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In the last decade, the pressures for change on organizations have been more pronounced than ever. One of the more dominant of these pressures has been new technology, particularly information technology (IT) which has precipitated increasing globalisation of markets, deregulation of industries, and the rise of new organizational forms such as the strategic network. In trying to respond, firms have adopted a wide variety of approaches including downsizing, outsourcing, reengineering, corporate venturing, restructuring, and rejuvenation. The automobile industry has been no exception to this trend and this is manifested in, among other things, the popularity of strategic alliances and, more recently, mergers. All of these developments have one commonality and that is they are usually accompanied by bouts of organizational restructuring, (Bruner and Spekman, 1998, p. 138). Two of the more significant competitive priorities that have emerged in the industry are the introduction of the platform strategy in new product development and the integration of IT in the product as well as in the organization of production and aftermarket activities. Both developments have contributed to an emphasis on knowledge management and organizational change as a means towards the end of keeping up with the fast pace of change at the level of technology and customer demands. This trend, taken together with the earlier mentioned trend of mergers and buyouts, have led to the emergence of a view that the creation of flexible and agile organizational structures is now a strategic priority in the car industry as in many others (Muffatto, 1999; Siegal et al., 1996; Pilkington, 1999). While organizational change has been a traditional item on the menu of management literature for several decades (Lewin, 1958; Leavitt, 1965; Clark and Ford, 1970; Pettigrew, 1987), the notions of flexibility and agility as properties of organizational structure or as goals in themselves are of more recent vintage (Tushman and Reilly, 1997; Fulmer et al., 1998; Dove, 1999). Many of the first generation models of organizational change focused on creating a new structure and then building up an institutional culture that would support the new structure. The

Restructuring for agility at Volvo Car Technical Service (VCTS) Golaleh Ebrahimpur and Merle Jacob

The authors Golaleh Ebrahimpur is with Product Verification and Analysis, Volvo Car Corporation, Gothenburg, Sweden, and is also a Doctoral Student at the Chalmers University of Technology, Gothenburg, Sweden. Merle Jacob is Associate Professor at the Institute for the Management of Innovation and Technology, Chalmers University of Technology, Gothenburg, Sweden. Keywords Organizational change, Knowledge, Information technology, Corporate culture, Agile production, Organizational structure Abstract The last decade has been a turbulent one for the automobile industry. Two of the more significant competitive priorities that have emerged from this turbulence are the introduction of the platform strategy in new product development and the integration of information technology in the product, in the organization of production and in after-market activities. Both developments have forced the car industry to introduce wide-ranging organizational changes to create structures that are flexible and agile. This paper provides a practitioner's account of the impact of the simultaneous introduction of these two interventions on Volvo Car Technical Service (VCTS). Electronic access The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft

European Journal of Innovation Management Volume 4 . Number 2 . 2001 . pp. 64±72 # MCB University Press . ISSN 1460-1060

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new demands for agile and flexible structures, however, assume that continuous change is now a prerequisite for creating and maintaining competitive advantage. For this reason, the concept of organizational agility aims to inscribe receptivity to change itself as the most important value of corporate culture. That being said, however, transforming today's companies into organizations that can support agility remains a major challenge for managers. This is particularly vexing for large established companies and industries where the tasks of building flexibility and agility represent challenges that are analogous to that posed by innovation. This paper is a practitioner's account of organizational change in Volvo Car Technical Service (VCTS), a division at Volvo Car Corporation (VCC). The account provided here will focus on how VCTS responded to changes in its external and internal environment induced by a major technological shift, i.e. the introduction of a platform strategy in product development as well as a revolutionary IT-based after-market system. The paper argues that the simultaneous introduction of these two interventions had the impact of precipitating radical restructuring of VCTS. At the inception of the change process, VCTS was a traditional mechanical engineering division with little IT competence, very late involvement in the product development process and no direct contact with the market. The goal of the restructuring process was to change this as well as create an organizational structure that would be able to respond proactively to future changes. The paper provides an account of how this was achieved and uses the management literature on organizational change to reflect on the achievements and challenges of the change process. The discussion is divided into four parts of which this introduction is one. The second part provides the background or context of the case while the third section features the case description and discussion of the main points, respectively. The final part of the paper discusses the main points of the case in the light of the management literature and posits some managerial implications. 65

Background VCTS is the division at VCC that has overall responsibility for the serviceability of the cars. This means ensuring that cars are serviceable and that the prerequisites for user-friendly service and maintenance are provided. Ensuring serviceability requires an active participation in the product development process in order to influence the design of the car in this respect. Likewise providing userfriendly service demands that VCTS takes part in a broad range of activities that affect customer satisfaction after delivery. These include optimal methods, tools, instructions and information, training programs, etc., for repair shops in order to ensure fast and costefficient repairs. Traditionally, activities associated with the technical service function in the car industry are performed as the last link in the development chain and almost at the time when the car design was fixed. Volvo's technical services division was no exception to this rule. Additionally, VCTS had little or no direct market contact and was unable to drive its own market strategy with respect to repairshop activities. A number of factors converged to create a set of conditions that implied that VCTS had to radically revise its structure and way of providing services if it was to be able to perform its functions efficiently. Two of the more important of these were the development of a new ITbased after-market system and the introduction of a platform strategy for product development, which entailed a reorganization of the product development process. The introduction of the platform strategy VCC has recently reorganized its product development process in accordance with a platform strategy. The notion of platform is an interpretatively flexible concept. By this we refer to the fact, the understanding of what is a platform differs among different units within VCC. For example, some units regard a platform as a tool or just hardware while others take a more holistic view and see the platform as encompassing hardware, organizational (software) and in some instances even strategic dimension. These differences are well known within the different units and efforts are made to translate the different understandings when

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units have to communicate to each other about platform issues. Reasoning from this, we argue that the broad definitions outlined by Meyer and Lehnerd (1997) and Wheelwright and Clark (1992) when taken together approximate the meaning of platform in the Volvo context. This is platform qua a relatively large set of product components or common assets that are physically connected as a stable sub-assembly and are common to different final models (Meyer and Lehnerd, 1997; Wheelwright and Clark, 1992). By using a platform approach, a company can develop a set of differentiated products or derivatives. In the case of the automobile industry, this generally refers to common technology content and processes for different car models (frames, chassis, engines, etc.). The advantage of the platform strategy is that it allows an extensive amount of reusable efforts, investments, experiences and knowledge. (In the absence of a platform approach, each new model has to be developed anew.) This implies a radical shift in the product development process to include the possible options that a platform can offer in the early stages of the development process. Muffatto (1999) argues that the introduction of a platform has far-reaching consequences in that it affects, among other things, lead times, R&D strategy, international operations and last, but not least, product development performances. In the case of VCC, the practical effect of the platform mode on VCTS was felt directly in at least two important areas. One was that it brought about a change in the technical content of the product. For example, some of the existing non-IT-based functionality was replaced with IT-based ones and additional new IT-based functionality was added. The second effect of the introduction of the platform mode of organization was that it effectively halved lead-time. The reduction in lead-time may be attributed to a number of factors that are in turn related to the platform mode of organizing product development. These included a reduction in the time needed to develop and test parts and components, because economies of scale could be realized with respect to machinery, equipment, tooling and the engineering time needed to produce them. Thus, for VCTS the introduction of platform meant a major

revision in the timetable for the conduct of the unit's activities. The IT-based after-market system At the same time as VCC had adopted the platform mode in product development, it had embarked on a project aimed at developing an IT-based after-market system. This system involved using the new technical possibilities offered by IT to provide for communication between mechanic and car, training program, diagnostic operations, electronic tools, etc. Once the platform and after-market IT-based system projects were ready, VCTS would have the responsibility for the car industry's most advanced aftermarket process with respect to both the technical content of the car and the required IT-based system. This system required that VCTS develop an infrastructure that would be accessible to repair shops and retailers worldwide and allow them to make remote diagnostics and download software. VCTS qua organization could not respond to the dual challenge of the platform concept and the after-market system. The main reasons for this were that these new developments demanded processes and competencies that did not exist within the division at the time. Additionally, the new after-market system and platform concept created the need for VCTS to have direct market contact as well as involvement in the early phases of the product development process. The result was obvious; VCTS would have to undergo radical structural changes to be able to handle issues of that high degree of complexity. The most important factor in this context is the radical impact of IT on VCTS' internal organization and work practices as well as its relation with the external market. If we focus on the internal factors first, these may be reduced to four significant shifts. First, the use of IT as a tool during the process had the effect of making the existing sequential work practices of VCTS obsolete. This implied that VCTS would have to shift to a parallel process when it worked with the product development teams. Rather than being involved in the late stage of product development, VCTS was now being required to cooperate with the early phase of product development. It should be emphasized here that the shift from sequential to parallel work practices brought with it an initial increase in 66

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uncertainty for VCTS employees since it implied that they had to also adapt to the relative uncertainty inherent in the early phases of product development. Second, IT has had the impact of increasing the rate of development of non-IT technologies, which in turn increased the pace at which VCTS had to accommodate these new technologies and concomitant competencies. Third, the integration of IT in the products created technology-linkage problems, e.g. the implementation time of new IT designs is often shorter than in traditional technologies. Finally, the shift to IT demands totally different types of competencies and attitudes compared with traditional ones. For example, VCTS has traditionally had a strong engineering culture with high emphasis on safety as defined by exhaustive testing and careful retooling. The introduction of IT in this setting implied that VCTS would have to acquire a full range of specialized competencies within this area. Some were needed because of the new products and systems and other were needed in combination with existing competencies to speed up and improve the quality of working practices. Given the timetable, it was clear that VCTS would be unable to achieve all of this on its own. The introduction of IT also had a number of consequences such as that of changing the external market in terms of customer behaviour and requirements. This implied that VCTS needed to become a more marketdriven organization with the ability to utilize new technological possibilities to develop commercially viable new products through direct linkage with the market. Linking these different internal and external dimensions created totally new dependencies, that in turn demanded new and flexible processes and methods that continuously change as new knowledge and/or unexpected problems emerge.

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clarify the new demands and their implications for the organization; design a new structure that would have the ability to cope with this new situation; start the implementation of the new structure.

The study was divided into two phases. Seven people were involved in the first phase. This group was a mixed one and included people from within VCTS, external consultants as well as individuals from other parts of VCC. The Volvo employees in the group were both from the management and other positions. The vice-president of VCTS and some members of the management group were not directly involved. The aim of the first phase was to study the existing organizational structure of VCTS to ensure that each member of the investigating team shared a common vision of the organization and to divide the existing organization into a number of core areas. These areas were to be later subjected to further and more extensive investigation. The first phase consisted of about four workshops in which members of the study group discussed different issues and got feedback from each other. Between workshops, the group gathered information and talked to people both outside of VCTS and outside of Volvo. The group also had some short internal meetings between workshops. Group members informed each other at these meetings, if they found interesting issues for further discussion at workshops, and in some cases asked for help from other team members if they could find more information about the issue. During this time, all group members had some kind of individual informal dialogue with the vice-president. He was not directly involved but his views were always presented in the study and in some way all the team members were affected by his thoughts. The entire group reported the results of the first phase to the vice-president at a review meeting and apart from some minor issues he approved the bulk of the proposal and gave the green light for the second phase. The first phase lasted about two months. The reported result identified four main operational areas for VCTS operation and business, including areas of shortcoming and what to strengthen. Four investigation teams with a total of 30 people were involved in the second phase.

