal of the rental or utility-type solutions with the costs for services known in advance of revenues (Taylor et al., 2001). The major question is: can the purchasing organization assess the ASP as a stable enough business entity to entrust it with its corporate data for safekeeping? In the short run, many ASPs find it difficult to make the case for their staying power. Acquisitions and mergers are inevitable and, in many cases, service will undoubtedly suffer. Many will run out of investment. The Gartner Group predicts that 60 per cent of today’s ASPs will disappear into bankruptcy by the end of 2001 (Paul, 2001a, b). Research has shown that to be successful in sourcing, any value-added activity through a third party, such as in the case of outsourcing or rentalsourcing, a company must have the following (Christensen, 2001; Kakabadse, A. and Kakabadse, N., 2002a; Kakabadse, N. and Kakabadse, A., 2002): . a sourcing strategy that supports the company’s strategic positioning; . be able to clearly specify what attributes of the service it requires; . capabilities to measure critical attributes of the service that must be reliable and conventionally accessible – both must be able to verify that what is being provided is what is needed; and . must be informed as to what else in the system must be adjusted and how it can be integrated whenever there is any variation in what the suppler delivers the company.
In considering an ASP option for IT sourcing, an enterprise needs to question whether (Cameron, 2001; Tao, 2000): . particular ASP models/solutions are specific to the enterprise’s industry and business model; . the ASP offers a full suite of business applications; . ASPs exhibit staying power in the marketplace; . the ASP provides scalable, top-tier applications that can grow as the enterprise grows; . the ASP can manage the custom applications that are unique to the business and integrate its solutions with legacy applications; . the ASP model will be able to integrate the enterprise’s future applications with existing applications; . the ASP offers seamless integration with the enterprise’s customers, suppliers and partners; . there are other potential providers; . to enter into a long-term contract with a proven partner when the costs might, initially, be higher; . to choose to use a “spot market” contract (a transaction for immediate delivery and payment) which is less expensive, but could also provide less control; . there needs to be consideration of ASP market dynamics; . to trust the provider with financial and customer information (security, privacy, reliability and back-up/recovery); . the risks, costs and benefits of ASP sourcing option are fully canvassed; and . service contract agreements include clear language about data ownership and that the ASP is preclude from making any use of that data other than backing it up and producing support.
The considerations to buy, to rent or to outsource are a strategic-choice decision for many enterprises and, as such, require careful consideration of all available options. Implementing strategic information systems such as ERP systems or rolling out e-commerce initiatives needs considerable debate by the top team regarding whether the enterprise: . requires a “bleeding edge” of performance, such as mission-critical servers running on nonstandard components or a well established technology such as standard servers; . needs a technology solution faster than inhouse teams can build and/or adapt; . lacks the IT resources to implement a new project; . can afford a long-term capital outlay or a fixed monthly payment; . needs 365/24/7 service and whether the current in-house resources can provide it; and . has reviewed all available IT sourcing options.
Notwithstanding that there are significant benefits for both parties in ASP sourcing arrangements, such as the recurring money stream afforded by hosted services and customer access to sophisticated software without having to pay for expensive hardware, constant upgrades or a large IT staff up-front, ASPs need to prove themselves as reliable and having staying power in the marketplace before they can attract large corporations. The large corporations will have to forgo their IT department in order to switch to sourcing core applications via the Internet. ASPs need to show successful track records within the SME market, gain some history and adopt new applications specially developed for the component architecture. As well as gaining
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financial stability that will project their staying power in the market, ASPs need credibility before corporations will/can decide to be liberated from their complex IT departments (Kakabadse, N. and Kakabadse, A. 2002c; Korac-Kakabadse and Kakabadse, 2002). Although client organizations generally understand the “total cost of application ownership” and appreciate that the ongoing cost of application maintenance/support and IT support staff are substantial, the current cost of renting applications is still too high (Bennett and Timbrell, 2000). Costs need to come down in order for ASPs to prosper in the current market. Savings on support staff costs, transfer of risks costs and cash flow benefits achieved by application rentals are equally important premiums. The question of how large those premiums are needs to be answered by each potential purchaser of services. In other words, ASP/Internet use, similar to the use of any new product or service, will develop slowly, over time, with applications that have proven themselves in hosting arrangements entering common use gradually. In the first instance, enterprises will spend 90 per cent of their investment in optimizing the 5-10 per cent components in their expertise domain and adopting commercial-off-the-shelf components for the rest of their applications (Tao, 2000). Gradually, companies will cull through available electronic services, experiment, evaluate and slowly, but surely, adapt to new ways of IS/IT sourcing which may liberate their organizations from the complexity of machinery, cables and IT departments. Thus, a move to a “solutions” focused model will require fundamental changes in the way companies operate and particularly in the manner they acquire and redistribute their resources (Shepherd and Ahmed, 2000), developments which will have profound implications for the enterprise, its stakeholders and wider society.
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Peters, T.J. (1987), Thriving on Chaos, Pan Books, London. Prahalad, C.K. (1993), “The role of core competencies in the corporation”, Research Technology Management, Vol. 36 No. 6, pp. 40-7. Quinn, J.B. and Himler, F.G. (1994), “Strategic outsourcing”, Sloan Management Review, Vol. 35 No. 4, pp. 43-55. Rooney, P. (2001), “Microsoft cements ASP foray”, Computer Reseller News, No. 926, 1 January, pp. 12-13. Rumpelt, R.P. (1991), “How much does industry matter?”, Strategic Management Journal, Vol. 12 No. 3, pp. 167-85. Rysavy, P. (2001), “E-commerce unleashed”, Network Computing, Vol. 12 No. 2, pp. 56-64. Shepherd, C. and Ahmed, P.K. (2000), “From product innovation to solutions innovation: a new paradigm for competitive advantage”, European Journal of Innovation Management, Vol. 3 No. 2, pp. 100-6. Stalk, G., Evans, P. and Shulman, L.E. (1992), “Competing on capabilities: the new rules of corporate strategy”, Harvard Business Review, Vol. 70 No. 2, pp. 57-69. Tao, L. (2000), “Application service provider model: perspectives and challenges”, paper presented at the International Conference for Advances in Infrastructure for Electronic Business, Science and Education on the Internet (SSGRR), 31 July-6 August, L’Aguila, Italy.
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Introduction
The dynamic nature of innovation partnering: a longitudinal study of collaborative interorganizational relationships Cassandra Marshall
The author Cassandra Marshall is based at the Stockholm School of Economics, Stockholm, Sweden.
Keywords Partnership, Innovation, Product development
Abstract This paper provides insights into the initiation and early development of collaborative interorganizational relationships (IORs) for innovation and new business creation. Data were gathered from field observations of three ongoing collaborative IORs. A conceptual framework previously developed by Ring and Van de Ven served as a means of restructuring and analyzing the data. The results reveal an emergent process that is dependent on the comparative achievements in negotiation, commitment, and execution. Three organizational practices were identified: volatile agreements, continuous reevaluation and reorganization through real practice, and a process wherein “co-participants” were challenged to work on their relationships. The limited prospects of specifying agreements ex ante, combined with continuous variation in conditions, entail active management and continuous re-design of the relationship. This suggests that managers play the role of the architects of relational linkages.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 128-140 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534401
The perception of the organizations’ use of collaborative interorganizational relationships (IORs) as an important source of innovation and new business creation is far from new (Kanter, 1989; Pennings and Harianto, 1992; Powell et al., 1996; Teece et al., 1997; Van de Ven et al., 1999). Jarillo (1988, p. 39) reminds us that “in any case it is an essential characteristic of entrepreneurs to end up using more resources than they can control, for they are motivated primarily by the pursuit of opportunity, rather than feeling constrained by using the resources they control”. Jarillo (1988) thus considers the accumulation of and access to the necessary resources and capabilities as the “first entrepreneurial problem”. Analogously, Sarkar et al. (2001, p. 701) argue that: “entrepreneurial opportunities also (besides product markets) exist in factor markets”. According to their reasoning, a capable firm with the capacity to explore and exploit new business opportunities with complementary partners, referred to as “alliance proactiveness”, may be rewarded with increased competitiveness. Collaborative ventures are, however, frequently viewed as difficult to manage (Alter and Hage, 1993; Das and Teng, 1996; Powell, 1987). Innovation is seen as an uncertain and equivocal endeavor, and a significant rate of failed outcomes in new business development has repeatedly been considered typical. The remarkable failure and dissolution rate of business alliances (somewhere between 30 and 50 per cent) further accentuates the joint challenge (Barringer and Harrison, 2000; Das and Teng, 1997, 2000). The question of how partners in a collaborative IOR obligate themselves to general commitments and specific courses of action has thus been of particular interest to a number of scholars and practicing managers. Nevertheless, in a comprehensive analysis of earlier empirical studies, Sobrero and Schrader (1998) found that understanding the “how” falls far behind the tested insights into justifying whether or not to start an alliance. They also found that the link between contractual and procedural coordination within the relationship has been rather neglected. Scholars, who invoke the transaction cost perspective generally concentrate on the choice of contractual mechanisms and governance structures that minimize the sum of the production and transaction costs. On the other hand, research based on structural contingencies and organizational learning addresses the exchange of information and knowledge, which in turn evinces a primary interest in procedural coordination. Even though research taken from a
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resource-based view supplements a contractoriented outlook with procedural orientation by linking it to “day-to-day” communication and the conditions for transacting resources that are not perfectly transferable, the related empirical work pertains mainly to contractual coordination (Sobrero and Schrader, 1998). Scholars are thus encouraged to examine, in detail, routines and processes that facilitate coordinated action and value-creating linkages between organizations (Dyer and Singh, 1998; Ring and Van de Ven, 1994). This paper examines how interorganizational partners jointly accomplish and support the initial phases of innovation and new business creation. This is accomplished by: . presenting empirical data from the formation of collaborative IORs between a Scandinavian telecommunications company and its partners in the context of new product development; . analyzing and elaborating on the characteristics of the case; and . discussing the implications of the findings.
to be cyclical, and constantly reconstructed by continuing interpretations and events. Another premise concerns the interactions between the formal and informal courses of action, suggesting that personal relationships, tacit understandings and psychological contracts are increasingly replacing formal roles, agreements and legal contracts as a collaborative IOR evolves over time. However, the repetitive execution of acts also leads to the institutionalization of informal terms into formal manifestations and organizational routines. The process they propose consists of three simultaneous stages: negotiation, which involves formal bargaining and informal sense-making between actors and forms the basis for mutual commitments in terms of legal and psychological contracts, which in turn support the execution stage, wherein negotiations and commitments are transformed into collective interaction (Figure 1). The negotiation stage affects the way the potential partners and actors involved think about the upcoming venture. It is a process of developing a common understanding and definition of purposes and expected outcomes. Through the exchange of values and priorities, the negotiation will, if successful in its formal or informal context, lead to the congruent conceptualization of future joint action and increase the chances of establishing commitment between the partners. Thus, the commitment stage concerns the establishment of agreements and terms of coordination and action. To a great extent, the early moves in negotiation and commitment constitute a “cognitive anchor” (Ring and Van de Ven, 1994, p. 102) that is critical for subsequent
The next section begins with a discussion on the theoretical framework that has guided current study, followed by a more detailed account of the method used during the data collection process. Then, the empirical data from a case study of three ongoing IORs will be presented. The concluding sections expound upon and analyze the findings and propose some managerial implications.
The emergent process of collaborative IORs
Figure 1 Developmental processes of collaborative IORs
Researchers have developed various guidelines and measures for successfully managing IORs. One field of work considers careful planning and systematic implementation to be a precondition for success, and cultivates a division into sequential stages of decisions concerning the collaborative venture. However, the implications of uncertainty in cases where at least some information about future events is not possible to know in advance, e.g. in innovative endeavors, have caused other researchers to stress an emergent view of the process. For instance, Doz (1988, 1996), Doz and Hamel (1998) and Doz et al. (2000) argue that a positive attitude toward renegotiations and additional commitments, over time, becomes critical. Ring and Van de Ven (1994) previously developed a theoretical framework for the development of collaborative IORs. One basic assumption underlying the framework is the emergent pattern. The relationship is considered
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negotiations and goal-setting. The execution stage, finally, puts intentions and plans into effect. The innovation agenda commonly involves discontinuity, multiple commitments, interruptions, and transient purposes, thus challenge the partners to explore their common future. Although earlier research has described important stages and key issues in the developmental process of IORs, limited attention is paid to the relationship between negotiation, commitment and execution for coordinated action under unpredictable conditions (Sobrero and Schrader, 1998). Arin˜o and de la Torre’s (1998) concept of “relational quality” is, however, informative in this case. Building on Doz (1996) and Ring and Van de Ven (1994), the authors advance an evolutionary model of collaborative ventures that focuses on continuous learningaction-reaction loops. Their tentative model also takes into account the development of “relational quality” on a cumulative basis, i.e. considered as both an initial condition and an output of the relationship. The authors argue that processes for conflict resolution are among the most important initial conditions for promoting positive renegotiation loops. A recent article by Arin˜o et al. (2001) further elaborates on the partners’ ability to manage relational quality and improve the prospects of attaining common goals.
prerequisites and strategies for interorganizational collaborations, the author was fortunate to participate in activities carried out in two of the three relationships (at Alpha and Beta). Consequently, a considerable part of the process of different events and episodes was collected in real time from the perspective of an insider or “observing participant” (Alvesson, 1999). Insights and thoughts from events occurring at the operational and managerial levels were captured by means of participating in both project teams and steering committees. The two particular relationships were studied during their first 10 months of existence (from May 2000 to March 2001). A total of 22 (59.5 h) formal and joint meetings and group efforts (i.e. booked in advanced and with at least one representative from each partner attending) were spent during the period. Notes were taken and documented in a chronological diary in each case. As a complement to the observations and narratives of individuals, the study also included written text sources, e.g. “formal descriptions” of joint agreements in contracts and minutes of meetings, as well as conversations conducted through e-mail. The kind of self-ethnography described above was also planned for the third relationship (TelCoDelta-Epsilon). However, the author entered the relationship when the collaboration had been under way for about 6 months and, unfortunately, the first and only meeting was to be the last before the relationship ended. Further, data were thus collected by means of interviews with TelCo’s representative on the steering committee and the appointed project leader, and by analyzing written agreements in letters-of-intent, minutes of meetings and final project reports from each of the participating firms. Given the risk of “staying native” (Alvesson, 1999), my familiarity with and closeness to the studied object may be considered an obstacle and a potential source of bias. To preclude any misrepresentation of the results, semi-structured face-to-face interviews with key participants from “each side” of the collaboration provided additional data. The interviews were conducted either in tandem, i.e. together with a research colleague, or by a researcher not directly involved. Archives and interviews thus served as a complement to the data collected by observation, as well as a means of triangulating the validity of the data (Eisenhardt, 1995). In one of the three IORs (case Alpha), a structured follow-up meeting was arranged with the main purpose of discussing and reflecting on the experiences gathered from the collaboration. Besides additional data regarding the relational
Methods The focal level of analysis in the current study was the process of engaging in relational acts, which makes time a significant frame of comparison. However, time as used in this study refers to “event time” rather than “clock time”, i.e. time as measured by particular events that have affected or created the process direction (McPhee, 1990). Since the empirical data sought were generated at a level of detail that only the actual participants could provide, the research was carried out as a longitudinal in-depth case study (Eisenhardt, 1995; Yin, 1994). Yin’s (1994) earlier description of case studies as: “. . . the most popular research strategy when how and why are the questions posed, when the researcher has little or no control over the events and when interest concerns some everyday phenomenon within some context of real life” applies to the overall circumstances and aims of this study. The object concerned three collaborative arrangements between an incumbent telecommunications company (TelCo) and its partners (Alpha, Beta, Delta and Epsilon). Permanently employed by one of the companies (TelCo) and under instructions to outline the
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process itself, this particular meeting facilitated the selection of what was to be expressed in the text describing all that had been said and observed during the study of TelCo and its partners.