Diagnosing the need for organizational change In response to the above, an extensive study of VCTS was initiated. The aims of the study were to: . study the existing organization and identify the needed changes; 67

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Every team had a designated leader and studied a separate area. Leaders worked together intensively on an overall level to ensure that the new structure was coherent and met all the requirements. The investigation took a period of two months. During this time team members met once or twice and team leaders once a week. Team leaders prepared whatever was needed for the next meeting through in-house studies, studies of other organizations, contacts and discussions, etc., between these meetings.

Recommendations for organizational change The VCTS study revealed a number of problem areas. The four that were considered most worthy of immediate attention were: Organizational culture VCTS was for the most part an organization that was characterized by the culture of the engineering industry of the previous era. This manifested itself in a pronounced hierarchical structure with traditional management roles. Even though the organization had a project dimension, projects were run in a line management fashion.

is common with organizations in this situation, even when the inefficiency of its approach to work seeps through, there was little willingness or slack time to introduce internal changes with respect to the abovementioned factors. In short, only crisis could create the necessary time out for change to be recognised as necessary, designed and implemented. The study concluded that the structure of VCTS was unable to act proactively to integrate new technology, products, competence, services, etc. It was therefore decided that VCTS' organizational structure would have to be changed to make room for a more market- and technology-driven operation. It was further recommended that VCTS needed new competencies and processes in order to be able to work with the maintenance and development of the ITbased after-market system. Competence profile The change leadership group also recommended that one of the existing and more important competence areas in VCTS should be outsourced to an external company based on long-term commitments. The rationale for this was that VCTS did not have the power to develop this area quickly and efficiently enough. Further, some new areas were identified as important additions for the existing area as part of a strategy to improve outcomes. Apart from the above, the group recommended that VCTS reorganize its way of working and introduce cross-functional teams and early and extensive involvement of both customer and suppliers in order to increase the unit's ability to create an effective product concept. More generally, the recommendation was that VCTS operations in the future would have to be characterized by flexibility and process dynamics. Further, it was found that VCTS would have to change the time perspective it used for strategic planning from one-to-two years to one-to-five years with more emphasis on structure with frequent iterations and shorter milestones. VCTS was also advised to give priority in the future to internal (i.e. within VCC) and external communication in order to secure the variety of competencies necessary. One of the important factors was a supplier network with high level specialized skills, which would allow VCTS to respond quickly and

Contacts with market and business development activities VCTS viewed market and business development activities as distinct from itself and as functions that were performed and delivered to VCTS. Different markets demanded different products and services and VCTS merely delivered them without any regard as to how they fit together as a whole. This meant that the organization lacked the knowledge or interest to evaluate and prioritize such demands. The result was that VCTS developed a diverse range of products and services that were not optimized. Reactivity Since VCTS did not have an overall picture of what were its main activities and how they related to each other, most of the unit's available resources were effectively taken up simply trying to cope with market requirements. This reactive mode of operation also implied that VCTS had very little time to focus on the world around it either within the company or outside of it. As 68

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effectively to sudden and unusual conditions within small domains. VCTS needed to shift to more processoriented working methods with focus on technology development if it was going to be able to speed up the adjustment and adaptation processes. For this reason, the unit created a very technology-focused function with different and high level competencies. However, it was clear that the unit as it currently existed could not secure the variety of competencies it needed and simultaneously focus on VCC's core values from a technical point of view. This gap was filled by initiating an outsourcing project (actually the biggest one in Volvo's history). In summary, the areas to be targeted for improvement were organizational factors such as structure and processes, cross-functional team design for work processes, networks, and changes in leadership and culture. The new structure A three-dimensional organization model was chosen as the structure that would be best capable of meeting the requirements listed above. This structure was comprised of an organization that included line and project dimensions as well as an additional process dimension. The line dimension was to be responsible for developing the necessary basic technology and expertise. The line was also designed to function as a site where people could experience a feeling of belonging and stability as well as a meeting point for people with similar expertise to develop their skills on both spontaneous and on arranged occasions. In addition, the line would be responsible for activities continuously in progress. The projects were to be transient constructs, which would be responsible for the drive and dynamics of the organization. They were to be the sites where expertise and technologies were applied and developed to meet specific ends. It was further argued that projects would also be a natural source for new ideas and perspectives to enter the organization. Thus, the project function would not merely create products but it would also have a replenishing effect. The process dimension was introduced to induce coherence and a united image of how work should be done. The process dimension is one way of building in flexibility and 69

enabling the management of knowledge in the organization because processes are linked both to organization goals as well as customer requirements. This meant that processes were not be seen as rigid control procedures but were intended to provide a feeling of security of controlling and having control over the current situation. By implementing these principles, the organization would become more decentralized with different management roles. This model is informed by the assumption that every person in the organization plays several different roles based on her/his responsibilities with respect to these dimensions. Multidimensional roles mean that people are responsible for products or outcomes from one or several projects, at the same time as being responsible for how the process that supports projects performs and the knowledge that enables these is provided by the line dimension to which they also belong. This together with being provided with up-to-date market knowledge through direct and/or indirect market channels, should work as a facilitating mechanism to secure prerequisites to allow fast response and adaptation to internal and external changes, i.e. agility.

Discussion and managerial implications The discussion will try to make sense of the change process described above at three levels. The first is through contextualizing the route to change in VCTS against the backdrop of the situation at VCC at the time of change, the second is through a dialogue with the literature and, finally, by trying to assess how the organizational structure will continue to respond to change. Why was the change process implemented in the fashion that it was? The introduction of a platform strategy in product development at the same time as VCC was attempting to cope with the implications of a technical paradigm shift at the industry level implied by the introduction of IT meant that the organization was going to be the site of radical structural and processual changes. Although when viewed from the point of view of the automotive industry, VCC is at best a medium-sized

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company, it is still a fairly large and complex organization and this has several well-known implications when one is thinking of introducing change of a radical nature. In this particular instance, there were only two possible options for VCC management and these were: (1) An organization-wide change process that would be based on a well thoughtthrough strategic plan informed by a forecast of the possible effects and implications of the introduction of a platform strategy on all the constituent units of VCC. (2) A compartmentalized change process directed at selecting discrete units as sites for change while leaving the rest of the organization more or less intact. Several factors militated against strategy (1) and among these, three stand out as significant: (1) Volvo AB had recently extricated itself from an unsuccessful strategic alliance with Renault, which had proven to be costly and had created some uncertainty at the operational level, particularly for VCC; (Bruner and Spekman, 1998). (2) VCC was in the process of building a car that was perceived to have a high symbolic significance for the company, thus organization-wide solidarity as well as time were critical. (3) The future of VCC was still cloudy after the failure to effect a successful alliance with Renault, thus it was not clear whether the potential costs involved in an organization-wide restructuring in terms of further uncertainty would lead to sustainable benefits In view of the above, the second option, i.e. a compartmentalized approach to change was the only rational alternative. This approach had the additional advantage of allowing VCC to benefit from the potential gains in reduction of lead-time in the first run of the new innovation, the platform. This, however, entailed that VCTS got involved in the overall change process at a latter phase compared to other development departments. Yet, in order to contribute with necessary inputs to the platform system, VCTS had to carry through changes within the entire organization contemporaneously. 70

How does the change process described conform to the models of change found in the management literature? and How does the new structure provide for a dynamic upgrading of competence and access to knowledge? In keeping with the corporate world's current preoccupation with agility and flexibility, the issue of organizational change is a popular theme in management literature. The focus, however, has shifted from promoting flexibility and creativity in the innovation process to a preoccupation with agility in organizational structure, learning and management of knowledge. Despite this shift of interest, an examination of models of change, as well as the case studies from praxis such as the one above suggest that the logic of freeze, unfreeze, refreeze remains the dominant underlying model for change management and implementation (see Lewin, 1958; Kotter, 1996). Thus, while terms such as learning, agility and continuous improvement suggest a dynamic process of constant renewal, managers are still being exhorted to implement these with guides which recommend building consensus throughout the process of change, demonstrating commitment on their part as well as building commitment among others and finally promoting the acceptance of the philosophy underlying the particular change at an institutional level (refreezing). Put differently, on one hand, management is told that it should seek to create organizations which are able to learn and adjust to environmental circumstances presumably without the trauma of a managed organizational change program yet the models for guiding such processes are static. If we return to the VCTS case described above, one notes that all the classic lessons available in the management literature have been employed in that the first step was that of unfreezing or establishing a sense of urgency through the act of initiating a study of VCTS' structure as well as the sense-making process which involved workshops where the change group met and developed a common understanding of the problem. The final step was preparing for the institutionalization of the new structure. However, in attempting to answer the question of how does the new structure provide for constant upgrading of competence and allow for access to new knowledge, we were stumped for an answer. One obvious answer to this question is that by

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creating a structure, which is oriented towards the market, the new VCTS will have access to information about customer preferences, etc., from within VCC as well as outside. This answer is unsatisfactory, however, for two reasons. The first is a practical reason outside the control of this study, i.e. the VCTS division was unexpectedly integrated into another division shortly after the completion of the restructuring process. This has meant that it is now difficult to assess how top management viewed the outcome of the change process. A second is that it raises the problem of static versus a dynamic analysis mentioned above. Our account allows us to capture structure but it offers very little in terms of process. ``How does the new organizational structure process information about customer preferences, etc?'' and further, ``What are the mechanisms in the new structure which determine how decisions will be made on which market signals should get immediate attention and which could be safely ignored?''. This is not a new criticism, since more than a decade ago Pettigrew pointed out similar gaps in the change literature (Pettigrew, 1985). In trying to come to grips with this question we were led to return to the new change literature to see what insights could be gleaned there. One common characteristic of this work is that the more recent discussions of agility and learning (Perez-Bustamante, 1999; Dove, 1999) converge on the fact that agility is characterized by not just the ability to respond to change but the ability to incorporate change as a fundamental value or way of managing the business. However, thus far the focus has been on case descriptions, which produce further evidence of this stipulative definition. There is little by way of tools to assess whether an organizational structure can support processes that would induce agility. Thus, we can merely conclude that the new structure as described above is designed to allow for the influx of information from sources within other parts of the organization as well as from outside. Further, the process and project dimensions build in a system for managing and applying this knowledge to achieve continuous improvement. Managerial implications One of the most obvious implications of the above is that with respect to organizational 71

change, managers are often confronted with a trade-off between what may be the best change model for the long term and what is feasible given the situation in the organization at the time when change must be introduced. In the case above, the latter was the option chosen and it was successful insofar as VCTS was able to meet its short-term deliverables. In terms of the long term, the integration of the unit into another structure implies that another study will have to be done to assess whether the new structure can continue to support agility in its new context. Management literature converges on the view that for a change process to be successful there has to be a visible commitment on the part of top management, that the change should be anchored in as wide as possible a cross-section of the organization and that there should be a reward system which recognizes the change as positive. The change process described here confirms the first two insofar as there was a definite commitment on the part of the division head to this change. That being said, however, this commitment was demonstrated via a quasi laissez faire system in which the division head and members of the top layer of management were not directly involved in the design of the change process. All members of the change team were in dialogue with the division head and the team did discuss his ideas and input at their meetings. The group-based dialogue between the division head and the change team, however, seems to have been formal and limited to the presentation and discussion of the report at certain pre-arranged stages of the process. This model was successful in achieving a change process in the time necessary to secure the division's capacity to achieve its shortterm deliverables to the rest of the organization. The subsequent integration of the section into another unit suggests that change processes can be a source of a tension between the career objectives of an individual manager and the success of his/her division. The change process at VCTS was conducted through a management strategy which involved the vice-president initiating change, selecting a team for implementing this change and then letting them get on with the design of the change process with as little interference as possible. This approach was successful but there was little political visibility for the vice-president qua

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architect of change. Further, there was little visibility for the unit itself contra to the rest of the organization, so it is unclear whether there was any knowledge on the part of management outside of VCTS as to the nature of the change the division had undergone. The only concrete result that was visible outside of VCTS was the division's meeting of its target. The management lesson from this seems to be that successful change has to be communicated upwards to top management. In other words, managers have to be able to publicize their successes and that of their units, since getting the job done does not always seem to speak for itself.

(Eds), Readings in Social Psychology, Holt, Rinehart & Winston, New York, NY pp. 197-211. Meyer, M.H. and Lehnerd, A.P. (1997), The Power of Product Platforms, The Free Press, New York, NY. Muffatto, M. (1999) ``Introducing a platform strategy in product development'', International Journal of Production Economics, Vol. 60-61, pp. 145-63. Perez-Bustamante, G. (1999), ``Knowledge management in agile innovative organizations'', Journal of Knowledge Management, Vol. 3 No. 1, pp. 6-17. Pettigrew, A. (1985) Awakening Giant: Continuity and Change in ICI, Blackwell, Oxford. Pettigrew, A.M. (1987), ``Context and action in the transformation of the firms'', Journal of Management Studies, Vol. 24, pp. 649-70. Pilkington, A. (1999), ``Strategic alliance and dependency in design and manufacture: the Rover-Honda case'', International Journal of Operations & Production Management, Vol. 19 No. 5/6 pp. 460-74. Siegal, W., Church, A.H., Javitch, M., Waclawski, J., Burd, S., Bazigos, M., Ta-Fu Yang, AndersonRudolph K. and Warner Burke, W. (1996), ``Understanding the management of change: an overview of managers' perspectives and assumptions in the 1990s'', Journal of Organizational Change Management, Vol. 9 No. 6 pp. 54-80. Tushman, M.L. and O'Reilly III, C.A. (1997), Winning through Innovation: A Practical Guide to Leading Organizational Change, Harvard Business School Press, Boston, MA. Wheelwright, S.C. and Clark, K.B. (1992), Revolutionizing Product Development ± Quantum Leaps in Speed, Efficiency and Quality, The Free Press, New York, NY.

References Bruner, R. and Spekman R. (1998), ``The dark side of alliances: lessons from Volvo-Renault'', European Management Journal, Vol. 16 No. 2, pp. 136-50. Clark, P.A. and Ford, J.R. (1970), ``Methodological and theoretical problems in the investigation of planned organizational change'', Sociological Review, Vol. 18 No. 1, pp. 29-52. Dove, R. (1999), ``Knowledge management, response ability and the agile enterprise'', Journal of Knowledge Management, Vol. 3 No. 1, pp. 18-35. Fulmer, R., Gibbs, P. and Keys, J. (1998), ``The second generation learning organizations: new tools for sustaining competitive advantage'', Organisational Dynamics, Vol. 27 No. 2, pp. 7-20. Kotter, J.P. (1996), Leading Change, Harvard Business School Press, Boston, MA. Leavitt, H.J. (1965), ``Applied organizational change in industry: structural, technological and humanistic approaches'', in March, J.G. (Ed.) Handbook of Organizations, Rand McNally, Chicago, IL. Lewin, K. (1958), ``Group decision and social change'', in Maccoby, E.E., Newcomb, T.M. and Hartley, E.L.

Further reading Martiny, M. (1998), ``Knowledge management at HP Consulting'', Organisational Dynamics, Vol. 27 No. 2, pp. 71-7. Nadler, D. and Tushman, M. (1999), ``The organization of the future: strategic imperatives and core competencies for the 21st century'', Organisational Dynamics, Vol. 28 No. 1 pp. 45-60.

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1. The post-audit and the capital budgeting process

The design of the investment post-audit process in large organisations: evidence from a survey

The post-audit (PA) of investments is the control process aimed at making an overall revision of all those activities concerning the management of an investment proposal, from its definition, to its implementation, up to the end of its life. The PA process represents the last phase of a much longer and complex process, which in literature is generally called ``the capital budgeting process'' (see Figure 1)[1]. The PA process is different from a simple project monitoring, for the scope of the analysis, and, consequently, for the degree of completeness. Indeed, the PA process is not limited to the control of the start-up phase (in terms of costs and time), but the focus of the analysis is extended to the operational phase (that in which the investment begins to generate cash inflows). Moreover, as we will see in the following sections, the analysis of the actual cash-flow patterns of the investment can be used both for an immediate feedback on the management of the controlled investment, and to improve the effectiveness of all the phases of the investment process. Several PA processes can be performed during the different stages of the life-cycle of an investment, to exploit all the potentialities of the tool; some of these processes can take place already in the start-up phase, as illustrated in Figure 2. Hence, a classification of the different kinds of PA can be introduced, based on the timing of the process. In particular, we can distinguish between: . ``early'' PAs: the processes conducted during the phase of start-up of the investment project; . intermediate PAs: review processes that take place during the operational phase. These controls are conducted to verify the respect of the budgeted performance, to analyse some specific issue, and/or to verify the effect of some corrective action performed after the results of previous PAs; . final PA, which is conducted at the end of the life-cycle of the investment (or when

Giovanni Azzone and Paolo Maccarrone The authors Giovanni Azzone is Full Professor of Business Economics and Organisation and Paolo Maccarrone is Assistant Professor, both at the Politecnico di Milano, Milan, Italy. Keywords Capital budgeting, Investment, Performance, Learning, Design, Organisational development Abstract Focuses on the possible benefits and problems generated by the implementation of a post-auditing (PA) system. This research work was structured as follows: first, an integrated model for the design of a firm PA system has been elaborated, based on the critical re-elaboration of specialised literature; an empirical investigation (a survey) has been conducted in a sample of large companies operating in Italy, to analyse the most common configurations of PA systems. The aims were: to understand the behaviour of firms, with respect to the design variables identified in the previous section; to identify common patterns and possible correlationships between the solutions adopted in the different parts of the PA system. The results of the empirical analysis show a substantial alignment between the model and the configuration of PA systems implemented by firms (with some important exceptions), which seem to be influenced to a great extent by the objective with which the PA system has been implemented (project performance control vs learning). Electronic access The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft

This article is due to the joint work of the two authors. However, Giovanni Azonne has written sections 1, 2 and 6, while Paolo Maccarrone has written sections 3, 4 and 5.

European Journal of Innovation Management Volume 4 . Number 2 . 2001 . pp. 73±87 # MCB University Press . ISSN 1460-1060

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Figure 1 The capital budgeting (or capital investment) process

Figure 2 The different kinds of post-auditing during the life-cycle of an investment

These aspects are analysed also through specific field analyses (especially case studies), aimed at measuring evidence of theoretical issues in firms' procedures. The second group of studies is aimed at identifying the most important process design variables, and the set of correlated mechanisms. In particular, studies tend to focus on (Dillon and Cantwell, 1981; Mills and Kennedy, 1990; Neale, 1995): . the screening criteria for the identification of investments to be controlled; . the timing of the various phases of the process; . the individuation of responsibility for PA activities; . the information that must be gathered and the analyses that must be conducted; . the content of PA reports; . the diffusion and the use of information elaborated in the process.

the residual effects on the firm can be considered as irrelevant). Particularly important for learning purposes, especially for those investments characterised by returns concentrated in the final stages (as for those generating strategic options)[2].

2. The state of the art Only recently, PA of investment projects has been given an increasing attention by firms, especially in some manufacturing sectors. Also the specialised literature has for a long time overlooked this issue, and focused particularly on the development of the new, discounted cash-flow techniques for the evaluation of capital projects. However, contributions on PA can be traced into two fundamental streams: the first focused on the fundamental conceptual issues linked to this tool, the second on organisational design problems. In particular, the first field is more fertile, and include studies on (Pike and Dobbins, 1986; Gordon and Myers, 1991; Neale, 1991): . general and specific objectives of PA; . potential benefits; . operational problems, and effects induced in other parts of the organisation.

However, despite the number of contributions, the literature presents some shortcomings and some unexplored issues. In particular, what emerges is: . the limited number of studies that analyse in an integrated way the key factors in influencing the PA adoption/nonadoption decision; . the lack of a systemic vision of PA: the various elements that constitute the process are often treated separately, without taking into consideration the existing links and interdependencies; 74

The design of the investment post-audit process in large organisations

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.

the lack of a punctual assessment of the contextual variables on the configuration of the process; the poor attention given to the formalised use of the information generated by the control process.

3. The objectives of the research In the light of these considerations, the research plan was articulated in two phases: (1) an integrated model for the design of the PA system in a manufacturing firm has been elaborated; (2) an extensive survey was conducted among manufacturing firms operating in Italy, aimed at: . measuring the degree of diffusion of PA among Italian firms (which had never been done before), and identifying the reasons for non adoption; . verifying the behaviour of firms, with respect to the fundamental design variables of the reference model; . identifying possible correlationships between the different design variables, and between the design variables and the main purpose with which the PA system has been identified.

4. The reference model The first step in the elaboration of the model consisted of the identification of the possible objectives of the PA of investments, which influence the design of the whole system[3]. In particular, as for any control system (Merchant, 1998), three main objectives can be identified: (1) Decisional support. The results of the audit can be used for a feedback on the controlled investment, aimed at improving its performances. (2) Learning. The analysis of past experiences can be used to improve the management of all the phases of the capital budgeting process. (3) Behavioural-related purposes. PA can be used to prevent opportunistic behaviours by people involved in the capital budgeting process (implementation included), and, more generally, thus controlling people involved in the 75

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different phases of the capital budgeting process (implementation included). This can be done either in a formalised way, by linking PA with the incentive/evaluation system, or by motivating them implicitly. It soon became evident that the third objective could hardly be pursued in an ``explicit'', formalised way: first of all, the use of a control system for a strict control and evaluation of people requires a high degree of timeliness and measurability, as well as the precise definition of responsibilities. These two conditions are generally not fulfilled by a PA system, given the long duration of the process (i.e. the amount of time going from the identification of a project to the end of its life) and the difficult identification of the cause-effect relationships between the different phases. Moreover, what often happens is that the responsibles have changed their position in the meanwhile (or even left the company), which reduces significantly the efficacy of this kind of control and incentivation system. Second, the use of PA for an explicit control of people can hamper the achievement of the other two objectives underlying the implementation of a PA system: line managers (or project sponsors) may be induced to provide biased information, to increase the apparent ex post performance of implemented investments, and, hence, their evaluation and the correlated benefits. This opportunistic behaviour is allowed by the inevitable information asimmetry that characterises this process, which cannot be eliminated even by the most sophisticated information systems (like ERPs). In short, given the complexity of the process (in terms of cause-effect relationships, interrelationships between projects, quantification of revenues and costs ascribable to each investment), the costs (and risks) of designing a PA system with explicit control-oriented purposes are much higher than the benefits that might be gained. Hence, it is better to limit the use of PA for behaviour control purposes to the implicit motivational impact of the PA system: if correctly designed, middle managers can see it as a really useful tool for a better management of investment proposals, and they could be willing to collaborate to the

The design of the investment post-audit process in large organisations

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revision process, given the benefits they could perceive from a good analysis. If we limit the analysis to the first two objectives, the PA process can be represented as in the scheme of Figure 3, where the main impact areas of the PA analysis are highlighted. The elaboration of the model for the design of a PA system required the identification of two classes of variables, namely (see Figure 4): (1) The architectural levers, which define the more ``structural'' elements (positioning of the PA unit in the organisational scheme, composition of the PA team, investment selection criteria, timing of the various phases of the PA process). (2) The operational levers, which are linked to the execution of the audit process (information collection, analysis of

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data, structure of reports, diffusion of reports). Of course, the configuration of the PA system emerging from the combination of the design variables must be characterised by an internal coherence: with regard to this point, a relationship seems to exist between the specific objective pursued by the PA system (in particular, decisional support vs. learning), and some design parameters. Moreover, the context variables (firm strategy, management style, organisational structure, environmental turbulence, etc.) may also influence to some extent the configuration of the system (see Figure 5), but this link has not been examined in this work, since it has been considered not as relevant as the other earlier described. In the remaining part of this section, each organisational variable will be briefly analysed.