TelCo-Beta, respectively. Alpha portrayed themselves as “digital business creators”. Alpha with approximately 1,900 employees, located throughout Europe, was mainly involved in projects aimed at developing and redesigning major companies’ various business processes. Beta was in e-commerce. With 29 offices in 18 countries and almost 2,000 employees, they worked with new e-business solutions across different Internet platforms. Both companies were supposed to have a degree of authority in areas of interest to TelCo. As consulting firms, the two companies differed from TelCo in their overall business logistics. While TelCo mainly targets a mass market, Alpha and Beta’s market strategies were based on exceptional customized solutions. TelCo was also involved in a project together with the supplier of the platform in question, Delta, and a hardware/software supplier called Epsilon, for the purpose of testing current functionality and proposing further development. Delta and Epsilon can be described as mature international companies, twice as large as the combined group of companies in TelCo. This latter collaboration is subsequently referred to as alliance TelCo-Delta-Epsilon. According to Van de Ven and Ferry’s (1980) way of classifying IORs, the collaboration with Alpha and Beta corresponds to an “interorganizational set” of dyadic relations, wherein TelCo played the part of the focal agency, while the collaboration between TelCo, Delta, and Epsilon is more along the lines of a network relationship (Figure 2). Each relationship was structured so as to have a joint steering committee with two or three representatives from each company, plus an operational project group directed by a joint project leader. The number of participants in the project group varied, being approximately seven in TelCo-Beta, ten in TelCo-Alpha and 20 in TelCoDelta-Epsilon.
The TelCo case Background The telecommunications industry has repeatedly been described as a relatively turbulent and competitive arena, due to rapid technological change, deregulation, and fresh competition. Product innovation has become known, in this context, as a viable way of carving out new market niches and adapting to changing environments. The case study reported in this paper refers to TelCo, a department of an incumbent and reasonably large (30,000 employees) Scandinavian telecommunications company that was commissioned to explore and develop new customer applications based on mobile communications. The narrative begins in the late 1990s, when a supplier, with whom the parent company had been collaborating for considerable periods of time, developed a new technological platform for future mobile services. In the light of increased customer demand for mobile solutions, the company decided to invest resources in early testing and evaluation of the platform. Even though the prospect seemed promising, there were uncertainties regarding future business models and market players, as well as customer demand for business applications based on the platform. As a result, one division of the parent company was instructed to establish an organization to explore and develop new products and services based on the platform. Thus TelCo was born. The fairly small group of ten colleagues was assigned with exploring new business opportunities, beyond the present scope of the firm, which would require an understanding of how this particular technology could bring customer benefit by means of improved functionality and innovative user applications. They had to expose themselves to new sets of knowledge in somewhat unknown territory in order to expand their techno-market insight (Dougherty, 1992). This made them consider the prospect of collaborative relationships with other firms in order to gain complementary capabilities and expertise. Thus, even at take-off, the individuals involved realized their need for affiliates who knew more about software and application services. TelCo’s manager at the time had useful contacts among some firms whose main business concerned system integration and software development. Through these contacts, TelCo entered into negotiations with two firms, Alpha and Beta, referred to as alliance TelCo-Alpha and alliance
Initial interorganizational motivation Even though the assignment was ambiguous and the territory somewhat unknown, all parties felt the future prospects for the mobile platform to be promising. This mutual enthusiasm shaped the
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Figure 2 The structure of TelCo’s interorganizational relationships
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“interorganizational motivation”. For Alpha and Beta, the collaboration was an opportunity to learn more about an emerging technology for future application development. Furthermore, the collaborative venture was supposed to start from customized solutions with a view of learning about new functionality, which could eventually result in future products or services on a mass-market. The collaboration was thus expected to be a perfect fit for both Alpha and Beta. The partners of the thirdparty relationship, TelCo-Delta-Epsilon, had longterm ambitions regarding common product development in the area of “mobile e-services”. The partners made the point that the chance of success is based on each party’s complementary qualifications. Their overall aim was described as follows: The Parties’ common objective is to continue to jointly evaluate, both from a technical and a market perspective, [Delta, Epsilon, and TelCo’s] mobile e-services system solutions, applications and hosting services for generating competitive, brokered e-services to the B-2-B marketplace, thereafter jointly marketing and providing these services on a revenue-sharing basis between the Parties (LoI, May 2000).
Without exception, the initial commitments were based on wide-ranging terms set forth in “letters of intent” (LoI). No lawyers were involved at this stage. Any details about the objectives of the relationships and the future products were to be decided later on. One person at TelCo characterized this first stage as an unsophisticated, but somewhat preventive measure paving the way for “concrete discussions”: You agree on entering into an agreement. In that way, you are eliminating the risk of the other party running away with crucial knowledge. Thus, you can allow free scope for concrete discussions without the risk of the other party suddenly bailing out (Participant TelCo, from interview in September 2000).
The LoI was also regarded as a time-saver: There is a written letter-of-intent, since we tried to keep away from big deals with contracts and layers who scrutinize every word and formulation. [. . .] I like this model, doing something simple in the beginning to see what we can actually achieve instead of spending a lot of time preparing press releases and drafting contracts by the hundreds. Suppose we don’t achieve anything, then it would all be a waste of time (Participant Beta, from interview in October 2000).
The willingness to collaborate was negotiated and committed to by virtue of the LoI. As a result, the very first achievement represented a common understanding and a desire to collaborate in the wireless Internet business, based around “mobile e-services”. So far, only senior managers had carried out the negotiations. At this point, middle
managements and members of various functions were supposed to get onboard. The TelCo-Alpha case In TelCo-Alpha, the two participating firms jointly decided to put their resources at each other’s disposal with each one bearing its own expenses. Hence, without further ado, a project staffed by three or four members from each company was organized in order to carry out the very first joint action. In the opening workshop, the agenda became rather action-oriented. The participants tried to outline the prerequisites for activities in the immediate future, i.e. the first 2-4 weeks, supplemented with a few words about the expected results 6 months down the line. The subjects discussed varied from technological issues to market strategy, and people related situations from previous experience they had gained from other projects. Throughout the conversations, all the conditions they agreed on were noted on a big flipchart. Results from the workshop were supposed to be discussed by the steering committee later that same day. It should be noted that all members, but one (who participated during the final hour) of the steering committee were present throughout the meeting. A matter of vital importance during the workshop was the decision to start with a limited prototype based on a real business case together with a common customer. This idea came into full focus when one participant pointed out that: We should do tests on a couple of trial customers. It’s easier to describe examples of services if you are working with a concrete customer (Participant Alpha, workshop in October 2000).
Thus, the strategy was to present a customized application, which could in turn become a potential product or service and the basis for further collaboration between Alpha and TelCo. On the participants’ advice, the joint steering committee decided that the initial efforts would be conducted in the sense of a trial with a common trial customer. This focus on a common customer turned out to be the guiding characteristic of the continued collaboration, as well as the overall basis for assessing the contributions. The ensuing weeks were characterized by intense activity. The participants at both companies agreed on the joint task of listing 15 prospective customers, and together putting forward ideas about suitable wireless applications. Nonetheless, after a couple of weeks, it became apparent that the list of customers was hard to pin down. Some of the participants were rather frustrated and felt that the time was slipping by:
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So far we have not reached a point where we disagree. However, this is a process where we have to learn each other’s language. For this to work we need common customers; if we can’t reach that goal then there will be no point [in continuing] (Chairperson of steering committee, from interview October 2000).
With the steering committee’s permission, the project group decided to adjust its strategy. Still emphasizing the importance of customer-driven development, the group decided to choose a single customer. At this stage, the parties began to allocate roles among themselves. While one person answered for all customer contacts, two or three individuals took on the responsibility of preparing the mock-up, and another two for organizing the forthcoming customer presentation: It was rather frustrating, until we decided to go for customer Y. Moreover, we were discussing several topics simultaneously [. . .]. When we divided the customer case into different tracks, it felt a lot better – the burden was lifted and the job became easier to deal with (Participant from Alpha, followup meeting in January 2001).
Joint knowledge creation was described as an impossible task before one had come to understand parts of the others’ knowledge. The participants thus arranged a joint training course for those who required deeper technical knowledge of the platform, which, according to the participants, helped in fostering a common language. Another example in the same vein was the time when it became apparent that the representatives of TelCo were, first and foremost, business developers based in the area of market expertise, while Alpha’s participants mainly possessed a technical skill set. This difference resulted in a “comprehension gap”, and led to communication trouble between the members. When the issue came to light, the parties decided to add one participant from each company. Consequently, one technician from TelCo and one business developer from Alpha entered the project. During the interviews, one of the participants remarked that the project was biased toward technical questions from the outset: Initially, we focused very hard on technology. I think it was very useful when person X joined the project with his complementary skill set (Participant Alpha, follow-up meeting in January 2001).
the emerging concept. Based on the positive response, an additional idea seminar was arranged with more representatives of the customer firm a few weeks later. TelCo and Alpha had thus come to the stage where a common customer was seriously interested in the kind of wireless applications being proposed. It was time to prepare a joint offer to further specify requirements. Discussions took place regarding how to approach the customer jointly, and how to divide investments and returns. Two people were assigned with the task of planning and outlining the basis for further collaboration, thus preparing portions of a future negotiated agreement between the parties. Instead of conducting activities one after the other in a predetermined sequence, the partners gave the impression that they were continuously trying to find a more effective way of turning their respective competencies into work. When carried to the ultimate negotiation, commitment and execution took place concurrently. In addition to meetings and workshops for carrying out a task, participants in TelCo-Alpha held follow-up meetings where the members asked themselves the question; How are we doing? They evaluated the results of various activities, as well as how they were doing them, i.e. the process. Those meetings most likely had an impact on their future undertakings, and how they were being conducted. For information sharing, the partners established a common “virtual-office” on the Internet, and at the same time the project was named TelCo-Alpha (TelCo and Alpha), an arrangement that further instilled the sense of community. The relationship went public in February 2001, launched at a European trade fair 10 months after the parties had met for the first time. The TelCo-Beta case When representatives of Beta and TelCo opened their first joint meeting, the level of enthusiasm was high, and everyone was ready to “step on it”. Besides getting to know each other, the participants aimed at articulating each partner’s expectations and concerns. Another matter of importance concerned the working method. As was the case with TelCo-Alpha, the parties emphasized the importance of shared experience through early trials and prototypes:
An initial mock-up in the form of an interactive multimedia presentation was developed to illustrate ideas regarding the concept of wireless applications. The idea was to elaborate the mockup further so that it could serve as a mediator of ideas and form the basis of a customer presentation. Eventually, TelCo and Alpha arranged a meeting with the customer to present
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The collaboration will initially consist of two to four trial projects, after which the parties will evaluate the results and establish the final forms for the continued collaboration. Negotiations should continue until the Contract has been signed or a written statement thereon has been received from the other party. The period during which negotiations are conducted will subsequently be called the “Negotiation period”. Agreements
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regarding activities and projects that are planned together during the negotiation period will be documented as an appendix to this Letter of Intent (LoI, May 2000).
In spite of this, TelCo and Beta became deeply involved in examining their contractual obligations. The partners held different views as regards how to acquire suitable customers for the trial. Participants from Beta regarded TelCo as the natural owner of the wireless concept and thus thought it best that TelCo put forward a candidate. These remarks made representatives of TelCo suspicious of their partner’s intentions and willingness to collaborate on equal terms. TelCo and Beta entered into a discussion about whom the project belonged to. The already strained discussion got even more heated when the Beta manager expressed the following: You are the ones largely in control. We are willing to support you, but it is your show. In this collaboration, you own the customer (Participant Beta, workshop September 2000).
Participants from TelCo began to question whether the joint venture would actually come to anything, and whether all the discussions about collaboration had simply been a pretext for obtaining access to their large customer base: If the reason for collaborating with us is just a consultant’s fee, without sharing any of the risks – then there are many consultants to choose from (Project leader TelCo. Collected from an informal discussion after a meeting with Beta, September 2000).