Figure 3 The different feed-backs of the PA process

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Figure 4 The design elements

.

the modelling and problem-solving capabilities.

The team members can be both ``internal'' (i.e. involved in one or more phases of the project) and ``external'': anyway, the mixed configuration seem to be the best results, since the direct experience and the ``historical memory'' of the ``insiders'' can be coupled with the objectivity and the specific competencies in PA activities of external, neutral elements. Of course, the ``mixed'' solution has also some risks: first of all, the integration of the two ``groups'' may be difficult. Second, the internal members may be very busy with operational, day-by-day activities, which, in turn, can create some tensions inside the team. In this sense, the emphasis given (formally and informally) to PA activities by top management has a great role in ``balancing'' these contrasting forces.

4.1 The architectural variables 4.1.1 The location of the PA unit The responsibility for the PA system is given the ownership of the process; his tasks include: . the management of the resources involved in the PA activities; . the control of the correct application of procedures, and of the degree of accuracy of the analyses made by the members of his unit; . the monitoring of ``environmental'' variables that may influence the quality of the PA process; . the selection of the investments that must be controlled; . the identification of the review teams; . the continuous development and improvement of the PA system.

4.1.3 The selection of projects The selection process is aimed at identifying the set of investment project that must be controlled in a given period of time, in order to maximise the benefit/cost ratio. The selection should be made by the chief of the PA unit, in collaboration with line (business unit/divisional) managers. Defining the selection criteria means answering to the following questions: . Which kind of projects should undergo an audit process? . When should they be identified? Ex ante or ex post (i.e. in the first phases of the capital investment process, prior to the implementation and operating phase, or at the end of the project)?

Moreover, he/she may be involved also in the different phases of the PA process: this may in turn improve the learning capacity, due to the direct participation to PA activities. 4.1.2 The composition of the review team In the definition of the review team much attention must be put on: . the set of technical competencies needed to analyse the investment project; . the balance of managerial and operational attitudes of the members; . the interpersonal relationships attitude of the members;

4.1.4 The timing of the PA process This variable includes the definition of: . the number of PAs (i.e. the number of reviews of the single project); . the timing of each review process.

Figure 5 The mutual interrelationships between the different set of variables

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objectives of this phase of the research were to: . Quantify the degree of diffusion of PA systems among firms, and to verify the correlationship between some of its characteristics and the adoption of PA. . Analyse the most common configurations of PA systems: pursued objectives, organisational and operational solutions, as well as problems faced. The aims were to understand the behaviour of firms, with respect to the design variables identified in the previous section, and to identify common patterns and possible correlationships between the solutions adopted in the different parts of the PA system. . Verify if (and to what extent) the different objective pursued (project performance control vs. learning) influences the configuration of the system.

In particular, the objective is to find the best trade-off between the completeness of the analysis and the timeliness of control, fundamental for the feed-back on the project 4.2 The operational variables 4.2.1 The structure of the audit process This variable can be in turn split in several items, the most important being the following: . the sequence of activities performed (i.e. the flow chart of the process); . the type of data analysed; . the sources of information and the gathering tools. 4.2.2 The structure, the content and the diffusion of reports Reports should be characterised by a modular structure; in particular, two major sections can be identified: the first illustrating the main results of the review (actual vs budgeted performance, main problems identified, behavioural aspects, deliverables), the second aimed at exploding the analysis on the critical elements which emerged during the analysis. The reports may include also the illustration of identified interventions (on the project and/ or on the structure of the capital budgeting process): this depends mainly on the composition of the review team, on the management style and on the power given to the PA unit. Great attention must be given to the diffusion of the reports, which should reach all people involved in the different phases of the capital investment process (according also to the specific objective of the PA process). The final step consists of the implementation of the suggested interventions: this is a very critical point, especially for learning purposes (to close the ``double loop''), and should be accompanied by ad hoc procedures and control mechanisms, aimed also at measuring the effects generated by the modifications made on the capital budgeting system.

The sample consisted of 124 Italian firms (or Italian subsidiaries of foreign companies), identified by merging two groups, which included, respectively, the first 100 Italian firms by turnover, and the first 100 by value added, as resulting from Mediobanca (1998) ranking of 1998. The number of respondents was 34: a response rate comparable with that of similar studies conducted in other countries (Neale, 1994; Mills and Kennedy, 1993). Of these 34 firms, 24 declared to adopt a PA system consistent with the definition provided in the questionnaire. The adoption rate[4] is then about 70 per cent, slightly lower to what registered in other countries (the UK and the USA, in particular): but it must be underlined that these results are not fully comparable, due to the different dimension of the samples (especially for US studies). Anyway, what emerges is that the adoption of PA by Italian firms is rather recent (in most cases after 1990), while in the UK it can be traced back to the second half of the 1980s, and in the USA even to the late 1970s/early1980s. The results of the survey confirm the positive correlationship between the firm dimension and the propensity to PA adoption, as reported by the most influential authors. The reasons can be various: . the high volume of investments: since the system is characterised by a certain percentage of fixed costs, as well as by

5. The results of the survey The survey, designed ad hoc for this research, consisted of a questionnaire containing a mix of open and closed questions (with a prevalence of the multi-choice form), which was sent by fax to the firms. The specific 78

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. .

.

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some interesting findings. In this section of the questionnaire, first of all the respondents were asked to judge the relevance of PA, with regard to the three fundamental objectives of a control system: decisional support, learning, motivation. The results (summarised in Table II) show that the most important reason for a PA system to be implemented is to improve learning on the capital budgeting process, in order to enhance the ability of predicting future scenarios and, more generally, of evaluating investment proposals. Decisional support is judged important as well, but not as much as learning. In contrast, the motivational impact is considered far less relevant: it must be underlined that we refer here to the explicit use of PA information for the control and evaluation of people involved in the different phases of the life-cycle of an investment project. As will be illustrated in the following sections, this result seems to confirm the conceptual problems in using the same control system to improve organisational learning and to judge people responsible for the various activities. Indeed, if people are judged on the NPV of an investment, they will be induced to overestimate the real cash inflows (this opportunistic behaviour being allowed by the inherent difficulties of this kind of measurement, especially in case of information asymmetry). Moreover, this information bias would inevitably undermine the learning potentialities, or even lead to erroneous conclusions (measurability is a fundamental pre-requisite for learning purposes).

economies of scale, its adoption is more attractive for large, capital-intensive firms; the availability of adequate skills; the presence of more structured and analytical information systems; the existence of formalised planning and capital budgeting procedures, which represent a necessary prerequisite for the success of a PA system.

It is also interesting to understand how notadopting firms have justified their choice: Table I illustrates the average value (on a 1-4 Likert scale[5]) of the importance attributed by the not-adopting respondents to each possible reason listed in the questionnaire (identified on the base of existing literature). The reason judged as most important is that the analysis of past experiences is useless for an improved management of future initiatives. Other important reasons are the unfavourable balance between the uncertain benefits and the fixed, highly foreseeable costs, and the inadequacy of PA as a control tool for the specific kind of investments of the company. Interesting to note, the latter reason is considered as very important, especially by firms operating in the IT sector. In contrast, problems with existing information systems, or the lack of skilled resources, seem not to be relevant issues (which once more confirms that the largest companies usually are better organised to deal with these kinds of problem). 5.1 The objectives of the PA system The analysis of the architectural and organisational solutions adopted by firms which have implemented a PA system leads to Table I The reasons for non-adopting the PA system

Average value of importance attributed by firms

Reasons for non-adoption PA useless, given the very different nature of projects and the high degree of environmental turbulence Excessive gap between (certain) costs and (uncertain) benefits Inadequacy of the tool, given the particular kind of investments Conceptual and practical problems in modifying the ongoing investments Already good relationships existing between operating managers and controllers Scarcity of human resources Lack of qualified personnel for the implementation of PA Unwillingness to modify existing information systems Lack of relevant investments

79

2.91 2.73 2.73 2.55 2.36 2.27 1.73 1.27 1.27

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Table II The degree of importance attributed to the three fundamental objectives of a PA system by responding firms Degree of importance (1 ± very low; 4 ± very high) Objective Improvement of performances of the controlled investment (decisional purposes) Enhancing the quality and effectiveness of the whole capital budgeting process (learning purposes) Controlling and evaluating the personnel involved in all the phases of the capital budgeting process, implementation included (behavioural/motivational purposes)

5.2 The problems faced by firms with PA The next section of the questionnaire was aimed at identifying what problems firms face in implementing PA. Also in these questions the respondents were asked to judge the importance of a list of different problems, identified by re-elaborating the existing literature. Anyway, they were also invited to suggest any other difficulty encountered, not included in the list. The most important sources of problems turned out to be the scarcity of resources that can be dedicated to PA activities, and the lack of complete and adequate information, as reported in Table III. Moreover, the frequency and the importance of these kinds of problem may also derive from poor attention given to these aspects in the phase of design of the PA system. The next three problems in the ranking are very similar, since they are all related to the gathering of information concerning the single investment proposals; moreover, their relevance is more influenced by ``exogenous'' variables (as the environmental turbulence, or the nature of

Average value

1

2

3

4

2

6

10

6

2.83

18

6

3.25

6

5

2.54

3

10

the investments), than by the organisational (internal) structure and design of the system. The lack of co-operation between managers is only in sixth position in the ranking; interestingly, this critical issue is underlined especially by those firms who have assessed to use PA also (or mainly) for behavioural control purposes. Indeed, firms' managers who have judged this problem as ``relevant'' to ``highly relevant'', have also attributed more importance to the behavioural aspects (average value 2.86 vs 2.54). Interestingly, lower importance has been given to some indirect consequences of the implementation of a PA system, like the increased risk-aversion of project sponsors, and the lengthening of some phases of the planning process, as well as of the development and evaluation phase of each proposal. The explanation can be twofold: (1) If PA is not used to control the behaviour of lower levels, it is more likely to be seen as a useful tool inside the organisation; hence, the collaborative climate may limit the undesired effects.

Table III The main problems faced by firms in the implementation of the PA process Problems faced by firms

Average value

Incompleteness or inadequacy of data Insufficient resources that can be dedicated to PA Investment-related costs and benefits hard to quantify Difficulties in troubleshooting (especially with respect to the impact of qualitative aspects) Problems in analysing investments that have been modified during the implementation phase Lack of co-operation between managers The planning and evaluation phase of the capital budgeting process becomes too long Excessive risk aversion of sponsors as a consequence of the implementation of a PA system

80

2.65 2.61 2.26 2.17 2.09 2.04 1.61 1.35

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(2) The respondents were not fully aware of the existence of this kind of secondary effects, which are also hard to be measured. A careful analysis of correlationships between this and the former section provides another proof of the contrast between the learning and the control objectives; indeed, those firms that have given more importance to the motivational objectives have also reported as a major operational problem the lack of collaboration between controllers and line managers. This, in turn, causes a lot of troubles in the phase of information gathering, reduces the amount, as well as the reliability, of data, thus undermining the effectiveness of the whole process. 5.3 The architectural solutions The analysis of the organisational solutions adopted by firms who have implemented a PA system was focused on the following elements: . composition of the PA unit (if existing) and position of responsibility for PA activities inside the organisation; . composition of the PA revision team; . the criteria used for the selection of investments; . the timing of the PA process (with respect to the whole investment management process). 5.3.1 The composition of the PA unit With respect to the first point, the empirical results show that only in a few cases an independent organisational unit is introduced to manage PA activities: as is quite foreseeable, this happens in the largest and most diversified firms, although this choice seems to be also correlated to the importance given to the control of investments and, consequently, to the degree of sophistication of the system. The responsibility for PA activities is located at a rather centralised level (see Table IV). In most cases he reports directly to corporate top management, while only in the other cases his direct report is to the chief of the planning and control unit (or equivalent), as illustrated in Table IV. Moreover, what emerges from the analysis of real cases is that the allocation of responsibility for PA activities tends to be more centralised in those firms who have indicated learning as the most important objective of PA; indeed, where managers use 81

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PA information especially for decision making, the responsibility is often located at an operating level (for example, at business unit level, or even at a functional level). A possible explanation for this different behaviour resides in the trade-off between the timeliness needed for most managerial decisions, and the need for co-ordination and generalisation of results, which is typical of learning activities. 5.3.2. The project review team The first question concerned the number of people involved in each project review. As reported in Table V, 20 firms adopted the ``team'' solution, while only in five cases all the PA activities concerning a single proposal were performed by a single reviewer (in one firm both solutions were allowed, depending on the project dimension and importance). Interestingly, the choice of one reviewer seems to be linked to the lack of resources: as a matter of fact, firms that have adopted this organisational solution have also attributed an above-average importance to the problem of resources (3.00 vs 2.61). Moreover, the ``single reviewer'' solution seems to be adopted by firms who have given relatively more importance to the behavioural control purposes (3.00 vs 2.54). The second aspect analysed was the composition of the project team. As illustrated in Table VI, the preferred solution is a ``fully external'' team, i.e. a team constituted by people not involved in the project (in any of its phases). Also, the ``mixed'' (or ``hybrid'') solution is quite diffused, while the ``all internal'' solution is adopted by only two firms, but always in parallel with a mixed team, for the analysis of technical aspects. A correlation seems to exist between the composition of the review team, and the aim of PA: indeed, those firms that have introduced PA especially to improve the control on the ongoing project, seem to prefer the mixed team solution, while those who consider learning as the primary objective tend to adopt the external solution. As illustrated in Table VII, five firms adopted a ``fixed'' configuration of the review team (which means that PA activities are conducted by the same people), while the majority of firms chose the elements according to the specific characteristics of the project. This is the solution adopted in the most complete PA

The design of the investment post-audit process in large organisations

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Table IV The position of the person responsible for PA activities

Position of PA responsible Direct report

Number of firms

Local unit (division/business unit level) 4

Centralised (corporate level) 18 Corporate top Planning and control management (CEO, manager general manager, etc.) 12 2

Chief controller

4

4

Note: Firms not responding: 2

Table V The dimension of the ``average'' project review team

Number of firms Average dimension of the team Number of firms

2 2

Team

Single reviewer

20

5

3 8

4 3

5 2

6 1

Notes: Firms not responding: 0 One firm has marked both answers (team and single reviewer)

overall firm's performance. Dimension can then be seen as a proxy of the risk of the investment (in terms of absolute deviation, at least). But large investments often give the best opportunities also for learning purposes, since their greater complexity and their modularity. Moreover, the largest projects are often characterised by a higher strategic impact: in this sense, in several cases the dimension can be considered also a proxy of the strategic relevance. Interestingly, firms that use a random choice criterion to select the investments have also assessed to have designed all the PA system for behavioural control/motivational purposes. The reason adduced is that, due to the random choice, any investment proposal may be submitted to control by the centralised PA unit, should have a motivational impact on people involved in all the phases of the management investment process. Another examined point was the average number of investments controlled in a year: here the behaviour of firms appears quite

Table VI The composition of the review team

Composition of the review team Internal Number of firms 2

Mixed 9

External 11

One reviewer Number of firms

Internal 1

External 4

Notes: Firms not responding: 1 Two respondents have marked two answers (internal and mixed)

systems, since it implies a larger dimension of the unit, and the possibility to perform more PA in parallel. 5.3.3. The selection of investments The criteria used to select the project to be audited varied to a certain extent from company to company, as illustrated in Table VII. The most diffused parameter is the dimension, followed by the implementation/ operational complexity, and by the strategic relevance of the project. As can be noticed in Table VIII, most firms use more criteria simultaneously. The dimensional criterion is preferred for its objectivity and easy applicability. But the superiority of the dimensional criterion can be explained also by its importance, both for strict decisional support, and for learning purposes. Indeed, in the control of ongoing projects the larger ones must be privileged, given the higher potential impact on the

Table VII The dimension of the review team Team composition Number of firms

Fixed

Variable from project to project

5

14

Note: Firms not responding: 1

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Table VIII The criteria used for the selection of investments

Dimension

Implementation/ operational complexity

Strategic relevance

Risk

Random choice

23

11

8

8

1

No. of firms Note: Multiple choice allowed

The next question concerned the most appropriate moment for implementing the PA process. As illustrated in Table X, in the great majority of PA systems (15 of 23) the starting time of PA activities is not determined ex ante. Interestingly, all the firms that had declared to use the operational complexity of the investment as one of the selection criteria are in this group: indeed, in this case the PA process is supposed to depend on the characteristics of the specific project (critical phases, milestones, etc.). Moreover, what emerges from a more accurate analysis is that the capital budget of most of the eight firms in the left column of Table X are characterised by few, large and highly standardised investment projects (petrol-chemical firms, for example): hence, it is easier for managers to establish the most appropriate moment for controlling the results of each project. One half of the sample usually performs more than one review process on a project (13 of 24): some correlationship seem to exist with the answers given in other sections of the questionnaire. In particular, all these firms have declared learning as the fundamental objective of the PA process (average importance attributed: 3.4 vs 3.25). Moreover, most of the firms that do not perform multiple audits have also declared problems of scarcity of resources.

variegate, as can be seen in Table IX, thus confirming the impression that the ``dimensioning'' of PA systems differ to a large extent from firm to firm. It must be also essential that a trade-off must be found between the pervasiveness of PA (i.e. the extension to all the investment proposals), and the deepness and accuracy of the analysis. With regard to this point, the PA system of the firm who proceeds to a punctual control of almost all the investments (over 80 each year, in Table IX) has been designed explicitly for motivational purposes, and appears more oriented to the formal control of procedures and to a ``mechanical'' control of variances between expected and actual results, than to organisational learning and to an improvement of the overall process. Moreover, most of the firms that have introduced a more ``learning-oriented'' PA did not answer to this point, probably due to high variability in the number of projects that undergo a PA process from year to year (depending on their nature, complexity, and from the specific aim of control). 5.3.4. The timing of PA activities With regard to the last point examined (the timing of PA activities), the behaviour of firms is quite homogeneous, with few exceptions. In particular, apart from two significant exceptions, the PA process on an investment project starts after the implementation phase, when the investment is already ``operative'' (i.e. when it has already started to generate operating net cash flows). The exceptions are represented by firms characterised by very large projects with long implementation times, where the adoption of project control tools is critical to guarantee the respect of time and of total investments.

5.4 The operational configuration The solutions adopted by respondent firms for the organisation of the PA process seem to be more variegate: in particular, managers seem to be pay little attention to some mechanisms that could greatly improve the effectiveness of control. Table X The kick-off time of PA activities

Table IX The number of average controlled investments in a year <20 No. of firms

7

21-40 41-60 61-80 4

1

0

>81

Pre-determined

Variable from project to project

8

15

No. of firms

1

Note: Firms not responding: 1

Note: Firms not responding: 11

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For example, Table XI shows the limited number of firms that proceed also to the analysis of qualitative information, besides quantitative data (the latter representing the base of all the PA process, obviously). Similarly, Table XII illustrates the degree of detail and of completeness of the reports that summarise the results of the PA analysis: quantitative information, such as the actual performance of the investment (measured in almost all cases by NPV or IRR), or the variance between actual and estimated cash flows are included in almost all cases. Moreover, quantitative data are usually followed by comments, on the main fact which occurred in the previous phases, on the causes of variances, and on other relevant aspects analysed. In contrast (but in accordance with the previous findings on the nature of gathered data), little importance is given to the analysis of qualitative information, while the systematic inclusion of intervention proposals (emerging from the analysis) represents more an exception than a rule. Finally, Table XIII shows that the majority of firms uses of information included in the report in a discretional way. In other terms, line managers are given much freedom whether or not to perform corrective actions (if already included in the report), or to identify solutions: no control/feed-back mechanism seem to be designed for this fundamental phase. Moreover, even looking at firms that have some kind of formalised procedures, what emerges is that only in one case has the PA management introduced

specific mechanisms to check the implementation and the real effects of the interventions.

6. Conclusions and implications for the PA model The main considerations that can be drawn from the analysis of the empirical investigation can be grouped into two separate clusters: (1) general findings; (2) evidence of correlationships between the objective for which PA is implemented and the way in which it should be configured to be effective. In particular, with regard to the first point: (1) According to the theoretical indications, learning is the most important objective that is pursued with the implementation of a PA system. Similarly, the inherent difficulties of using PA for a strict behavioural control seem to be confirmed. (2) There is scarce evidence of some of the problems highlighted by specialised literature: as a matter of fact, the most common problem is the lack of resources that can be dedicated to PA activities. This discrepancy may be justified by the particular composition of the set of analysed firms, which can be considered ``cases of excellence''. Hence, the problems mentioned by firms in previous studies may be more an attempt to justify the non-adoption or the failure of PA, than represent really insurmountable difficulties. (3) The configurations of the PA system are rather variegate: it is possible to identify some common elements, which confirm the hypotheses of the model. In particular:

Table XI The type of information gathered by firms during the PA process Type of data Qualitative/ quantitative Quantitative No. of firms

11

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23

Note: Firms not responding: 1 Table XII The content of reports Investment performance (NPV, IRR)

Quantitative analysis (commented)

24

23

Number of firms (multiple choice allowed)

General Comments on comments on qualitative data the investment 11

Note: Firms not responding: 0

84

24

Intervention proposals 6

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Table XIII The use of information elaborated during the PA process Use of information included in the reports No. of firms

Free (discretional)

Formalised

13

8

Note: Firms not responding: 3

the responsibility for PA activities is generally unique, and is usually localised in a central staff; . the use of mixed (internal and external) teams is preferred to less structured solutions (like single reviewers); . the selection of investments is made using a mix of different criteria; . financial and non-financial information is jointly used in the analysis of the project; . final reports are usually rich and accurate; . meetings of controllers and users of reports are generally arranged for the discussion of the results of PA and the design of interventions on the capital budgeting process. (4) Poor importance is given to the final phases (the dissemination of information and the implementation of interventions identified in review process), which, on the contrary, represents the critical step, especially in a ``learning-oriented'' PA system. .