Correspondingly, the Beta participants thought that TelCo was trying to withhold essential details of its future development plans. They could not understand their partner’s sudden displeasure: I don’t think that TelCo is willing to allow us in too far. If I were in their position, I’m not sure I would have let us in (Participant Beta, from interview October 2000).
Once the collaboration had started to falter, key players in the alliance gradually lost contact. Shared appointments were rescheduled, and occurred at longer intervals. After a couple of months, the collaboration dissolved into silence without any final meeting or formal notice of termination.
The TelCo-Delta-Epsilon case The third-party relationship in TelCo-DeltaEpsilon was initially based on a joint test of a technical platform developed by Epsilon for application service provisioning, i.e. a platform that could facilitate the further elaboration and integration of end-user applications from different service providers. Based on individual and
common objectives, the parties agreed on four phases: (1) A joint trial of the communications and application platform. (2) The development of future principles of collaboration regarding the business model, revenue-sharing and joint marketing. (3) The launch of the trial offer into commercial operation. (4) Collaboration on new products. In contrast to the previous two relationships, TelCo agreed to largely finance the trial. The partners appointed an outside (from a fourth company) project leader to manage the joint project. The participants were spread across Scandinavia, Europe and the USA, a circumstance characterized as an additional challenge. As in the relationship between TelCo and Alpha, a common knowledge base and face-to-face interaction were regarded as determining factors. For those reasons, the participants traveled quite a lot, e.g. TelCo participants in Scandinavia traveled to Epsilon’s office in the USA to learn more about the platform: Participant X and Participant Y [both from TelCo] also had a one-week lesson on how [the platform] worked and how it was being developed . . . and then [Epsilon participants] sent all the drafts and documentation for the codes (Project leader, from interview).
The initial stages of the trial lived up to expectations. Epsilon put an exploratory version of their application platform at the alliance’s disposal. They also supplied the trial with an application already being used by their field engineers. All the parties found the application in question useful, and praised the original concept. Even so, over time, TelCo and Epsilon found that Delta had failed, for undeclared reasons, to fulfill its commitments. At the same time, they tried to bring another application into the trial. The joint project leader explained: Delta’s participants suddenly understood that they wouldn’t get so much out of the project. And that’s why they felt forced to try out as many of its products as possible, to have something to show their sponsors that [the project] was more than just a money pit. [. . .] Delta came up with the idea of using a system that had not originally been included. People from Epsilon who had worked with all the interfaces said: oh no, not more, we don’t have the time (Project leader, from interview).
Every extra hour of delay and each evasive answer from Delta annoyed the other two parties. Since Epsilon and TelCo felt unconvinced about their common partner’s continued interest in collaborating, they considered the prospect of continuing with the project by themselves, leaving
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Delta out. Consequently, in addition to their regular meetings, TelCo and Epsilon arranged separate meetings to discuss their common interests and ideas regarding future collaboration. One of the topics discussed was whether Delta should still be one of the members. Eventually, the trial came to an end and the overall experience gained from it was summarized in a joint report. Even though TelCo and Epsilon felt that Delta had not fulfilled its commitments, the first stage had been completed. However, earlier experience negatively affected the climate for further negotiations. When the parties initiated discussions in accordance with the stipulated second phase, the dialog revealed the differing views of the alliance partners. As a result, they entered an endless process of negotiation in order to ensure future commitments and results. Almost 6 months after the start of the secondround of bargaining, the three alliance partners were still investigating, and occasionally negotiating about, the chances of starting the next phase. In conformity with the TelCo-Beta case, the partners gradually lost contact – again, the collaboration dissolved into silence without any final meeting or formal notice of termination.
Analysis A brief comparison of the three cases The three cases provide us with narrative regarding how the formation of collaborative ventures has varied as a result of the partners’ initial negotiation-commitment-execution cycles (N-CE cycles). The various cycles, identified as junctures at which significant achievements were observed in the relationship (e.g. the distribution of roles) or in the innovation idea (e.g. the development of a prototype), are summarized in Table I. Ring and Van de Ven (1994) have proposed that partners in collaborative IORs continually negotiate, make commitments and put their intentions into action, a description that corresponds to the findings in the current study. The crucial task, however, was to get the N-C-E cycle moving, and to sustain that motion. Once the achievements declined, or displayed an imbalance between the three stages, the entire collaboration ran the risk of ending. Three organizational practices can be identified which may explain the various paths taken by the partners: (1) A process coordinated by rather volatile agreements.
(2) A process that involved continuous reevaluation and reorganization through actual practice. (3) A process wherein “co-participants” were challenged to work on their relationship. Furthermore, the findings reveal yet another quality associated with the dissolution of relationships. When relationships ended, they petered out in secrecy. That condition will be discussed in the last section. Evolving contracts From a governance and coordination point of view, contractual agreements are supposed to legally define the mutual exchange of rights between interorganizational partners. The concept of joint coordination and control is, in this respect, embodied in the agreed and specified outcomes. Nevertheless, the nascent market for mobile eservices constituted an “emerging opportunity arena” (Hamel and Prahalad, 1994) in which both the business concept and the boundaries of the industry were waiting to be shaped. The unpredictability of outcomes made it hard for the partners to predict and even harder to apportion a guaranteed outcome or result prior to its realization, thus diminishing the value of fixed commitments as a relationship management form. In place of discrete agreements, the partners introduced themselves through less formal negotiations that, in all three cases, resulted in fairly vague LoI. As an illustration, you might recall the LoI between TelCo and Beta, in which the partners agreed to initiate joint activities and trials during the “negotiation period”. The LoI was thus supposed to mark the start of mutual activities and further negotiation, rather than to represent a conclusive deal. This particular arrangement reveals a permissive attitude toward a wide range of possible outcomes, and the changing nature of the relationship. Furthermore, it replicates Salbu’s (1997) persuasive request for “evolving contracts” as a means of flexible coordination and control. However, the wiggle room for contingencies and the evolving nature of the contractual process required the parties involved to have the ability and motivation to take the risk of acting between different states of negotiation and commitment. For this to happen, we can expect that each partner tried to transform the perceived ambiguity into a point of clarity it regarded as sufficient for action. Nevertheless, the level of clarity regarded as “sufficient” may differ from one organization to another (Weick, 1979). The TelCo-Beta case shows how the participants, opposed to their initial intentions, adopted the role of formal negotiators trying to scrutinize and assert their rights as
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Time schedule, stage II Task distribution and match of competencies
Joint offer
Time schedule, stage I Initial task distribution
Vital activities of the process
Customer target group
Wide-ranging LoI
Delayed activities
Division of the work
Division of the work
An initial idea about the future prospect for the trial application
None Although formally in progress, all project activities ceased while the partners adopted a wait-and-see policy
First implementation and evaluation of the test application
Development of test application
Establishment of various project teams
November 1999-May 2001
None
Project plan regarding human, technical and financial resources Time schedule for development of the test application
Wide-ranging LoI
Execution
Future business model between the partners Proposed time schedule for initial phase
Task domain and an idea about business concept/ initial offer
An initial idea about combined resources, products and services
Negotiation
None Ultimately the relationship is dissolved
Joint seminar
Execution
May 2000-January 2001
None
Wide-ranging LoI
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Public launch May 2000-February 2001
Workshop with customer
Development of a mock-up
Initial meeting with joint customer
Joint seminar
Execution
Achievements in the formation process TelCo-Delta-Epsilon Negotiation Commitment
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Total cycle time
The third cycle Outline of future business model between the partners
Division of the work
Task domain and an idea about business concept/ initial offer Proposed time schedule for the joint development of a mock-up (i.e. a limited test application)
An initial idea about combined resources, products and services The second cycle
The first cycle
Negotiation
TelCo-Alpha Commitment
Table I A summary of the collaboration in TelCo-Alpha, TelCo-Beta, and TelCo-Delta-Epsilon
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regards future division of expenses and potential outcome. Their explicit preference for contractual considerations forced them to (en)act the process according to a structure-conduct-performance pattern and to deny inversion and fusion between planning and action before they had obtained control through a classic contracting process. As a result, they failed to initiate the N-C-E cycle, likewise the associated accumulation of knowledge about the innovation idea, each other’s capabilities, and the potential of the collaborative arrangement itself.
had agreed on a joint customer project. The rapid pace erased the dividing lines between each stage of the N-C-E cycle and the actions became increasingly improvisational. According to the joint project leader, the participants in TelCoDelta-Epsilon described a similar pathway:
Trial cycles The somewhat relaxed attitude toward specific guarantees or instant results seems to have had a constructive effect on the initial collaboration between TelCo-Alpha and TelCo-Delta-Epsilon. However, keeping the N-C-E cycle moving forward without contractual closure requires the ability to detect, create and complete incomplete knowledge. The key turned out to be shared experience. In both cases, the participants decided to employ a tryout-strategy through joint trials. In the words of one participant: . . . the collaboration involves adding a number of pieces, competence and energy; if you don’t take that step, the relationship gets very strained.
The chairman of the TelCo-Alpha steering committee similarly claimed the need for real-time experience to assess the potential of the joint venture, saying: . . . one can write any amount of papers. However, of major importance is whether you find a customer to work with, who can actually confirm the state and existence of the market – since you can’t create that by entering into a partnership agreement.
Thus, creating in real time was considered a major source of comparative data, where different perspectives and expectations could be brought together in a more concrete account of the content and conduct of the continued relationship. Accordingly, the participants described the process as alternating between what they initially aimed to do and what they might do given the opportunities (or constraints) realized through customer interaction and the real-time development of product ideas. Encouraged to “rework the preliminaries”, the participants also continually made choices regarding the structures and processes for getting along. You might recall how participants in TelCo-Alpha decided to add project members in order to overcome the perceived comprehension gap and how they started to divide work among the participants in terms of roles and responsibilities as soon as they
. . .something very significant [for the relationship] was that it changed a lot during the project. The parties’ focus and interest changed.
These accounts of incremental movement through a developmental trial period agree with Larson’s (1992) depiction of the formation process of entrepreneurial dyads. Not only the platform prefigured the task domain and reflected the initial conceptualization of the business (Bouwen and Steyaert, 1990), but it also formed the essential capabilities and competencies to start out from. Furthermore, face-to-face and day-to-day activities were valued, and regarded by the majority as an absolute necessity. In addition to meetings and workshops with a view to carrying out a particular task, the participants in TelCo-Alpha and TelCo-DeltaEpsilon held follow-up meetings where the members asked themselves the question; how are we doing? They evaluated results from various activities, as well as the ways of doing them, i.e. the process. All these kinds of meetings had an impact on future undertakings and how these were carried out. The above emphasize sense-making over decision-making when the nature and properties of the joint endeavor presented a changing pattern that was vague and initially hard to discern (Weick, 1998). Considering the option of early involvement in joint activities, it appears as if experience of actual practice facilitates such formation by framing concepts and choices, thus suggesting that those parties who lack the ability to stir themselves to action, i.e. those who do not expose themselves to the process of learning and joint sense-making, are in the greatest danger. Co-participants A move towards IORs is dependent on players who practice and encourage collaborative rather than adversarial behavior. The contributor’s authority and ability to play the role of a co-participant thus become a decisive factor. According to Dixon (1998), this implies that members sensing the motivation to collaborate and jointly transform organizational actualities, rather than just seeing themselves as players in someone else’s game. The distinction between co-participants and “guided players” was apparent in the relationship between TelCo and Beta. Their debate about project ownership had a negative effect on the extent to which the partners felt comfortable and
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were willing to rely on trust when dealing with one another. As a result, within TelCo-Beta, the participants primarily played the roles of formal negotiators trying to assert their rights, while in TelCo-Alpha the partners gradually developed personal roles as they got to know each other by name, and reputation, and as new knowledge was acquired through joint action. In TelCo-DeltaEpsilon, the roles changed as a result of increased mistrust between the partners. In response to breached commitments and increased mistrust, they put on their “lifejackets” (Ring and Van de Ven, 1994), adopted a more formal attitude and enforced structural safeguards. Eventually, the NC-E cycle ceased as the participants became deeply rooted in contractual considerations. These results suggest, in agreement with Ring and Van de Ven (1994) that behaviors shift with role relationships, but also that individuals may don and doff their “lifejackets” depending on how the collaborative process develops. Furthermore, the findings correlate with Arin˜o and de la Torre’s (1998) description of “relational quality” as a cumulative variable that challenges the partners to learn from their interactions and gradually affect the level of inter-partner trust and intimacy. Trust became both an input and an outcome. Unfortunately, in two cases of three, the relationship ended in impaired relational quality.
TelCo did. Not to set one off against the other, rather to find the most suitable partner. The cases thus reveal how partners engage in a “dating process” with exploratory aims. Attempts to explore new business opportunities imply that the parties concerned can:
Concealed termination Although trust and intimacy are valued, a onesided representation of intimate relations as being essential to collaborative behavior runs the risk of overlooking the significance of relationships, which at the outset are not so intimate. On the basis of the belief that IORs can evolve and be adjusted over time, we can expect that prospective partners incrementally signal their motivation for further engagement (Larson, 1992). The case study thus reveals yet another quality related to the unpredictability and essentially fragile nature of joint endeavors. The findings suggest that partners authorize discussions and trials with external parties in order to explore “embryonic possibilities” and evaluate the relationship’s business potential. By this means, it seems reasonable to give up or leave the venture when one of the partners discovers, for whatever reason, that the relationship would not be relevant to future plans. This is in accordance with Larson’s (1992, p. 100) view that “. . .partnerships cannot and should not necessarily last indefinitely”. Sustained survival is thus altered by a pattern wherein firms move in and out of relatively stable relationships over time. Furthermore, a firm may well be “dating” more than one potential partner at the same time, just as
. . .cope with discontinuity, multiple commitments, interruptions, and transient purposes that dissolve without warning” (Weick, 1995).