.

.

The second group of considerations deal with the ``core'' issue of this paper: the design of the PA system. In particular, the empirical investigation seems to confirm the central hypothesis, that the configuration of the PA system depends heavily on the main objective that it is supposed to pursue (decisional support vs learning). In particular: . The positioning of the responsibility for PA activities inside should be more centralised in the case of a PA system mainly focused on learning. This should enable the process of conceptualisation of the problems faced in the different phases and in the different parts of the organisation, as well as the generalisation organisational solutions that have been implemented to cope with these problems. On the contrary, in a PA designed mainly for performance control, a higher degree of decentralisation is needed to shorten the decisional process

.

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and, hence, improve the timeliness of the response. This, of course, leads to a multiplication of the PA units (one for each division, for example): costs generally increase, due to the nonexploitation of economies of scale, and organisational linking mechanisms must be designed to foster communication between the different units. In the selection process, a PA system oriented to performance control should privilege larger projects, due to the higher potential impact on firm economic and financial results. The selection should be both ex ante (for example, risk of innovative projects should be kept under strict control from the very early phases), and in itinere (underperforming projects should be identified and immediately analysed, for example). On the contrary, for learning purposes, the set of controlled investments should include at least one project for each typology (new product development, re-structuring, expansion in new markets, etc.), to capture all the peculiarities and the most differential set of information. Also the timing of the PA activities seems to be different to a certain extent: while for a control of the investment performance ongoing audit processes are given greater importance, the final PA is essential for learning purposes. Moreover, to enhance the performance of the learning process it can be necessary to repeat the ex post review process of the project (or at least some of its phases). In the operational phase, the main differences can be found in the amount and kind of information gathered for the review process, as well as in the scope and deepness of the analyses conducted. This reflects, in turn, on the structure of the reports: indeed, in a PA process aimed at a strict control of the project performance great emphasis should be given to the estimation of variances, the identification of possible feasible interventions, the evaluation of the related strategic impact, the identification of the responsibilities for the implementation of corrective actions. Most of the analysed information should be quantitative in nature. In a learning-oriented PA process, the focus is on the identification of the possible causes of the variances linked to the

The design of the investment post-audit process in large organisations

Giovanni Azzone and Paolo Maccarrone

quality of the capital investment process, in terms of forecasting of external variables, modelling of the real organisation, etc. The set of initial information should then be wider, and should include the analysis of the respect of procedures, and interviews/comments with the people directly involved in the process. Coherently, comparatively more attention is given to qualitative aspects (comments, judgements) to get the most complete picture of the analysed project. In conclusion, the PA of investment projects, if correctly designed and effectively conducted, can lead to a great improvement in the management of the investment projects and, hence, in ultimate analysis to the management of the innovation process. From this point of view, more importance should be given to the learning process, and to the related formalisation, dissemination and ``embedding'' organisational mechanisms.

Notes 1 Actually, the most correct definition is ``capital investment process'', since the term ``capital budgeting process'' should be used for the process that leads to the identification of the investment budget of a firm (although some phases are common, of course). 2 On the theme of real strategic options, see, for example, Trigeorgis (1993a, 1993b), Putnam (1994). 3 Hereafter, the term PA system will be used to identify the whole set of organisational mechnanisms and structures for the management of PA activities. 4 The adoption rate is here calculated (as in previous studies) as: number of firms adopting PA/number of responding firms. Hence, it is not a real adoption rate. 5 The 4 level scare was preferred to the ``classical'' 5 level Likert one, since it does not allow respondents to choose the ``average'' level (3) in case of uncertainty/difficulty.

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Merchant, K.A. (1998), Modern Management Control Systems: Text and Cases, Prentice Hall, Englewood Cliffs, NJ. Mills, R.W. and Kennedy, J.A. (1990), ``Post-completion audit guide'', Management Accounting (CIMA), July/ August. Mills, R.W. and Kennedy, J.A. (1993), ``Experiences in operating a post-audit system'', Management Accounting (CIMA), Vol. 71 No. 10, pp. 26-8. Neale, C.W. (1991), ``The benefits derived from postauditing investment projects'', Omega, Vol. 19 No. 2/3. Neale, C.W. (1994), ``Investment post-auditing practices among British and Norwegian companies: a comparative study'', International Business Review, Vol. 3 No. 1, pp. 31-46. Neale, C.W. (1995), ``Post-completion audits: avoiding the pitfalls'', Managerial Auditing Journal, Vol. 10 No. 1. Pike, R. and Dobbins, R. (1986), Investment Decision and Financial Strategy, Philip Allan, Oxford. Putnam, B. (1994), ``How to apply options theory to investment decisions'', Global Investor, February, pp. 19-23 Trigeorgis, L. (1993a), ``Real options and interactions with financial flexibility'', Financial Management, Autumn, Vol. 22, pp. 202-24. Trigeorgis, L. (1993b), ``The nature of option interactions and the valuation of investments with multiple real options'', Journal of Financial and Quantitative Analysis, Vol. 28, No. 1, pp. 1-20.

Further reading Bower, J.L. (1972), Managing The Resource Allocation Process, Richard Irwin, Homewood, IL. Brealey, R.A., Myers, S.C. (1996), Principles of Corporate Finance, McGraw-Hill, New York, NY. Butler, R.J., Davies, L., Pike, R. and Sharp, J. (1993), Strategic Investment Decision: Theory, Practice and Process, Routledge, London. Ehrenreich, K.B. (1983), ``Post-audit review of capital budgeting'', Internal Auditor, February. Gadella, J.W. (1986), ``Post auditing the capitalinvestment decision'', Management Accounting, November. Gadella, J.W. (1993), ``Post-project appraisal: a chance to invest in better capital projects'', Management Accounting, March. Gadella, J.W. and Jones, J. (1996), ``Post completion review: a method to manage business risk'', Management Accounting, September. Gordon, L.A. and Pinches, G.E. (1984), Improving Capital Budgeting: a Decision Support System Approach, Addison-Wesley, New York, NY. Gordon, L.A. and Smith, K.J. (1992), ``Post-auditing capital expenditures and firm performance: the role of asymmetric information'', Accounting, Organisations and Society, Vol. 17 No. 8. Gordon, L.A., Loeb, M.P. and Myers, M.D. (1994), ``A note on post-auditing capital assets and firm performance'', Managerial and Decision Economics, Vol. 15 No. 2.

References Dillon, R. and Caldwell, J.C. (1981), ``A system for PA capital projects'', Managerial Planning, January/ February. Gordon, L.A. and Myers, M.D. (1991), ``Post-auditing capital projects: are you in step with the competition?'', Management Accounting (CIMA), January.

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Gulliver, F.R. (1987), ``Post-project appraisals pay'', Harvard Business Review, Vol. 65 No. 2, pp. 128-32. Heebink, D.V. (1964), ``Post completion audits of capital investment decisions'', California Management Review, Spring. Herath, H.S.B., Park, C.S. and Prueitt, G.C. (1995), ``Monitoring projects using cash flow control chart'', The Engineering Economist, Vol. 41 No. 1. Lambrix, R.J. and Singhvi, S.S. (1984), ``Pre-approval audit of capital projects'', Harvard Business Review, Vol. 62 No. 2, pp. 12-14. Lister, R. (1983), ``Appraising the value of post-audit procedures'', Accountancy Age, October. Mediobanco (1998), ``Le principali societa'' italiane? Miller, E.M. (1978), ``Uncertainty induced bias in capital budgeting'', Financial Management, Autumn Mills, R.W. and Kennedy, J.A. (1988), ``Post auditing and project control: a question of semantics'', Management Accounting, November. Mills, R.W. and Kennedy, J.A. (1990), Management Accounting Guide N. 9: Post-Completion Audit of Capital Expenditure Projects, CIMA Publishing, London. Mills, R.W. and Kennedy, J.A. (1992), ``Post-completion auditing: a source of strategic direction'', Management Accounting (CIMA), May. Mills, R.W. and Kennedy, J.A. (1993), ``Post completion audits and company style and strategy'', Management Accounting (CIMA), Vol. 71 No. 11, pp. 26-30. Mukherjee, T.K and Henderson, G.V. (1987), ``The capital budgeting process: theory and practice'', Interfaces, Vol. 17 No. 2, pp. 78-90. Myers, M.D., Gordon, L.A. and Hamer, M.M. (1991), ``Post-auditing capital assets and firm performance: an empirical investigation'', Managerial and Decision Economics, Vol. 12 No. 4, pp. 317-27. Neale, C.W. (1990), ``The post-audit in project appraisal'', MBA Review, September. Neale, C.W. (1991), ``A revolution in post-completion audit adoption'', Management Accounting (CIMA), Vol. 69 No. 10, pp. 44-6. Neale, C.W. (1992), ``Investment project management'', Credit Management, March, pp. 32-40. Neale, C.W. (1993), ``Linkages between investment post-auditing, capital expenditure and corporate strategy'', Management Accounting (CIMA), Vol. 71 No. 2, pp. 20-4. Neale, C.W. and Buckley, P.J. (1992), ``Differential British and US adoption rates of investment project post-completion auditing'', Journal of International Business Studies, 3rd Quarter. Neale, C. W. and Holmes, D.E.A. (1988a), ``Post completion audits: the cost and benefits'', Management Accounting (CIMA), Vol. 66 No. 3, pp. 27-30.

Neale, C.W. and Holmes, D.E.A. (1988b), ``Post-audits shouldn't be necessary'', Management Accounting (CIMA), Vol. 66 No. 9. Neale, C.W. and Holmes, D.E.A. (1990), ``Post-audit capital projects'', Long Range Planning, Vol. 23 No. 4, pp. 88-96. Nonaka, I. (1991), ``The knowledge-creating company'', Harvard Business Review, Vol. 69 No. 6, NovemberDecember. Norgaard, C.T. (1979), ``The post-completion audit of capital projects'', Cost & Management, Vol. 53 No. 1, pp. 19-25. Otley, D.T. (1980), ``The contingency theory of management accounting: achievement and prognosis'', Accounting, Organisations and Society, Vol. 5 No. 4, pp. 413-28. Peters, T.J. and Waterman, R.H. (1980), ``Structure is not organisation'', Business Horizon, June, pp. 48-60. Pike, R. (1982), ``Capital investment: theory or results?'', Management Accounting (CIMA), Vol. 60 No. 10. Pike, R. and Neale, C.W. (1993), Corporate Finance and Investment. Decision and Strategy, Prentice-Hall, Englewood Cliffs, NJ. Pinches, G.E. (1982), ``Myopia, capital budgeting and decision making'', Financial Management, Vol. 11 No. 3, pp. 6-19. Posey, A., Roth, H.P. and Dittrich, N.E. (1985), ``Post audit practices'', Cost & Management, Vol. 59 No. 3, pp. 8-14. Prueitt, G.C. and Park, C.S. (1991), ``Monitoring project performance with PA information'', The Engineering Economist, Vol. 36 No. 4. Pruitt, S.W. and Gitman, L.J. (1987), ``Capital budgeting forecast biases: evidence from the Fortune 500'', Financial Management, Vol. 16, Spring, pp. 46-51. Scapens, R.W. and Sale, J.T. (1981), ``Performance measurement and formal capital expenditures controls in divisionalised companies, journal of business'', Journal of Business Finance & Accounting, Vol. 8 No. 3, pp. 389-419. Seitz, N. and Ellison, M. (1988), Capital Budgeting and Long-term Financing Decision, The Dryden Press, New York, NY. Singhvi, S. (1986), ``Post-completion review for capital projects'', Planning Review, May. Smidt, S. (1979), ``A Bayesian analysis of project selection and of post audit evaluation'', The Journal of Finance, Vol. 34 No. 3. Smyth, D. (1990), ``Keeping control with post completion audits'', Accountancy, August. Smyth, D. (1990), ``How to structure an effective PCA'', Accountancy, September. Yin, R.K. (1994), Case Study Research: Design and Methods (Applied Social Research Methods, Vol. 5), Sage Publications, Thousand Oaks, CA.