Furthermore, to create a learning opportunity, the partners are challenged to evaluate their experience and jointly close the books. We may thus question the extent to which the concealed termination in TelCo-Beta and TelCo-DeltaEpsilon negatively affected their prospects for learning.
Conclusions and managerial implications This paper examined the formation process of IORs in response to new business opportunities under volatile conditions. The empirical findings suggest a multi-level and fairly explorative process. Multi-level because the challenge includes coordination and development in two dimensions: (1) The operating mechanism through which key personnel negotiate, make commitments and act in order to develop their relationship (i.e. the N-C-E cycle). (2) The entrepreneurial effort of new product development. Explorative, because the appropriate alliance strategy, can hardly be identified prior to its execution. Even though contracts will still be needed, the findings suggest that a good number of activities will be left to reciprocal co-ordination, reflecting individuals creating new behaviors while executing them. In these respects, the results echo Eisenberg’s (1990, p. 13) description of coordination under conditions of limited consensus, as characterized by: . . .coordination of action over the alignment of cognitions, mutual respect over agreement, trust over empathy, diversity over homogeneity, loose over tight coupling, and strategic communication over unrestricted candor.
The limited prospects of specifying agreements and contracts in advance, combined with constant changes in conditions, imply the active management of an emergent process in which collaborating partners negotiate throughout the collaboration. This process is maintained by a permissible attitude to “bottom-up planning” and each participant’s permission, as well as responsibility, to act as a co-participant. Managers
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are thus challenged to design relational linkages that simultaneously embody elements of a “joint agenda” and prospects for renegotiation. Moreover, either party must be given a chance to generate detailed records of reference and learn about their own values and assumptions from what they are doing. Managers need to ensure that the N-C-E cycle gains momentum. Characterized as a revolving NC-E cycle, managers might also see a lack of achievements during any of the three stages as a “warning signal” for the relationship’s continued progress. Moreover, the emergent path wherein participants delimit the knowledge gap and become increasingly “connected” as events unfold calls for managers who make arrangements without dictating the outcome. Interorganizational arrangements during nascent stages of innovation and new business creation suggest that partners may terminate the relationship if either one of them discovers that the collaboration is irrelevant to future plans. Considering the exploratory aims, we should not necessarily condemn the termination. However, the potential for learning from results and conclusions created during the collaboration may be lost if the termination is concealed. Even though each relationship represents unique combinations, insights obtained from a previous collaboration can improve the performance of managers and co-workers as architects of relational linkages and potential value combinations. Furthermore, a concealed termination without a “closing statement” may unintentionally bring a sense of failure that will have a negative impact on the participants’ motivation regarding future interorganizational initiatives. The results presented provide insights into some aspects of how organizations “date” each other based on the prospect of innovation and new business creation. However, it is important to tie these results to an understanding of the limitations of the proportionately small number of cases included in the study. There are also restrictions related to examining a given stage, i.e. in this study, the initial formation, in advance of its ultimate outcome. In other words, further research into process activities and even more longitudinal studies are needed in order to move towards a conceptually richer understanding of the formation of interorganizational ventures.
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References Alter, C. and Hage, J. (1993), Organizations Working Together, SAGE Publications, Newbury Park, CA.
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McPhee, R. (1990), “Alternative approaches to integrating longitudinal case studies”, Organization Science, Vol. 1 No. 4, pp. 393-405. Pennings, J.M. and Harianto, F. (1992), “Technological networking and innovation implementation”, Organization Science, Vol. 3 No. 3, pp. 356-82. Powell, W.W. (1987), “Hybrid organizational arrangements”, California Management Review, Vol. 30 No. 1, pp. 67-87. Powell, W.W., Koput, K.W. et al. (1996), “Interorganizational collaboration and the locus of innovation: networks of learning in biotechnology”, Administrative Science Quarterly, Vol. 41 No. 1, pp. 116-45. Ring, P.S. and Van de Ven, A.H. (1994), “Developmental processes of cooperative interorganizational relationships”, Academy of Management Review, Vol. 19 No. 1, pp. 90-118. Salbu, S.R. (1997), “Evolving contract as a device for flexible coordination and control”, American Business Law Journal, Vol. 34 No. 3, pp. 329-84.
Sarkar, M.B., Echambadi, R. et al. (2001), “Alliance entrepreneurship and firm market performance”, Strategic Management Journal, Vol. 22 No. 6/7, pp. 701-11. Sobrero, M. and Schrader, S. (1998), “Structuring inter-firm relationships: a meta-analytic approach”, Organization Studies, Vol. 19 No. 4, pp. 585-615. Teece, D.J., Pisano, G. et al. (1997), “Dynamic capabilities and strategic management”, Strategic Management Journal, Vol. 18 No. 7, pp. 509-33. Van de Ven, A.H. and Ferry, D.L. (1980), Measuring and Assessing Organizations, Wiley, New York, NY. Van de Ven, A.H., Polley, D.E. et al. (1999), The Innovation Journey, Oxford University Press, Oxford. Weick, K.E. (1979), The Social Psychology of Organizing, McGraw-Hill Inc., New York, NY. Weick, K.E. (1995), Sensemaking in Organizations, Sage Publications, Thousand Oaks, CA. Weick, K.E. (1998), “Improvisation as a mindset for organizational analysis”, Organization Science, Vol. 9 No. 5, pp. 543-55. Yin, R.K. (1994), Case Study Research: Design and Methods, Sage Publications, Thousand Oaks, CA.
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Hollywood wives revisited: a study of customer involvement in the XC90 project at Volvo Cars Fredrik Dahlsten
The author Fredrik Dahlsten is at Fenix Research Program, IMIT/Chalmers University of Technology, Chalmers, Gothenburg, Sweden.
Keywords Customer orientation, Market orientation, Product development
Abstract This paper presents a case study of customer involvement in the XC90 project at Volvo Cars. A group of female customers in Southern California influenced the development of the XC90 by continuous involvement in the project. In a cost-effective way, the project management team acquired a common understanding of the target customer, giving context to new product development decision-making and eventually shaping the market offer. Customer interaction has been managed in a more subtle way than normally suggested by literature – tacit design by customer presence. The pragmatic and experimental approach to customer involvement used in the project complements conventional market research activities and is as associated with organisational innovation as it is with product innovation. This account of value co-creation in the XC90 project offers guidelines for firms wanting to increase connectivity with customers in their new product development efforts.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 141-149 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534384
Introduction Background Despite intense research since the 1970s on new product development (NPD), there is little evidence that R&D effectiveness has increased (Cooper, 1999). Among areas that are still problematic, the voice of the customer is neglected, especially in the early phases of product development. Consequently, NPD is often depicted as a non-interactive, seller-led process. Customers have, therefore, played a relatively passive role involved only during particular phases of the NPD process such as concept and market testing (Athaide and Stump, 1999). Efforts are, however, put both in understanding and developing customer involvement. Customers could be seen as a new source of competence for the company (Prahalad and Ramaswamy, 2000). Involvement of customers in innovation project development has become nearly an article of faith among both technology researchers and innovation management practitioners (Gales and Mansour-Cole, 1995). Several approaches for the collaboration between the company and customers, and the potential benefits of these relationships, have been launched and described in literature (Kaulio, 1998; Neale and Corkindale, 1998; Von Hippel, 1986). Wikstro¨m (1995) concludes that intensive interaction with potential customers is a likely source of generating new ideas and ways of doing business, and thus potentially increasing R&D effectiveness. Despite the acknowledged importance of customer involvement, research intended to increase the understanding of the customer involvement process that remains underdeveloped (Alam, 2002; Neale and Corkindale, 1998; Tomes et al., 1996). One typical example is the market orientation literature which emphasises entrepreneurial action that delivers superior customer value grounded in sound customer understanding (Slater and Narver, 1998), but unfortunately does not offer any advice on how to achieve this goal (Flint, 2002). It could be argued that customer focus has not been developed as a research question, but has instead been dominated by fairly ungrounded prescriptions (Hennestad, 1999). Customer-focused companies, however, desire to get closer to the customer, i.e. to consider the person behind the market research data (Davenport et al., 2001). By spending time with customers and actually taking part in activities with them, deep insights have an opportunity to emerge (Flint, 2002). The poor connectivity between firms and customers, recognised as the main obstacle for customer involvement
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(Nambisan, 2002), is increasingly being resolved. There is a shift taking place from a perspective of exploiting customer knowledge to a knowledge cocreation with the customers (Sawhney and Prandelli, 2000). Customer involvement could, in other words, constitute a much-needed participatory learning approach for increased market orientation in organisations, proactively integrating the customer into the NPD process. In the development project of Volvo Cars first sports utility vehicle (SUV), the XC90, a customer involvement initiative was undertaken. A group of Southern Californian female customers (hence the title of the paper) met with the project management team throughout the development process and this interaction has had a great impact on the XC90 project. The impact, as well as the set-up of this customer involvement approach, is described and analysed in this paper, resulting in an account of customer involvement rarely seen in literature and one that offers some guidelines for firms wanting to increase connectivity with customers in their NPD efforts.
transaction process. The interaction implies a longer relationship, a refined role distribution and the possibility to acquire more knowledge (Wikstro¨m, 1995). Co-development could be seen as a process where the technology originator and the customer become intimately involved in an integrated or joint development project, where both parties contribute their expertise to the development project (Neale and Corkindale, 1998). Alam (2002) identifies four distinguishing elements of customer involvement activities. The customer involvement objectives or why the customers are involved is the first element. There are often multiple objectives involved in the customer involvement initiatives, but the development of a superior and differentiated product or service is regarded to be the most common reason for customer involvement. Customer involvement is often associated with innovation in literature (Von Hippel, 1988). There are however inherent tensions between customer focus and innovation (Christensen, 1997). Customers might not be reliable predictors of their own long-term buying behaviour (Trott, 2001). This is especially true in the case of disruptive technologies offering a new value proposition to the market. Customer involvement in the wrong setting might lead to an overemphasis on minor product modifications and eventually conservative NPD decision-making. This has led to the fact that some firms discount customer information altogether because of the risks (Flint, 2002). There is, however, a distinct difference between being customer-led and being truly market-oriented. Slater and Narver (1998) state that being customer-led is a short-term philosophy in which organisations respond to expressed customer wants, while being market-oriented represents a long-term commitment to understand customer needs – both expressed and latent – and to develop innovative solutions that produce superior customer value. In other words, market orientation is not adversary to innovation. Customer involvement could serve as a vehicle both for market orientation and innovation. The second important element of customer involvement is the project stage where the customer interaction takes place (Alam, 2002). Customer involvement is seen as more effective the earlier it is conducted in the NPD process (Veryzer, 1998). Ideally customers should be involved in the so-called fuzzy front-end of innovation (Reinertsen, 1999) in order to reveal their latent needs. Kaulio (1998) reviews customer involvement approaches in longitudinal and lateral dimensions. The longitudinal dimension corresponds to the phase of the design process, e.g.
Research method This paper is based upon a single case study (Yin, 1984) of the female customer group work within the XC90 project. Data were collected by means of interviews and observations, facilitated by the insider researcher role of the author. Albeit not participating in the meetings between the project management team and the female customers, the author was involved in other market research initiatives within the XC90 project. Full access to reports from the meetings, written by the moderator, as well as video recordings, has facilitated an understanding of the atmosphere in the meetings. In total, four formal interviews were conducted with members of the project management team. Data analysis was examined and validated by the manager of the female customer group initiative. An underlying intention with the research was to produce actionable knowledge (Argyris et al., 1985), and the results of this study have served as input into other customer involvement projects at Volvo Cars.
Customer involvement Customer involvement implies a different approach to value creation in a project. It is different from the traditional value-chain view in that co-production considers value creation as synchronic and interactive, not linear and transitive (Ramirez, 1999). With the customer as co-producer, the interaction between the parties should generate more value than a traditional
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specification, concept development, design, prototyping and final product. NPD projects often are directed by stage gate-models (Cooper, 1993) and different customer input is needed in the different stages. Few, if any, types of customer involvement cover all phases of NPD. Kaulio’s (1998) lateral dimension of customer involvement describes the type of interaction with the customer, which is clearly associated with Alam’s (2002) third and fourth elements of customer involvement activities, which are intensity and modes of the interaction. Intensity ranges from passive acquisition of customer input via feedback on specific issues, extensive consultation with customers to full customer representation in the project. Interaction is normally more intense during early and late stages of development. Kaulio makes the following distinction among interaction types. “Design for” denotes a product development approach where products are designed on behalf of the customer and traditional market research methods are used. “Design with” also includes display of different solutions/concepts for the customers, so the customers can react to different proposed design solutions, i.e. a way of maintaining a formal dialogue with the customers. “Design by” denotes a product development approach where customers are actively involved and partake in the design of their own product. The sharp distinction between customers and designers ceases to exist. In this role customers are agents of value transformation rather than objects (Nambisan, 2002). Von Hippel’s (1986) concept of lead users that face new needs early is closely related to the “design by” category. Von Hippel’s view is, however, contrasted by Gales and Mansour-Cole (1995), claiming that in slow-moving markets “typical users” may be satisfactory in informing the development of innovation. Customer involvement is also dependent upon known and unknown uncertainty in projects and on the environmental context (Gales and Mansour-Cole, 1995). Known uncertainty refers to gaps in information. Under high known uncertainty, project managers are likely to increase customer involvement. Project characteristics, project stage, project interdependence, external environment are all potential sources of uncertainty in a project, while the frequency of customer interactions and the number of customers contacted reduce uncertainty. Contacts with a large set of potential customers are likely to provide developers with novel information and reduce uncertainty. Conditions of greater environmental uncertainty should necessitate greater customer involvement. However, it is important to look beyond the numbers of contacts
and to examine the customer interaction in order to understand the impact of the customer involvement. Customer involvement is built upon collaboration with customers in a process of mutual and iterative learning (Sinkula, 1994). Customer involvement has the potential to bring market-oriented generative learning as opposed to customer-led adaptive learning (Slater and Narver, 1998), i.e. to learn about customers rather than only from them (Slater, 1997). Customer involvement is, however, not only a means for explicit knowledge creation leading to improved NPD decision-making. Mascitelli (2000) claims that breakthrough innovation results from harnessing tacit knowledge, i.e. knowledge that cannot easily be expressed, and which is seen as difficult and costly to transfer. Nonaka and Takeuchi (1995) suggest that tacit knowledge can be transferred between individuals by socialisation. Customer involvement could thus be seen as a socialisation process where tacit knowledge is coopted by the company. This opposes the common view of customer involvement, where customer interaction is more task-oriented than sociallyoriented. Nambisan (2002) concludes that longitudinal and informal customer involvement data have been found to be more beneficial than cross-sectional and formal data provided by structured enquiry tools. Customer involvement might thus require a more experimental approach to gather customer input (Christensen, 1997; Thomke, 2001; Trott, 2001). In projects developing discontinuous technology, this experimental approach is often in use, but there are few reasons why incremental NPD projects should not use the same approaches (Veryzer, 1998). Traditional market research tools are not likely to be sufficient for developing innovation (Slater and Narver, 1998). Observation at a closer distance, in the customer context, allows marketoriented firms to acquire information that is not available from traditional market research (Leonard and Rayport, 1997). Customer involvement, however, put demands on organisations. Product innovation aided by customer involvement is intrinsically linked to organisational development and innovation. Competence in customer group management (Tomes et al., 1996), relationship capabilities (Athaide and Stump, 1999), collaborative skills (Leonard and Rayport, 1997) and transferring knowledge across borders (Prahalad and Ramaswamy, 2000) are suggested focus areas for organisations wanting to increase impact from customer involvement. Customer involvement can eventually affect business models and management mind-sets (Thomke and Von Hippel,
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2002). Le Masson and Magnusson (2002) take this one step further and suggest that customers can play the role of a catalyst in redefining the existing mind-set of the company, and thus become an integrated part of the company’s change strategy. Organisations can, in other words, transform themselves with help from customers and thus create renewed collective understanding (Hennestad, 1999). With the potential to change organisations and not only to bring about product innovation, customer involvement could be a source of sustainable competitive advantage for firms. Knowledge is, however, needed on how to achieve this advantage and the following case from Volvo Cars offers an example of a successful customer involvement approach.
commented, “It is so easy to get a customer group – but what to use it for?” Reluctantly, after some urging, it was decided to carry out a trial and initiate a first meeting with a group of female customers in California. Meeting a customer group would complement the normal market research activities in the project. The criticism towards the idea of a customer group also included a notion that, as one marketing manager said, “This is not scientific”. A moderator was contacted in order to set up the first trial and error meeting between female customers and the project management team. The longer-term ambition was to establish a small group of customers for continuous contact during the 3-year duration of the project. The moderator seemed ideal for the task. Before becoming a consultant, she had led the Volvo Cars concept development facility in California. She lives in Hollywood and has a wide network of contacts in the area. In other words, knowing both NDP processes at Volvo Cars and female consumer reality in California, she immediately had an idea what the project team was searching for and what the contribution of the female customer group might be. Recruitment of group members started in the moderator’s circle of acquaintances. Affluent women in highly professional fields who were likely to make independent decisions regarding the purchase of a vehicle were recruited. They were screened for willingness to participate in future meetings as well as for confidentiality matters. A spread in age and professions was desired. This was not a random sample of female car customers in California but instead female professionals owning cars and having distinct views on cars, making the group a representation of the target customer in a qualitative sense rather than in an absolute sense.
Customer involvement in the XC90 project Background Volvo Cars has a long and successful history in the automotive market, primarily in the station wagon segment. The idea of widening the product offer has been present for a long time and for that reason the growth of the light truck segment in the American market has been monitored closely. Numerous concept studies of SUVs have been undertaken but all of them failed to reach the market. Volvo Cars, a part of Ford Motor Company since 1999, is a relatively small car manufacturer, which is why funding for new cars often is a critical issue. In 1998, a new concept study was initiated, which then was turned into the NPD project aimed at launching the XC90 in 3 years time. Owing to previous failures, the project had to be started in a careful way. Much of the concept work was deliberately located in the USA, not only because this is the most important market for SUVs but also to create peace and quiet for the first crucial phase of the project. The preconditions of the project dictated that the XC90 should be based on an existing product platform, thus reducing technological uncertainty. The market conditions, with recent success of other “car-like” SUVs, gave confidence to the project team in terms of market potential. The project team quite immediately realised that knowledge was lacking about the potential XC90 customer. Women were driving SUVs in increasing numbers in the USA and the project team did not have an understanding of this market phenomenon. One of the project team members began thinking about and discussing the idea of customer interaction. Initially, this idea was not popular within the XC90 project. The project leader
Customer interaction The first meetings were held in March 1999 in the moderator’s home. Two groups of female customers met with the XC90 project management team the same day. The general purpose of these meetings was to elicit opinions and expectations regarding SUVs to be fed into the concept development phase of the project. Sessions were organised in an informal dinner setting in order to give a less clinical approach in the first contact between the two groups. The meetings started off in a good way with participants engaged in discussion from the start and were willing to voice their opinions on SUVs. The presence of Volvo Cars executives gave a strong sense of seriousness to the subject. The project team received a good framework for the
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start of vehicle design. Primarily this meeting resulted in the confirmation of some of the project management team’s beliefs. The customers acknowledged that a SUV should not be intimidating and emphasised interior flexibility, comfort and safety. A concern for fuel consumption was also expressed, but at the same time powerful engines were seen as prerequisite for the segment. This initial trial meeting of female customers was judged successful and a second meeting was set up in October 1999. The management of the female customer group continued to be rather pragmatic. When the project management team had something to discuss, a new meeting was arranged. The second session was held in a consumer research facility, because interior and exterior concepts needed to be presented in a professional way. Initially, a normal focus group set-up was used, with the female customers studying videos and renderings of the XC90, while the project team observed in an adjacent room behind mirrors. An open discussion then followed between the groups. In addition to getting opinions on the displayed material, more implicit views on SUVs in general and the XC90 in particular were captured. There seemed to be a fine line between an attractive dynamic vehicle and a constrained family vehicle. The group said that the seven-seat set-up of the XC90 risked turning the car into only a family vehicle. Paying extra for features annoyed the customer group – “just include it in the price”. The notion of having email and fax in the car was unanimously judged as a bad idea – “my car is the only place left for some privacy”. The third meeting, in November 2000, was held in a hotel ballroom, since a full-scale plastic model of the XC90 was to be displayed. The emphasis at this meeting was on exterior and interior design, pricing and options. The two sessions were held over lunch and dinner. At this time there had been some negative press about SUVs in the USA, but the female group still praised the overall concept and SUVs as being fun to drive, having a high seat position, comfortable and great to throw things in – “an extra closet”. The question of power still appealed – “I like power when I am driving on Mulholland Drive”. The exterior styling was well received and the balance between ruggedness and elegance was also noted – “it can do the job”, “not intimidating, yet still looks safe”. The interior received more mixed impressions, as it looked cramped in a seven-seat set-up. Pricing concerns were not that important to the customer group, although petrol-pricing concerns were discussed. The project management team also received
specific feedback on the tailgate design, night vision system and rollover protection system. At this meeting, the female customer group judged the atmosphere to be easy-going and fun, while making them feel specially selected. At the same time, the forum was a familiar one which they felt gave them an opportunity to contribute. In total, 24 female customers participated, of which 16 followed the project from start to finish. The moderator claimed that this was remarkable since all of these women are in demanding professions. At each session the participants were paid $50 each to cover expenses. This sum barely covered the actual expenses for the group members, who instead enjoyed the social value of the sessions. The presence of the project management team was not perceived as being intimidating; on the contrary the female group members were glad to be heard. Another important explanatory factor for the positive atmosphere at the meetings is the subject matter. Cars hold a high interest in Southern California. Also the project management team was relatively intact during these 2 years. As a result, nearly all the same managers were present in all meetings, which gave them the potential of creating and sharing a common picture of the customer. In February 2002, a final meeting was held and at this time the female customer group got the opportunity to drive the final version of the XC90. This session was more emotional than the previous ones, with the project team proudly presenting the new car and the customer group eager to see the result of their joint efforts. One woman said, “I’m impressed by the fact that they really did listen to us”. Other participants in the customer group also recognised results of their personal ideas in the ready-to-drive car. Female customer group impact The overall effects of the female customer group project are multifaceted. In terms of concrete action taken based on input from the women, the interviewed project team members have some difficulties in recalling them. When prompted however, some concrete results appear, but more often in terms of confirmation rather than idea generation. The split tail-gate design, choices of textiles, fuel consumption considerations, overall exterior design choice as not being too aggressive, and the flexible child seat could all be attributed to the interaction with the women. There are also examples of counteractions to the customer input, such as the continued development of the sevenseat layout and night vision system. The female customer group has been a frequent discussion topic in project meetings. The project management team has often used the customer
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group input as support in argumentation within the Volvo Cars organisation. Project managers recognise the value of having a common view of the customer as a result of having participated in the customer group meeting together. The female customer group is viewed as an important tool for creating customer presence throughout the project. There were, however, more implicit benefits for the project team. The project leader states, “We got to know these women. Cars are important to them and to a great extent ‘you are what you drive’”. The role of the car in every-day customer reality is clearer due to the customer group. In addition, the project management team has been forced to visit customers in the market. Such a simple thing as a project manager being physically present in the target market might have increased customer understanding. To drive the highways around Los Angeles, seeing people driving their full-size SUVs, offers insights into customer reality that are hard to reproduce in any market research. Another important, and perhaps more farreaching, effect of the female customer group work is what has happened during launch of the XC90. The use of the customer group was clearly communicated and widely reported by journalists, leading to a more dynamic and perhaps unexpected effect of the customer group interaction. One example is the first XC90 testdrive at Swedish Television, where a journalist praised the effortless steering as being based on the preferences of the Southern Californian women. Market positioning of the XC90, as a sensible and caring alternative to competitive SUVs, was reinforced by the female customer group work.
group initiative at Volvo Cars was to increase understanding of women driving SUVs in increasing numbers in the USA. The project management team was committed to understand these customers and to develop solutions that would bring value to the group, i.e. a marketoriented approach to NPD. Although not a project of radical innovation, the XC90 includes innovative product elements, as well as constituting an entry into a new segment for Volvo Cars. The approach to customer involvement is, however, more radical. The project management team was willing to experiment by setting up meetings with the Southern Californian women. Based on this approach co-development has taken place, as the project management team and female group were intimately involved in an integrated development project, where both parties contributed with their expertise. Both actual customer and a shared customer understanding were brought into the project in a distinct way. One of the core characteristics of the XC90 project is that the customer involvement continued through all the phases of the project, ranging from concept development via product marketing issues to the final launch phase – in real-time. The dialogue was adapted to the different purposes of the meetings, following the NPD process, ranging from general and conceptual talks about SUVs to specific market propositions like price levels on the XC90. This continuous 3-year long approach to customer involvement combined the traditional way of market testing with fuzzy front-end requirements of capturing latent needs. Intensity of customer involvement in the XC90 development was both moderate and high, depending on perspective. Seven meetings took place on four occasions, which is relatively sparse for a customer involvement initiative. The continuous impact of these meetings on the work of project management team was, however, higher. There are similarities between the female group work and the “design for” perspective (Kaulio, 1998) of customer involvement, which includes traditional market research methods. Involvement was, however, more active and the relational side of the cooperation instead suggests that the “design with” perspective is more valid. The project management team does not overtly recall any design “by” the female customer group, despite the fact that this is likely to have happened. Furthermore, the co-operation between the female customers and the project management team was more implicit than any design perspectives from literature, as the women supported the project management team with target group related customer interaction – implicit design by customer presence – rather than with actionable
Discussion and implications One of the core questions of customer involvement activities is whether the creation of value in the NPD process has changed. The related question, which is identified as a weak point in terms of general research understanding, is if value creation has changed, how was this done? The case of the female customer group in the XC90 project offers some evidence and thus analysis potential to discuss these questions. Alam (2002), identifies the ambition to develop a differentiated and superior product as the main reason for a firm to use customer involvement. Since the recent market launch, the XC90 has been awarded several influential prizes and is in great demand by customers. The interaction between the female customer group and the XC90 project management team has contributed to this success. The overall purpose of the customer
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feedback. By their presence, the female group served as more than typical users, as their impact was stronger in a qualitative sense. Typical users might serve for customer involvement in slowmoving markets and lead-users might be key for radical innovation while the Californian women influencing the XC90 project management were important for concept, product and market development. It is noteworthy that this was done in a cost-effective way, having an impact on the project without too much effort from the involved parties. The project team faced a different and not very well understood market phenomenon, which affected the chosen experimental approach to customer involvement. Reducing uncertainty through customer involvement is one explanatory factor why the experiment with meeting the Californian women continued. A source of uncertainty in the XC90 project was that similar NPD projects had been stopped before. The female customer group might have aided in a political agenda by offering customer connectivity to the idea of a Volvo SUV and thus offering legitimacy to the project. There are also elements of low uncertainty in the XC90 project that oppose intense customer involvement. The steady market segment growth of car-like SUVs and the shared technological platform are examples of low uncertainty. This might, in turn, explain the relatively few contacts between the female group and the project management team and also the fact that a comparatively low number of female customers were involved. The quality of the interaction compensates for few meetings. The process of mutual and iterative learning at the heart of customer involvement (Sinkula, 1994) is applicable for the customer interaction in the XC90 project. The role of the moderator in creating the right atmosphere cannot be understated, as both relational and professional expertise of the moderator created involvement by both parties. Meetings were informal and did not put pressure on the female group. With a project context encouraging curiosity about customers, the project managers could form a relationship with the female group, leading to mutual respect between the groups. In the relationship established, the customer group did not feel like female customers only, but rather as successful affluent professional women who shared their lifestyles as much as their specific views on cars. The XC90 customer involvement is characterised by an informal quest for understanding rather than capturing data in a structured way. The meetings were sociallyoriented rather than task-oriented. The richness of understanding arrived at might suggest that more
than explicit knowledge was transferred. That tacit knowledge is transferred through a process of socialisation was applicable for the female customer group project, leading to a notion of tacit design by customer presence. The importance of peace and quiet in the car, the fear of being perceived as intimidating when driving an SUV or the independence of female decision-making about cars would not have been co-opted by a series of focus-group meetings without real interaction. The female group offered a context for NPD decision-making in the XC90 project. In addition to developing product benefits for new customers, the female customer group work constituted an organisational innovation within the project. The experimental approach of forming a relationship with customers and being influenced is not a common practice within the NPD projects at Volvo Cars. The way the product is viewed within the project was affected due to the interaction with the female customer group and this view also spread to the media during launch, thus influencing how the XC90 is currently perceived and positioned in the market. The value proposition of the XC90 thus has been changed by the female customer group interaction and this has been done by a customer involvement approach that has been pragmatic, informal and costeffective, yet continuous and intense. Customer involvement in the XC90 project has increased market orientation, i.e. created customer understanding that has been utilised within the project to create improved value for the target customer. The involvement has also constituted a participatory learning approach both within the project management team, such as by creating a common picture of the customer, and more importantly, in bringing the female customers into the NPD project for value cocreation. Making sense out of what the XC 90 constitutes in the mind of the customer has shaped the product offer. The customer involvement resulted in actively learning about people, rather than passively learning from customers. The customer group did not give directions or create a wealth of ideas, but instead affected the project management team by their presence. Interacting with the female group throughout all the project phases facilitated the solution of a common problem in NPD processes – keeping customer presence during a project. The project management team took an experimental approach to reduce their uncertainty, which is normally associated with disruptive technologies rather than a new product offer in a mature market. The interaction between the female customer group and the XC90 project management team
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illustrates that customer involvement is as much about organisational innovation as it is about product innovation. To recognise knowledge gaps and try to fill these gaps in an unconventional way might be a hard step to take for a NPD project. This organisational innovation then becomes an antecedent for product innovation as the customer interaction leads to explicit or tacit idea generation, which in turn affects the product offer. If the customer involvement then is used in a consistent way in terms of launch communication, there is a potential to create marketing innovation. Whether or not customer involvement can influence the way the total business is viewed, thus acting as a catalyst for organisational change, is a more open question that needs further research. There are, however, a few preconditions that are valid for the XC90 case and that are important to have in mind when considering customer involvement a` la Hollywood wives. The project rested upon solid technological and market foundations. The identity of the main target group was clear, but customer understanding was lacking. The role of the moderator was essential for success in the case of the XC90, allowing both groups to perceive the interaction as meaningful. Having the meetings within the customer paradigm, i.e. in the market, is another important factor for learning. A willingness to bring the knowledge or rather the customer into the project is another prerequisite. There also needs to be a project member who dares to fight for his or her conviction that an unconventional approach for gaining customer understanding is worth pursuing. However, the female customer group approach taken in the XC90 project offers room for improvement. Moving one step closer to the customer and introducing ethnographical research elements would add to customer understanding. Management of customer groups puts demands on organisations in terms of relational skills; flexibility and knowledge transfer across boundaries and these are issues that need discussion and planning up-front. Daring to experiment in pragmatic, costeffective and informal ways has the potential to bring genuine customer understanding to project teams. Organisations wanting to improve NPD effectiveness should search out and start interacting with their own kinds of Hollywood wives.