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Introduction ± the importance of innovation

A benchmark study of strategic commitment to innovation

In an era of globalisation, deregulation, increasing competition, new technologies and e-commerce, organisations are finding it harder to compete. In this dynamic and changing environment, one way to create growth and sustain performance is to innovate (Higgins, 1996; Kay, 1993; Patel, 1999). Furthermore, it has been suggested that innovation is essential in order to generate long-term stability, growth, shareholder returns, sustainable performance and remain at the leading edge of the organisation's industry (Cook, 1998; Davis and Moe, 1997; Doyle, 1999). One way to achieve growth and sustain performance is to foster and encourage creativity and innovative practices internally within the organisation. Naturally, there must be a commitment from senior management to facilitate this kind of innovative working environment (Ahmed and Abdalla, 1999). A recent study by the Open University Business School (cited in Patel, 1999) suggested that many British companies recognise the importance of innovation in order to remain competitive. However, the findings revealed that many of these organisations were not clear about how to ``fit'' innovation into the overall business strategy and day-to-day workings of their organisations. Of course, this may be one of the major obstacles to the encouragement of innovation. Organisations would appear to be keen for innovation to ``fit'' within the organisation's current workings. Yet perhaps the gains from innovation could be optimised where it is not constrained by traditional models (hierarchical and bureaucratic) of business organisation. Furthermore, an empirical investigation carried out by Synectics (1993, cited in Ceserani and Greatwood, 1999) suggested that senior management did not possess the appropriate skills to encourage and foster innovation. The study investigated the responses of 750 top managers from 150 organisations in the USA on the importance of innovation. The results indicated that although the vast majority (80 per cent) of managers considered innovation to be important, only a small minority (4 per cent) felt that they had the appropriate skills to foster and develop innovation.

Angela Cottam John Ensor and Christine Band The authors Angela Cottam is a Lecturer in Marketing, John Ensor is Acting Head of the School of Marketing and Tourism and Christine Band is a Research Assistant in Marketing, all at Napier University Business School, Edinburgh, UK. Keywords Innovation, Investment, Personnel, Strategic planning Abstract Describes the results of an empirical investigation of the FTSE 100 which was undertaken to ascertain whether UK industry is taking steps to address innovation at a strategic level within its organisations. In the research study, the appointment of staff with a specific responsibility for innovation was taken as an indicator of an organisation's strategic commitment to innovation. The findings revealed that a significant minority of these organisations had invested in personnel with a specific brief for innovation. These were: directors of innovation; managers of innovation and cross-functional teams. It is suggested that to maximise the benefits from innovation: it must be given a strategic direction; that relevant metrics be developed to measure the success of the innovation strategy; that organisations are educated on the holistic meaning of innovation; and finally, that there is a freedom from traditional hierarchical structures in the management of innovation. Electronic access The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft

European Journal of Innovation Management Volume 4 . Number 2 . 2001 . pp. 88±94 # MCB University Press . ISSN 1460-1060

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European Journal of Innovation Management Volume 4 . Number 2 . 2001 . 88±94

Angela Cottam, John Ensor and Christine Band

Consequently, although industry recognises the importance of innovation it would appear that senior management currently lacks the skills to foster innovation. This appreciation of the importance of the concept, alongside a recognition and acknowledgement of the deficiency of an innovation culture in the current staffing and structure of the organisation, is resonant of the early challenges encountered by marketing.

The marketing concept ± a comparative analysis Innovation would appear to be at a similar developmental stage to the position of marketing when it began to emerge as a functional area more than 30 years ago. The concept of marketing appeared ± like innovation now ± as a new way to organise and orient business activities (Hayes, 1988). It has been suggested that marketing orientation focuses on understanding and meeting customer needs (Kotler, 1988). As a result, the company should seek to build customer loyalty and consistently offer superior value. In order to achieve a truly marketing-orientated culture, it has been stated that marketing needed to operate with strategic leverage within the organisation (Piercy, 1982) It is perhaps not surprising to find that by the 1980s, there was general agreement on the need for companies to have a marketing strategy and marketing executives to manage these strategies. In the 1980s, marketing was influencing corporate planning, and was beginning to have an impact upon the business process (Burnett et al., 1984). However, an empirical investigation on the background, experience and responsibilities of chief marketing executives discovered that although strategic marketing was beginning to gain importance, very few UK companies were actually marketing-led (Chevenix-Trench, 1985). Hayes (1988) confirmed that although marketing was beginning to influence corporate planning, one of the main reasons that very few organisations were marketing-led was because many organisations had yet to recognise the true strategic nature of the marketing discipline.

Today, in many organisations, marketing is regarded seriously within organisations. Indeed, it has been suggested that in order to be truly marketing-led, marketing needs to be viewed not merely as a departmental function, but as a guiding philosophy or orientation that drives organisations forward (Brown, 1987; Hooley et al., 1990; Levitt, 1960). Therefore, as organisations appear to be unclear how to ``fit'' innovation into the existing structure of the organisation, we would suggest that innovation sits ``outside'' the traditional structure within the organisation. That is, innovation should be viewed as a philosophy that guides the company forwards and is managed ``outside'' the traditional, functional structure of the organisation ± perhaps on a cross-functional basis.

Aims: the empirical research It was against this background of a growing recognition of the importance of innovation that the present study was conducted in an attempt to establish to what extent, if any, UK industry has begun to make a commitment to innovation. Committing resources to innovation was taken as the indicator of the organisation's strategic intent. On the basis that the lack of resources is often indicative to a lack of commitment (Piercy, 1982), in the context of this study, investment in human resources (with specific responsibilities for innovation) is the measure that has been taken. The FTSE 100 were selected as the sampling frame, because the FTSE 100 Index have often been early adopters of the latest thinking on management.

Objectives Initially, the study was designed to identify whether investments in personnel with a specific remit for innovation had taken place. If so, to establish where these appointments had been made within the organisational structure. The study was also designed to explore in greater detail the remit, backgrounds, responsibilities, reporting structure, etc., in those organisations that had invested in personnel responsible for innovation. 89

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Methodology

Innovation and Cross-Functional Teams. The results revealed that Group Directors of Innovation accounted for 6 per cent, Directors of Innovation for 7 per cent, Managers for 5 per cent and Innovation Teams for 3 per cent. So, although the appointment of staff with a specific remit for innovation was not ubiquitous, a significant minority of organisations had already committed resources. This revealed that UK industry had invested in dedicated personnel with a specific brief for innovation.

A two-stage research methodology was applied. In the first stage of the research, all the FTSE 100 companies were contacted to determine who was responsible for innovation. To obtain this information, the main point of contact was with the Corporate Affairs Department or the Human Resource Department. The data was collected by telephone using a structured questionnaire. The second stage of the research focused specifically on the sub-sample of organisations with personnel responsible for innovation. Contact was made directly with these individuals. The data was gathered by minidepth telephone interviews using a semistructured questionnaire.

The background and responsibilities of innovations personnel Having identified those organisations within the FTSE 100 that had invested in human resources to manage innovation within their organisations, stage two of the research focused on gaining a more detailed profile of this group of personnel. The personnel in all such organisations were contacted and asked to participate in the research[3]. Mini-depth telephone interviews were conducted and the data was analysed. Details of the profiles and responsibilities of the individuals responsible for innovation were established. In the belief that their previous discipline could impact on the focus and nature of their approach to innovation, we were interested to discover from what discipline they had been recruited. However, it is not only the functional discipline of these personnel that will impact on the success of their appointments. The scope and responsibilities of their positions will also be important. For these reasons, we considered it important to obtain details of their background and responsibilities. Under each category of appointment, the findings on both background and responsibilities are reported. The background details are summarised in Table I, and areas of responsibilities in Figure 2.

The findings Responsibility for innovation The majority[1] of respondents (71 per cent) stated that there were no dedicated personnel responsible for innovation within their organisation. These responses indicated that the main areas of responsibility for innovation were with the R&D, Technical or Marketing functions or that each Strategic Business Unit or Division had a responsibility for their own innovative practices. A further 8 per cent of respondents were unsure of how innovation was managed throughout their organisation. A significant minority of those organisations participating in the first stage of research had invested in personnel with a specific remit for innovation (21 per cent). Figure 1 illustrates the four levels of personnel identified[2]. There were, Group Directors of Innovation, Directors of Innovation, Managers of Figure 1 Dedicated personnel responsible for innovation

Group Directors of Innovation Profile Group Directors of Innovation were responsible for innovation at a group level. These individuals were responsible for co-ordinating and supporting innovation across all subsidiaries, divisions or functional areas. Furthermore, one organisation stated that under the leadership of the Group 90

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Table I A profile of the individuals responsible for innovation Categories

Group Directors

Directors

Managers

Teams

Role

Strategic role at group level

Strategic role at functional level

Operational role at functional Strategic and operational role level at cross-functional level

Background

Science, Engineering, Technical or Marketing

R&D or Operations

Technical or Marketing

Various backgrounds

Length of position

Two years

Five years

Two years

20 months

Title

Innovations Directors. Group Director of Strategy, Imagineering, Futurology

Technology and Innovations Directors. Director of Product Innovations

Managers of Innovation

Innovation and Learning Group

Reported to

MDs or CEOs

MDs or Technical Director

Marketing or Technical Directors

Steering Group

Figure 2 The key responsibilities of personnel responsible for innovation

Director, the main aim was to build a ``team of innovators'' to support innovative practices on an organisation-wide basis. Group Directors of Innovation had been appointed on average within the last two years and came from a science, engineering, technical or marketing background. Prior to their appointments, responsibility for innovation had resided at a functional level, mainly the technical, R&D or marketing function. All had the word ``innovation'' in their job title apart from one, which was unique, Group Director of Strategy, Imagineering and Futurology with Ambassadors of Strategy as support. The majority of this group reported directly to their Managing Directors.

Responsibilities Group Directors of Innovation were responsible for strategic issues such as co-ordinating global strategies, identifying and exploiting new technology and assessing the market potential for new innovative products. Financial decisions were of extreme importance and a dominant theme throughout the responses from this group, was the need ``to perform in excess of current stockmarket expectations'' to satisfy stakeholders, especially shareholders. Public relations responsibilities were also important: one organisation sponsored young entrepreneurs, and educated and 91

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these appointments was similar to that of Group Directors of Innovation; all had been appointed (to these newly-created positions) within the last two years.

demonstrated to schools the use of its innovative new practices and products.

Directors of Innovation

Responsibilities Managers of Innovation were responsible for the implementation of innovative practices at an operational level. This meant that they were often involved in managing the change process and providing training for employees to help implement new and innovative practices. This group also had public relations responsibilities. In their capacity as ``innovators'', they were charged with building relationships with industry and academia to try and establish innovative new concepts and products.