Argyris, C., Putnam, R. and McLain Smith, D. (1985), Action Science – Concepts, Methods and Skills for Research and Intervention, Jossey-Bass, San Francisco, CA. Athaide, G.A. and Stump, R.L. (1999), “A taxonomy of relationship approaches during product development in technology-based, industrial markets”, Journal of Product Innovation Management, Vol. 16 No. 5, pp. 469-82. Christensen, C.M. (1997), The Innovator’s Dilemma – When New Technologies Cause Great Firms to Fail, Harvard Business School Press, Boston, MA. Cooper, R.G. (1993), Winning at New Products: Accelerating the Product from Idea to Launch, 2nd ed., Addison-Wesley, Reading, MA. Cooper, R.G. (1999), “From experience: the invisible success factors in product innovation”, Journal of Product Innovation Management, Vol. 16 No. 2, pp. 115-33. Davenport, T.H., Harris, J.G. and Kohli, A.K. (2001), “How do they know their customer so well?”, Sloan Management Review, Winter, pp. 63-73. Flint, D.J. (2002), “Compressing new product success-to-success cycle time – deep customer value understanding and ideas generation”, Industrial Marketing Management, Vol. 31, pp. 305-15. Gales, L. and Mansour-Cole, D. (1995), “User involvement in innovation projects: towards an information processing model”, Journal of Engineering and Technology Management, Vol. 12, pp. 77-109. Hennestad, B.W. (1999), “Infusing the organisation with customer knowledge”, Scandinavian Journal of Management, Vol. 15, pp. 17-41. Kaulio, M.A. (1998), “Customer, consumer and user involvement in product development: a framework and a review of selected methods”, Total Quality Management, Vol. 9 No. 1, pp. 141-9. Le Masson, P. and Magnusson, P.R. (2002), “Towards an understanding of user involvement contribution to the design of mobile telecommunications services”, 9th International Product Development Management Conference, 27-28 May, Sofia Antipolis, France. Leonard, D. and Rayport, J.F. (1997), “Spark innovation through empathic design”, Harvard Business Review, JanuaryFebruary, pp. 102-14. Mascitelli, R. (2000), “From experience: harnessing tacit knowledge to achieve breakthrough innovation”, Journal of Product Innovation Management, Vol. 17 No. 3, pp. 179-93. Nambisan, S. (2002), “Designing virtual customer environments for new product development: toward a theory”, Academy of Management Review, Vol. 27 No. 3, pp. 392-413. Neale, M. and Corkindale, D.R. (1998), “Co-developing products: involving customers earlier and more deeply”, Long Range Planning, Vol. 31 No. 3, pp. 418-25. Nonaka, I. and Takeuchi, H. (1995), The Knowledge-Creating Company, Oxford University Press, New York, NY. Prahalad, C.K. and Ramaswamy, V. (2000), “Co-opting customer competence”, Harvard Business Review, pp. 79-87. Ramı´rez, R. (1999), “Value co-production: intellectual origins and implications for practice and research”, Strategic Management Journal, Vol. 20 No. 1, pp. 49-65. Reinertsen, D.G. (1999), “Taking the fuzziness out of the fuzzy front end”, Research Technology Management, JanuaryFebruary, pp. 11-29. Sawhney, M. and Prandelli, E. (2000), “Communities of creation: managing distributed innovation in turbulent markets”, California Management Review, Vol. 42 No. 2, pp. 24-54. Sinkula, J.M. (1994), “Market information process and organisational learning”, Journal of Marketing, Vol. 58 No. 1, pp. 35-45.
References Alam, I. (2002), “An exploratory investigation of user involvement in new service development”, Journal of the Academy of Marketing Science, Vol. 30 No. 3, pp. 250-61.
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Slater, S.F. (1997), “Developing a customer value-based theory of the firm”, Journal of the Academy of Marketing Science, Vol. 25 No. 2, pp. 162-7. Slater, S.F. and Narver, J.C. (1998), “Customer-led and marketoriented: let’s not confuse the two”, Strategic Management Journal, Vol. 19 No. 12, pp. 1001-16. Thomke, S. (2001), “Enlightened experimentation – the new imperative for innovation”, Harvard Business Review, February, pp. 67-76. Thomke, S. and Von Hippel, E. (2002), “Customers as innovators – a new way to create value”, Harvard Business Review, April, pp. 74-81. Tomes, A., Armstrong, P. and Clark, M. (1996), “User groups in action: the management of user inputs in the NPD process”, Technovation, Vol. 16 No. 10, pp. 541-51.
Trott, P. (2001), “The role of market research in the development of discontinuous new products”, European Journal of Innovation Management, Vol. 4 No. 3, pp. 117-25. Veryzer, R.W. (1998), “Key factors affecting customer evaluation in discontinuous innovation”, Journal of Product Innovation Management, Vol. 15 No. 2, pp. 136-50. Von Hippel, E. (1986), “Lead users: a source of novel product concepts”, Management Science, Vol. 32 No. 7, pp. 791-805. Von Hippel, E. (1988), The Sources of Innovation, Oxford University Press, New York, NY. Wikstro¨m, S. (1995), “The customer as co-producer”, European Journal of Marketing, Vol. 30 No. 4, pp. 6-19. Yin, R. (1984), Case Study Research – Design and Methods, Sage, Beverly Hills, CA.
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Introduction
A model of product design management in the Spanish ceramic sector Ricardo Chiva-Go´mez Joaquı´n Alegre-Vidal and Rafael Lapiedra-Alcamı´
The authors Ricardo Chiva-Go´mez, Joaquı´n Alegre-Vidal and Rafael Lapiedra-Alcamı´ are based in the Department of Business Administration and Marketing, Universitat Jaume I, Castello´n, Spain.
Keywords Product design, Product development, Ceramics, Spain
Abstract Product design is an essential aspect of the process of new product development and innovation, the efficiency of which depends on the existence of some kind of management. However, there is no generally accepted agreement as to exactly what activities this management involves, nor any analyses of the most suitable context for it to develop in or of the relationships that link these activities with performance. In this paper, we study product design management in depth and examine in what way and in which contexts it contributes to an improvement in performance. In order to do so, we carried out a case study of four companies from the Spanish ceramic tile sector that also revealed the activities of an efficient product design management. These were divided into two phases of the product design process: the analytical-conceptual and the technical-creative phases.
Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1460-1060.htm
European Journal of Innovation Management Volume 7 · Number 2 · 2004 · pp. 150-161 q Emerald Group Publishing Limited · ISSN 1460-1060 DOI 10.1108/14601060410534375
Product design is an essential aspect of the process of innovation (Aubert, 1982; Walsh, 1996) and new product development (Jenkins et al., 1997), something that can be seen in the apparent importance it has in improving competitiveness and business performance (Potter et al., 1991; Roy and Potter, 1993; Trueman, 1999; Walsh et al., 1992). However, there seems to be a lack of understanding of its value and potential (Lorenz, 1995; Trueman, 1999), which, according to Lorenz (1995, p.74), is due to the fact that to date nobody has been able to develop a clear way of characterising design so as to achieve something like an equivalent of the four Ps in marketing. In addition, the process of product design requires management, which strongly conditions its efficiency, but whose problems and performance are barely known (Bruce and Cooper, 1997, p. 3). Cooper and Press (1995, p. 224) hold that there is a lack of agreement over its definition and the activities it involves, which, if taken together with its inherent interdisciplinary nature, make it a concept that is difficult to set up as a solid area of interest in management. The aim of this study is to further investigate the subject of product design management and analyse in what way and in which contexts it contributes to an improvement in performance. The framework chosen for this study was the Spanish ceramic tile sector and what we sought to discover was an understanding of the activities involved in efficient product design management, while at the same time looking into the context in which it best takes place and its repercussions on performance. Thus, the aim of this analysis is to provide answers to some important questions. First, what are the activities that go to make up product design management? Second, what is the context that favours most efficient product design management? Third, how and why do these activities bring about, if indeed they do, increased performance? Fourth, which aspects define and control the performance generated by efficient product design management? Considering the questions we wanted to answer in this study and the limitations of the literature we mentioned above, we considered case studies to be the most suitable methodological approach to use. Starting out from an initial theoretical analysis (Hartley, 1994, p. 210; Yin, 1989, p. 36), from which we obtained a preliminary theoretical model, we carried out a comparative case study within the Spanish ceramic tile sector. From the The authors wish to thank ALICER, the Spanish Technological Institute of Ceramic Design, for the support given in this research.
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preliminary model, and through the study of the four cases, we put forward a final model together with a series of propositions.
just that of designers or people who represent this function – which they call “Silent Design” (Gorb and Dumas, 1987) or “Total Design” (Jenkins et al., 1997).
Theoretical background and a preliminary model
Performance There is a lack of consensus among academics in the areas of conceptualisation, operational development and correct measurement of organisational performance (Lewin and Minton, 1986) and a satisfactory resolution still needs to be found (Camiso´n, 1999a). The controversy stems from the fact that the concept of performance is difficult to define and measure, as it may be evaluated in different ways because few indicators have been widely accepted. The prevailing objective approach has traditionally been based on indicators that show its economical and financial situation (example: ROI, ROS), which gives rise to a series of shortcomings or problems (Camiso´n, 1999a). In answer to these difficulties, subjective measurements have appeared that cover many of the aspects of the organisation that are usually compared with competitors within the same industry (Camiso´n, 1999a). In this study, we have used both objective (return on investment (ROI); return on sales, (ROS)) and subjective (Camiso´n, 1999a) measurement types. Nevertheless, given the aims of the work and its methodology, we also recognise the need for a thorough analysis of the consequences of product design management on performance, according to this literature.
In this section, we expand on the meaning of the concepts under study, as well as their relationships, with the aim of constructing a preliminary theoretical model.
Product design management Product design is taken as being the process by which a product is developed while considering any requirements concerning function, use, manufacture and communication (Dumas and Mintzberg, 1991; Walsh, 1996). This implies not only an act of creation but also the conjunction of technical, strategic and market aspects. The concept of design management is understood in different ways, by highlighting different aspects or activities, and involves diverse typologies and connotations. The activities included within this concept and mentioned by the literature may be classified into four groups. The first is made up of activities that are linked to decisions taken on where the design is to come from (design sources) and on where design is placed in the structure of the organisation (Bruce and Cooper, 1997; Bruce and Morris, 1994; Dumas and Mintzberg, 1991), which varies considerably and is unclear (Dumas and Whitfield, 1989; Walsh, 1996). The second consists of the activities related to the aspects of analysis and knowledge of the company, its markets and technology (Hollins and Pugh, 1990, Rothwell and Gardiner, 1989; Walsh, 1996). The third type includes activities associated with the creation of an organisational context that favours the design process, with special emphasis being given to communication, dialogue, participation and management support to raise its importance (Dickson et al., 1995; Rothwell and Gardiner, 1989; Walsh, 1996). Finally, we come to the activities that are immersed in the operational management of human and other resources within the actual product design process itself (Topalian, 1980). Here, there are two phases: one, analyticalconceptual, and the other, technical-creative (Cooper and Press, 1995; Iva´n˜ez, 2000; Nueno, 1989). A major part of the literature (Gorb and Dumas, 1987; Jenkins et al., 1997; Roozenburg and Eekels, 1995; Walsh, 1996) considers that this product design process requires the presence and active involvement of different participants – not
Relationship between product design management and performance Studies that consider the relationship between design and performance offer fairly similar results. Potter et al. (1991) claim that several pieces of research have shown that design improves the company’s financial performance and its market share and exports. Roy and Potter (1993) hold that one of the most important factor in the competitiveness and organisational performance of a company is the quality of the designs of its products. After carrying out empirical research within the ceramic industry, Press (1991) reaches the conclusion that companies with a positive view and efficient management of design showed greater sales, profits and export growth than those that did not. Dickson et al. (1995) observed that the directors of fast growing SMEs were closely involved in design and, consequently, in its management. The decisions made regarding design not only affect factors such as those concerning the
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performance of the products (their quality, originality, reliability, safety, user friendliness, durability), corporate image (product presentation, display or visualisation, packaging and containers, promotion), delivery time (designs that make transport easier) and after-sales service (designs that enable repairs to be carried out more easily); but also have a bearing on other price related factors, such as manufacturing or storage costs (Trueman and Jobber, 1995; Walsh et al., 1988, 1992).
Castello´n. After Italy, this Spanish business sector is the world’s second largest producer and exporter. In 1998, almost 92 per cent of the total national production came from this province, while providing employment for 21,700 workers. Nearly 95 per cent of these firms have less than 250 employees. However, it is not only firms from this sector itself that are to be found in the province, but also their suppliers or other related companies such as manufacturers of machinery, frits, enamels and ceramic colouring agents, those that make special pieces, design studios, mould manufacturers, and so on. Since the aim of this study was to analyse product design management and its relationship with performance, the first thing we set out to do was to determine a priori different situations as regards product design management, which could later be used to analyse their relationship with the performance of the firm. According to replication logic, we should try to find firms that efficiently manage design and others that do not. In order to do this, the Spanish Technological Institute of Ceramic Design (ALICER) played a fundamental role. The ALICER technicians’ knowledge of design and its management enabled us to select different firms that, a priori, managed design efficiently and others which did not. In order to obtain this dichotomisation, the basis used by the experts was the activities involved in design management shown in Figure 1, about some of which they had reliable information. The characteristics that could be used to form judgements about the firms were as follows: . the situation of design in the structure of the organisation; . the extent to which design was seen as being important within the firm; and . the degree of “Silent Design” and “Total Design” within the firm.
Summary Figure 1 shows a model that sums up the research carried out on the two concepts. The case study was based on this model insomuch as it was used both in selecting the firms or cases and in defining the structured interviews.
Research method Case selection The selection of cases is based on replication logic (Yin, 1989), which proposes that each case should be carefully selected so that it meets two requirements. First, it should forecast similar results in another case (literal replication) under similar circumstances; and second, it should yield opposite results to the other cases (theoretical replication), but for predictable reasons. Replication logic confers external validity on case studies, since it enables us to expect cases with similar conditions to offer similar or identical results. This logic determined the number and type of cases selected, which, in the end, were four companies from the Spanish ceramic tile sector. The Spanish ceramic floor and wall tile manufacturing industry’s most outstanding feature is the high degree to which it is concentrated geographically, as more than 80 per cent of the firms are located in the province of Figure 1 A preliminary theoretical model of product design management and performance
In accordance with the already existing literature, we assumed that if the last two were present to a high degree, then this would indicate efficient design management. On the other hand, the first of the characteristics, reduced to the simple existence or not of a design department, is seen as being indeterminate by the literature, i.e. it is not clear whether the existence of a department is better or worse for efficient design management. Thus, in this way two groups of firms from within the industry were created: those that were seen to possess these two characteristics to a high degree and those that did not. In addition, and with the aim of furthering the study, we looked within the literal replication of each group for firms that had a design department and those that did not.
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They were later differentiated according to their accessibility and potential interest. As an incentive to encourage the firms selected to take part in the study and also to check and verify our results at the end, they were promised a design management audit. Four companies finally agreed to take part in our study. Of the two that, a priori, managed design efficiently, one had a department while the other did not. The other two did not manage their design efficiently and in this case, as before, only one of them had a department. Table I shows the main characteristics of the firms, which were obtained before beginning the case study. The names of the companies have been changed to ensure confidentiality (detailed descriptions of each company are available upon request).
Innovation (DDI, 1992), as it was seen to have a sufficiently eclectic perspective. This model was later adapted slightly to focus more on product design management and on the idiosyncrasy of the Spanish ceramic tile sector. The two people interviewed were the general manager and the person in charge of product design within the company. They were asked about the following aspects: . the design department; . the design process; . product development and communication; . design sources; . characteristics of the design projects; . the extent to which people connected with design were involved; and . the role and importance of design in the firm.
Data sources The sources of the data used in our case study were structured interviews, documents and observation. Each of them was used to analyse different concepts and areas of the company: product design management, performance and general information about the firm. Data were collected between January and December 1999 by the authors and with the help of two experts from ALICER. Table II shows the data sources used for each of the organisational aspects. Structured interviews In this type of interview, both conversation and questions are precise and defined, sometimes coming from questionnaires. According to Schwab (1999, p. 53) the same care must be taken when drawing up the questions for an interview as for a questionnaire, since the only difference between them is the way the information is obtained from those participating in the study – interviews obtain the data verbally while questionnaires provide information in written form. We will now go on to look at the interviews about each of the concepts under study. Product design management On this concept, we reviewed different models of design auditing and finally chose that of the Spanish Society for Design Development and Table I Summary of the general characteristics of the firms obtained prior to carrying out the case study Characteristic Year founded Number of workers Importance of design in the firm Silent or Total Design Design department
Bigtechpusher
Follower
Young
Markpuller
1967 750
1979 150
1994 103
1967 40
No Scarce Yes
No Scarce No
Yes Yes Yes
Yes Yes No
The interviews lasted between 90 and 120 min. Regarding the social context in which product design management took place, we based our study on the concept of organisational learning from a social perspective (Brown and Duguid, 1991; Cook and Yanow, 1996; Gherardi et al., 1998; Lave and Wenger, 1991; Weick and Westley, 1996). This approach understands learning as taking place through participating in “communities of practice”, such as product design management, and attempts to explain what kind of social context is most suitable for organisational learning. In developing the structured interview, we took as a starting point the different characteristics that facilitate the existence of organisational learning (Brown and Duguid, 1991; Goh and Richards, 1997; Hedberg, 1981; Leonard, 1992; Nevis et al., 1995; Tannenbaum, 1997; Ulrich et al., 1993; Weick and Westley, 1996) and two questionnaires that evaluate these characteristics. More specifically, the two questionnaires were the “Organizational Learning Survey” by Goh and Richards (1997) and the “Learning Environment Survey” by Tannenbaum (1997). The final structure of the questionnaire consisted of approximately 70 questions that, in some cases, allowed for examples or longer answers to be given. This interview was administered to anybody who had some kind of relationship with the product design process and management: those in charge of or simply members of departments or areas such as design, management, production, R&D, marketing and commercialisation, finance and human resources. Although the questions were aimed at finding out to what extent there were certain contextual characteristics present, the activity we chose to ask these questions about was the product design process and management (Some examples were: What is communication like in the process of product design? Constant,
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Table II Data sources Concepts and areas under study Product design management
Performance and general characteristics
Instruments employed
Data sources Structured interviews People interviewed
Design auditing (DDI, 1992)
General manager and product design supervisor
Social context of product design management: instrument that evaluates the contextual factors that facilitate organisational learning
Members and those in charge of areas and functions connected with the product design process (at least 15 people)
Evaluation of performance instrument (Camiso´n, 1999a) and questions about aspects that appear in Figure 1. Instrument for evaluating core competencies (Camiso´n, 1999b) and general questions about the firm
General manager and those in charge of each of the functional areas of the firm
frequent? Can you give examples?). At least 15 interviews were conducted in each firm and although some went on for nearly 3 h, the majority lasted for about 2 h. Performance Camiso´n’s (1999a) subjective evaluation of organisational performance instrument was used and this enabled general managers to evaluate their firm’s situation as compared with their competitors in the industry. It makes use of linguistic scales that go from 1 to 5 and which represent the following appraisals: 1 – very bad, among the worst in the industry; 2 – bad, below the level of the rest of the industry; 3 – regular, of average for the industry; 4 – good, above the level of the rest of the industry; 5 – excellent, much better than the industry. The indicators that were evaluated referred to such aspects as average economic and financial profitability, market share gain, work productivity, domestic and international position as regards price, quality and design competitiveness, and so on. (Some objective data were also collected – more specific information about returns on investments and on sales.) In addition, we understood the need to carry out an in-depth analysis of how the efficient product design management proposed by this literature (Figure 1) would affect performance. The most significant of these consequences included manufacturing and storage costs, product profitability, corporate image, as well as delivery time and after-sales service. These data came from the general manager and from those in charge of the departments or areas involved. Given the motives behind a case study and the implicit importance of the organisational context, we also collected data on the general characteristics of each of the companies. To do so, members of management staff were also
Documents and observation List of best-selling products with their profitability and design sources, catalogues. Informal observation
Financial information (ROI, ROS). Organigram, information about customers, company journal, information about the sector, etc. Informal observation
interviewed about the core competencies of the firm, critical factors for success, aspects related to its business, customers, production, technology and structure of the organisation. Likewise, we also employed the instrument for evaluating core competencies designed by Camiso´n (1996b), which enabled us to interview each of the people in charge of the functional areas and thus found out their strengths and weaknesses. It also allowed us to triangulate with the data provided by general managers. Documents and observation We examined articles and reports on the Spanish ceramic tile sector, as well as those from the companies that dealt with their best-selling products, their profitability and design sources, catalogues, and in general, any documents to do with in-company communication. In addition, financial data were collected to obtain two measurements of profitability such as ROI, taking investment as assets minus current liabilities, and ROS (Buzzell and Gale, 1987). Simultaneously, and due to the time we spent visiting each firm (about 3 months altogether), we were also able to carry out informal observations. Data analysis Unlike hypothesis-testing research, inductive research does not have a generally accepted model of procedure to be followed (Eisenhardt and Bourgeois, 1988, p. 741). However, it should be proposed along with a database that contains all the information collected, but which is kept separate from the actual interpretation of the data since this confers a degree of reliability and consistency to the study (Yin, 1989, p. 45). Thus, in the absence of a standard procedure, or protocol, we used the following model: first, the data were collected by means of the instruments
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and methods mentioned above. Then, the data were synthesised and grouped, always bearing in mind that it should be triangulated or checked between different interviewees. Third, it was converted into table form and later compared and interpreted. Lastly, reports and results were presented to the firms with the aim of checking our opinions, which thus enabled us to put forward the conclusions set out below. All the work was carried out by the authors with the constant guidance of the expert opinions of the ALICER staff.
showed they had committed leadership that was not very hierarchical. Furthermore, we observed that Markpuller presented certain distinguishing features as compared to Young, i.e. it was more open to and had a greater capacity for innovative change, had a culture that favoured the contribution of discerning ideas and paid maximum attention to the environment. While considering the differences between the two pairs of companies, Bigtechpusher-Follower and Young-Markpuller, with regard to the context associated with design management and product design management itself, we attempted to establish links between the contextual characteristics that appeared in the second pair and the characteristics of their product design management. We also related certain characteristics that were unique to Markpuller regarding both aspects. This firm stood out above Young for the emphasis it placed on planning design and for its distinguishing feature: the importance given to the knowledge of the firm, its market and technology, which is associated with the distinguishing features that were observed in the section on the social context. The rest of the characteristics common to these two firms were associated with the other phase of product design, the technical-creative phase.
Results Although the protocol mentioned above was followed according to the logic of analytical induction, due to space restrictions, in this section we will only go into the results obtained once they were presented to and subsequently confirmed by the companies. However, besides describing the results of the study, we also include tables which show the data collected. Product design management We have summarised the situation of this concept within the firms in Table III. From the results several conclusions could be drawn. First, the Young and Markpuller companies managed product design more efficiently than Bigtechpusher and Follower, because they showed involvement in a greater number of activities that are seen by the literature as being necessary for efficient design management. Second, Markpuller showed a more complete vision of design management by placing special emphasis on planning the design of a product, which involved having a good knowledge of the company, its market and technology. Third, the existence of a design department does not seem to be necessary for efficient design management. Fourth, using free designs offered by enamel manufacturers, the predominant role played by representatives in design, reducing the role of design to simple sketches, low involvement of other areas in design, and the perception of design as an instrument that allows the manufacture of products similar to those that are currently successful are all associated with inefficient product design management. Regarding the context associated with product design management, the two firms Young and Markpuller showed themselves as having characteristics that were in sharp contrast to those of Bigtechpusher and Follower. The first two, unlike the others, possessed a culture that accepted risk and diversity, encouraged communication, delegation, participation and teamwork, and also
Performance Table IV shows the data on company performance, extracted from quantitative or objective and subjective data. They show Markpuller to be the most profitable and competitive company. Below, we outline the general information about each of the firms that was collected mainly through interviews with the managing director and those in charge of each of the functional areas in the company. Bigtechpusher This is only one of the four firms that is neither a SME nor a family business, although its owners are families that own other companies in the same sector. It is comparatively bureaucratised and departmentalised for its size, with its marketing, quality and human resources departments standing out above the rest. Their priorities or criteria for success are based on technological innovation or improvement and quality, which they try to use to assure the distributor that he or she will be able to sell their products easily and that they will not cause any problems later on. Special emphasis is placed on the corporate image. On the other hand, they also show high production and storage costs owing to the vast number of products
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Table III Situation of design management in firms Bigtechpusher
Follower There is no design department
Young Design department, answers only to management and on the same level as the commercial department
Markpuller There is no design department
Internal, suppliers of raw materials and other products, innovation and technology studios and centres
Suppliers of raw materials and other products
Internal, design studios, and innovation and technology centres
Design studios, and innovation and technology centres
Design planning
Design is based essentially on the sales representatives’ proposals, ideas from trade fairs and the analysis of product sales trends (Marketing Dept.). No emphasis is placed on design planning
Design is based essentially on the sales representatives’ proposals and ideas coming from the experience of the person in charge of marketing. No emphasis is placed on design planning
The designer bears in mind the strategies and priorities of the firm, commercial information and ideas from trade fairs. No emphasis is placed on design planning
Efficient and thorough design planning is performed since it is based on the priorities of the firm, on the analysis of future product trends and market research. Emphasis is placed on design planning
Involvement of design in other aspects of product development (the role of design in the firm)
None (sketches are made)
None (sketches are made)
Broad view of design in which development and communication are involved from the moment the first sketches are made
Design is everything, since management is involved in it
Involvement of other departments or areas in the design process (Silent Design or Total Design)
The commercial and development departments
The commercial department
The design department interacts with all the other departments, which also take part in the design process
The design administrator is in contact with all the departments, which also take part in the design process
Meaning of design
To give customers what they ask for, offer them lines of products that are already on the market
To give customers what they ask for, offer them lines of products that are already on the market
Distinguish the product from those of their competitors
It is the backbone of their capacity to innovate. Its serves to endow the product with quality by means of the careful selection of materials and components, and to offer a product that is different and innovative through the use of the most appropriate style and aesthetics
Role of the sales representatives
It is the sales representatives who have the last word on product design
It is the sales representatives who have the last word on product design
The sales representative is on the same level as the designers in making decisions about product design
The person in charge of the commercial department participates and reports to the design administrator on the commercial evolution of the products
Social context linked to product design management
Stability; infrequent and strictly channelled communication, little delegation and participation; rivalry between the technical (including design) and commercial areas; uncommitted hierarchical leadership; obsession with keeping secrets
Stability; infrequent and informal communication; little delegation and participation; rivalry between the technical (including design) and commercial areas; uncommitted hierarchical leadership; obsession with keeping secrets
Culture that accepts risk and diversity, and that encourages communication, delegation, participation and teamwork. Committed leadership that is not very hierarchical
Culture that accepts risk and diversity and that encourages communication, delegation, participation and teamwork. Committed leadership that is not very hierarchical. Open to and with capacity for innovative change; culture that favours the contribution of discerning ideas; maximum attention to the environment
Situation of design in the structure of the organisation
Design department, formally answers only to management, but subordinate to the commercial area and to production and R&D
Sources of designs
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Table IV The performance of the firms
1997 a
Turnover
Cost of materials and consumablesa a
Staff cost Net operating profita Investment (assets minus current liabilities)a
Bigtechpusher Evolution 1998 (per cent)
Follower 1997
Young Evolution (per cent)
1998
1997
1998
Evolution (per cent)
1997
Markpuller Evolution 1998 (per cent)
86092.6 98650.3
14.59
18198.8 19771.8
8.64
9538.9
11025.1
15.58
3954.2
4686.7
18.52
55714.0 63349.7
13.71
11644.4 12447.6
6.90
6768.0
7802.4
15.28
2707.4
2678.5
2 1.07
15371.4 16837.6
9.54
3867.8
4224.0
9.21
1276.7
1933.8
51.47
805.5
900.6
11.80
6662.6 10139.5
52.19
1636.1
2112.8
29.14
898.2
507.1
243.54
302.3
888.9
194.08
60484.1 71878.8
18.84
7839.9 10745.0
37.06
5972.9
8647.3
44.77
1593.8
2289.6
43.66
ROI (per cent)
11.02
14.11
28.06
20.87
19.66
25.78
15.04
5.86
261.00
18.96
38.82
104.71
ROS (per cent)
7.74
10.28
32.81
8.99
10.69
18.87
9.42
4.60
251.15
7.64
18.97
148.12
General manager’s perception of the competitiveness of the companyb
3.59
3.37
3.44
4.18
Notes: aQuantities expressed in thousands of Euros; bmean of the subjective appraisal given by the general manager of different aspects associated with the performance of the firm in comparison with its competitors (1 – very bad, among the worst in the industry; 2 – bad, below the level of the rest of the industry; 3 – regular, of average for the industry; 4 – good, above the level of the rest of the industry; 5 – excellent, much better than the industry
they offer and to the investments made in technology. Follower A family business with limited strategic programming, as can be seen in its approach, somewhat typical of a follower. They mainly focus on the production process. They have a poor marketing policy and high manufacturing and storage costs brought about by a need to offer a very wide range of products in large quantities. Young A young firm that was set-up by one person with a great deal of experience in the sector and who had left a family business in which he was a member of the family. His children, all of whom had a university education, are an important part of the management team. They see technological innovation as being as important as design and marketing, although they recognise the fact that they are still in the initial stages in all these aspects. In spite of having to bear high manufacturing and storage costs, they trust this will soon disappear when the design and technology employed enables their product to distinguish itself from that of their competitors. Markpuller A family business that is jointly managed by a member of the family and a professional executive who is very design and market oriented and has experience in other sectors. Their business shows a broader approach by offering wall and floor coverings made from materials other than ceramic
tiles. They define themselves as product innovators, mainly focused on design, since this is the central issue around which the company revolves. However, they do not neglect technological innovation. Other defining characteristics include carrying out small market and trend research to define their products, possession of a broad consolidated commercial network, choosing exclusive distributors for commercial areas, and excellent sales forecasts with hardly any stock being kept in the warehouse. They consider the profitability of their products as being high because of its greater added value and longer life cycle, as their distributors accept their prices and delivery times.
Relationship between product design management and performance Markpuller stands out as the most economically and financially profitable firm, from an objective and quantitative point of view. In the long term and more qualitatively, both Markpuller and Young were seen to have opened the way that will probably lead to greater performance in the future as they have broken, or are in the process of breaking, the vicious circle (Figure 2) that prevails in Bigtechpusher and Follower. This vicious circle arises from the fact that the firms’ customers (distributors of ceramic products) demand low prices, high quality and fast delivery and since the manufacturing companies lack clear strategic priorities or focus solely on
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Towards an integrating theoretical model of product design management and performance
Figure 2 The vicious circle
technological innovation, they find themselves with the obligation to offer all kinds of products and to stock them in excessively large amounts. This means that they are under pressure to sell however they can. Their salesmen, in turn, also find themselves under pressure but in a position of power, as they demand the development of products that their customers are already asking for and are therefore not very innovative. As a consequence, the manufacturers cover a great number of markets and have to offer an equally important number of products, which they have difficulties in managing. On the other hand, their customers have many firms available to them that offer similar products and are then in a position to lay down certain requirements concerning prices, delivery times and quality. Efficient design management means better product definition, which enables them to be differentiated from the rest and this leads to greater product success. This is essentially due to a less elastic demand on prices and delivery times, a longer life cycle and a reduction in manufacturing and storage costs. In the medium term, all this gives rise to greater returns on investments and sales. Myers and Marquis (1969) studied the progress of 567 successful products in 100 companies from five different industries and the main result they found was that “market pull” (identification and understanding of consumers’ needs) was substantially more important for the success of the product than “technology push”. These ideas seem to have been confirmed in this study as Markpuller represents the first concept and Bigtechpusher, the second.
The integrating theoretical model, shows the results from the study of the relationships between product design management and performance (Figure 3). The case study demonstrates the existence of a positive relationship between product design management and performance, which is determined by a series of contextual characteristics associated with the activities involved in product design management. There are three contextual characteristics that are associated with knowledge of the market, the firm and technology, which has to do with the analytical-conceptual phase of the product design process. The other characteristics could be associated with what we have called global guidance of product design, which is connected with the technical-creative phase. This global guidance would consist of the involvement of design in other aspects of product development such as production, R&D, marketing, communication, and so on; greater involvement of other areas in order to carry out the design process (“Silent Design” or “Total Design”); and the granting of strategic importance to design which comes out in the role it plays in making decisions about the product, its situation in the structure of the organisation, the sources of the designs used and the resources received. Figure 3 The integrated theoretical model of product design management and performance
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The case study showed the existence of a positive relationship between product design management and performance, which was defined by the return on investment and sales, by the reduction in manufacturing and storage costs, and by greater product profitability. The latter is accomplished by a higher added value of the product, arising from its lower price and delivery time elasticity, and a longer life cycle of the products. These positive effects on performance would be achieved by carrying out the two-product design management activities that were put forward. Moreover, we believe that two variables may moderate the performance of efficient design management: the firm’s choice to opt for a strategy that gives priority to identifying and understanding consumer needs (“market pull”) and consolidated systems of commercialisation and distribution. The following propositions summarise the relationships outlined above and shown in Figure 3. P1. Product design management involves two activities. The first includes knowledge of the firm, the market and technology, and it is associated with the analytical-conceptual phase of the product design process. The second involves the global guidance of the design process, and it is linked with the technical-creative phase. P2. The first activity may be associated to a context that is characterised by being more open to and having a greater capacity for innovative change, the existence of a culture that favours the contribution of discerning ideas, and paying maximum attention to the environment. P3. The second activity may be associated to a context that is characterised by a culture that accepts risk and diversity, encourages communication, delegation, participation and teamwork, and that also shows committed leadership that is not very hierarchical. P4. Product design management has a positive relationship with performance and more specifically with financial profitability, manufacturing and storage costs, and the profitability of the product. P5. The firm’s choice to opt for a strategy that involves giving priority to the identification and understanding of consumer needs (“market pull”) and consolidated commercialisation and distribution systems will have a moderating effect on the relationship that exists between product design management and performance.
This case study represents a more thorough analysis of product design management, as it describes its activities, the context in which they occur, and the relationship between these and performance, considering, however, certain moderators. Nevertheless, some of its limitations should also be pointed out, as well as those inherent to cases studies themselves. First, the empirical research was carried out in the Spanish ceramic tile industry and its idiosyncratic characteristics may well have affected the results of the study. This means that we should be careful when using them to generalise about other manufacturing firms. Second, assessment of performance is carried out over a short time span, which prevents us from being absolutely sure about the direct results of product design management. Finally, we offer some suggestions for future lines of research that would complement this study by corroborating and perfecting the propositions we have put forward and overcoming some of its shortcomings. First, similar studies need to be carried out in other sectors and countries; second, quantitative studies need to be performed in the ceramic tile sector with the aim of finding out the frequency with which these activities occur, as well as validating the propositions.
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Further reading Walton, T. (1991), “The hallmarks of successful design teams”, Design Management Journal, Vol. 2 No. 2, pp. 5-10.
Appendix. Concise questions for in-depth interview Product design management .
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Have you got design department? What is its place in the structure of the organisation? What are your design sources? What is your design process? Do you plan design? To what extent is design involved in other aspects of product development? How are other departments or areas involved in the design process? What is the role of the sales representatives? And of staff from the production area? What is the role and importance of design in the firm? What does design mean in your organisation? How would you characterise your design projects?
A model of product design management
European Journal of Innovation Management
Ricardo Chiva-Go´mez et al.
Volume 7 · Number 2 · 2004 · 150-161
Social context .
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Do company staff experiment or try doing things different in the product design process? And in designs? Do they suggest new ideas? Are they rewarded for new ideas? If so, how? Are people open to change in the design process and in product designs? Is change expected? Does the company facilitate this? How? Does the company analyse the environment? How? Does the company co-operate with universities or technological institutes, or other companies? Do managers accept mistakes? What kinds of mistakes are not accepted? Do managers accept risks? If so, what risks? Are people encouraged to take risks? Is there a culture that favours heterogeneity? What is it like? In product meetings, is diversity normally favoured? (Give examples) Is conflict-heterogeneity an acceptable way of solving problems? How would you describe the company’s communication (frequent, chaotic, formal. . .)? In general, is there open communication within the organisation? Are there good links between all departments? Is communication supported by management? How? What is communication like in the process of product design? Constant, frequent? Can you give examples? Is continuous training supported by the company? What kind of training or courses do employees participate in? (Details) Are ideas and methods put forward by employees at all levels? How? Is management encouraged to delegate? How?
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Do staff work in teams in the company? If so, how? If not, why not? Is there a collective spirit? Do people collaborate with each other in the process of product design? (Examples); Is there a good organisational climate? Is there rivalry? Are employees rewarded collectively? How? Do staff want to learn and improve? Is this encouraged by the company (management)? How? Is management committed to training, changes, risk taking, improving, communication etc.? How? Is learning an essential element in the product design strategy? Explain. Is it usually measured or controlled? How? What is the organisational structure like? (hierarchical, flexible); Describe. Is it acceptable to question one’s manager’s ideas? Can all staff speak to or be heard by the general manager? Describe the kind of relationship he/she has with workers. Is there an obsession with keeping secrets? Does everybody know the organisational objectives and strategies? How are they communicated? Are all types of information easily accessed? If not, which information is restricted? Why? Can we say that there is climate of transparency? Why? Is sense of humour found throughout the organisation? (Examples); If not, where is it found? And why? Is it favoured? How? Is (design) creativity favoured by the organisation? How? Has the organisation improvised? Examples.