Profile The backgrounds of Directors of Innovation were not as diverse as the Group Directors of Innovation. The former all came from R&D or operations backgrounds and reported to either the managing director or technical director. They carried out their responsibility for innovation strictly at a functional level, mainly the technical function. The positions had existed on average for five years and were involved with technical innovations and managing cost-effective solutions. There was a diverse range of job titles including a Director of Technology and Innovation, Director of Technical Innovations and Services, Director of Product Innovation and a Technical Director.

Innovation Teams The fourth, and final, approach that organisations had adopted in their deployment of human resources with a specific brief for innovation, was by means of an Innovation Team.

Responsibilities The main difference between Directors of Innovation and Group Directors of Innovation was that the former did not co-ordinate activities at a group level. Directors of Innovation appeared to have fewer strategic responsibilities than Group Directors of Innovation. The main responsibilities of this group of personnel included the implementation of innovative new practices and projects. This involved managing cost-effective solutions and meeting deadlines in areas such as technical and product innovations.

Profile Innovation Teams were inter-disciplinary, cross-functional teams constituted for the purpose of progressing innovation at group level. The inter-disciplinary nature of such teams meant that a variety of backgrounds influenced the direction of innovation. One organisation had created an Innovation and Learning Group (ILG) made up of different levels of personnel with a variety of skills. The highest level in the Innovation and Learning Group was the Steering Group (strategic level) which consisted of two main board directors, the chief executive officer from each major division, and corporate staff members such as strategic planners. The day-to-day operating group (operational level) of the ILG consisted of senior personnel from each division: . senior engineers; . marketing directors; and . directors of business development.

Managers of Innovation Profile In similarity with Directors of Innovation, the backgrounds of Managers of Innovation were again dependent on the scope granted to the concept. In those organisations where resource had been deployed at a functional level, the backgrounds of the staff appointed lay in marketing or science. They reported to either the marketing director or the technical director. Their job titles included that of Innovations Manager, Manager of Product Innovation, and Manager of Innovation and Development. All resided within the technical or marketing functional areas. The recency of

A further 200 staff had the responsibility of fostering and generating ideas locally within the company (tactical level). The Innovation and Learning Group had existed for almost two years. The operating group worked 92

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The cross-functional teams are perhaps a useful means of organising for innovation. Using this approach enables innovation to sit outside the traditional hierarchical structure of the organisation and the constricting practices that this often involves. In organising for innovation in this way, it perhaps also signals to the team that they should be creating and developing ideas ``outside the box''. Interestingly, a small number of organisations found it impossible to say where or who was responsible for innovation. It is unlikely that this would have been the response to a similar question on other key business functions.

together with the 200 local personnel to generate and foster innovative ideas within their organisation and then reported back to the Steering Group. Responsibilities The main responsibility of the ILG was to promote growth within the company and provide adequate value and returns to their shareholders. The organisation's target was for the investment in the ILG to yield an additional £600 million worth of sales over a five-year period. Another key reason for investing in the ILG was to change the corporate culture of the organisation into an innovative organisation. This would be achieved by encouraging a more entrepreneurial culture where ``employee empowerment'' was encouraged which would contribute to the innovation process. Employees throughout the organisation were encouraged to submit creative ideas to the ILG through the intranet or extranet. As a result, these creative ideas had the potential of turning into a commercial success. Incentives and support systems were in place to foster this kind of creative and innovative environment.

Conclusion This study set out to explore the scope and practice of innovation and establish whether UK industry were taking steps to address innovation at a strategic level. In doing so, investment in human resources was chosen to indicate commitment to innovation. While recognising that there may be other equally valid expressions of an organisation's commitment to innovation, we believe that people are needed to drive the agenda. Furthermore, these people need to have muscle at a strategic level. Therefore, in conclusion, this paper has suggested that there are similarities between the current understanding and practice of innovation, and that of the marketing concept in the early 1980s. That is, top management have begun to recognise the strategic importance of the innovation concept. In addition, previous research indicated that the senior managers' traditional skill-set could impede the development of an innovation culture. We would go further, and suggest that again in comparison to the adoption of a marketing orientation, it is not until the discipline has a strategic focus beyond the confines of a functional/operational level that the full potential of an innovation culture will be realised. As the majority of the findings revealed that innovation was confined by the traditional hierarchical structure ± with the exception of innovation teams ± this may require that innovation sits outside the traditional hierarchical organisational structure. It will probably involve further education of industry as to the meaning of

Discussion What is suggested by the findings, is that while the majority of organisations have no dedicated innovations staff, a significant minority have recently made appointments in this area. In all cases, these were newlycreated positions. No single discipline monopolised recruitment to these positions. Instead, individuals were appointed from a variety of backgrounds. However, where the brief for innovation resided at a functional level, i.e. technical or marketing, then the appointee would have a background in that discipline. Appointments had been made at four levels, with the level of the appointment being indicative of the scope of the innovations remit. Consequently, Group Directors of Innovation have a significantly greater strategic remit than Directors of Innovation or Managers of Innovation. This is also verified through the varying levels of responsibilities shown through each of the four categories of personnel. 93

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innovation, so that the concept is taken beyond its traditional and limiting alignment with new product development. Finally, we would suggest that relevant metrics are developed to measure the success of an innovation strategy.

References Ahmed, A.M. and Abdalla, H.S. (1999), ``The role of innovation process in crafting the vision of the future'', Computers & Industrial Engineering, Vol. 37 No. 1, pp. 421-4. Brown, R.J. (1987), ``Marketing ± a function and a philosophy'', The Quarterly Review of Marketing, Vol. 12 No. 3, pp. 25-30. Burnett, C.D., Yeskey, D.P. and Richardson, D. (1984), ``New roles for the corporate planners in the 1980s'', The Journal of Business Strategy, Vol. 4 No. 4, Spring, pp. 64-9. Ceserani, C. and Greatwood, P. (1999), Innovation and Creativity, Price Waterhouse, London. Chenevix-Trench, T. (1985), ``Marketing's executive chiefs'', Management Today, October, pp. 82-6. Cook, P. (1998), ``The creativity advantage ± is your organisation leader of the pack'', Industrial and Commercial Training, Vol. 30 No. 5, pp. 179-84. Davis, S.M. and Moe, K. (1997), ``Bringing innovation to life'', Journal of Consumer Marketing, Vol. 14 No. 5, pp. 338-61. Doyle, P. (1998), ``Innovate or die'', Marketing Business, December/January, pp. 20-3. Hayes, M.H. (1988), ``Another chance for the marketing concept'', Business, January/February/March, pp.10-19. Higgins, J. M. (1996), ``Innovate or evaporate: creative techniques for strategists'', Long Range Planning, Vol. 29 No. 3, pp. 370-80. Hooley, G.J., Lynch, J.E. and Shepherd, J. (1990), ``The marketing concept: putting theory into practice'', European Journal of Marketing, Vol. 24 No. 9, pp. 7-23. Kay, J. (1993), Foundations of Corporate Success, Oxford University Press, New York, NY. Kotler, P. (1988), Marketing Management: Analysis, Planning, Implementation and Control, 6th Ed., Prentice-Hall, Englewood Cliffs, NJ. Levitt, T. (1960), ``Marketing myopia'', Harvard Business Review, July/August, pp. 45-56. Patel, K. (1999), ``British struggle with innovation'', The Times Higher, p. 31. Piercy, N. (1982), ``Cost and profit myopia'', Quarterly Review of Marketing, Vol. 7 No. 4, pp. 1-12.

Further research There are several key areas beyond the limits of this research that can be investigated further. This research has shown that a significant minority of UK industry has invested in personnel with a specific remit for innovation. As this research has identified these various levels, a more indepth study could be undertaken to determine how the organisational structure supports innovation, not just at a strategic level, but throughout the whole organisation. In addition, it is apparent by the lack of empirical studies in the literature that the entire area concerning the implementation of innovation is an area for future consideration. Further research could concentrate on whether these appointments have made a significant contribution to the actual facilitation and implementation of innovation and whether there has been an impact on the performance of specific innovation practices.

Notes 1 Overall, 71 of the 100 companies participated with the first stage of the research. 2 These terms are described in greater detail under the profiles and responsibilities of this group of personnel. 3 A total of 11 out of the 15 possible companies.

Further reading Piercy, N. (1997), Market-led Strategic Change, Butterworth-Heinemann, Oxford.

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1. Introduction

The fuzzy front end and success of new product development: a causal model

Most projects do not fail at the end; they fail at the beginning. Khurana and Rosenthal (1998) contend that the real key to product development success lies in the performance of the front-end activities. Managers and researchers claim that the benefits resulting from improvements in the front end are likely to far exceed those that result from improvements aimed directly at the design engineering process (Chase and Tansik, 1983; Cooper and Kleischmidt, 1994; Rosenau, 1988). Just because these front-end activities are the final gate before the team decides to invest in designing and manufacturing the products do they need to be well managed. Otherwise, both time and money may be wasted in building the wrong products. The front-end activities include pre-phase zero (idea generation), phase zero (assessment of market, technology and competition) and phase one (product definition, project justification and action plan) of phase review or stage-gate system (Cooper, 1997; Khurana and Rosenthal, 1998; Moenaert et al., 1995). Such strategic, conceptual, objective setting, and planning activities typically precede the new product of development (NPD) execution activities such as the detailed design, prototype test, volume manufacturing, and market launch. At this stage, project team may not be sure what customers they really want, what competitors are doing, and what product and process technologies should be used. Environmental uncertainty (Gerwin and Tarondeau, 1982; Thompson, 1967) related to market changes, emerging technological developments, and the evolving competitive situation is defined as ``front-end fuzziness''. Environmental uncertainties can cause confusion as to project targets and how tradeoff decisions should be made. Gupta and Wilemon (1990) describe how uncertainty concerning customer requirements may result in a poor product definition. They also describe how uncertainties concerning what technologies are appropriate or when they are ready to be used can result in costly delays. Khurana and Rosenthal (1997; 1998) contend that unresolved technical uncertainties and inadequate customer needs

Qingyu Zhang and William J. Doll

The authors Qingyu Zhang is Assistant Professor, Department of Economics and Decision Sciences, Arkansas State University, Arkansas, USA. William J. Doll is Professor of Management, The University of Toledo, Toledo, Ohio, USA. Keywords New product development, Environment, Teams, Success Abstract While managers and researchers agree that the fuzzy front end of new product development (NPD) is critical for project success, the meaning of the term ``front-end fuzziness'' remains vague. It is often used broadly to refer to both the exogenous causes and the internal consequences of fuzziness. This imprecise language makes it difficult for managers to separate cause and effect and thus identify specific prescriptive remedies for ``fuzziness'' problems. The vagueness of the concept and the lack of a framework for defining ``front-end fuzziness'' also impede empirical research efforts. Building upon uncertainty theory, we define front-end fuzziness in terms of environmental uncertainties. Front-end fuzziness has consequences for a project's team vision. It reduces the team's sense of shared purpose and causes unclear project targets and priorities. Describes how foundation elements of a firm's overall product development program can help project teams cope with front-end fuzziness. Electronic access The research register for this journal is available at http://www.mcbup.com/research_registers The current issue and full text archive of this journal is available at http://www.emerald-library.com/ft European Journal of Innovation Management Volume 4 . Number 2 . 2001 . pp. 95±112 # MCB University Press . ISSN 1460-1060

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fuzziness (i.e. impacts on team vision). Furthermore, we do not know the role of foundation elements or what foundation elements are most important in moderating the effects of environmental uncertainty on team vision either. This study addresses this gap and seeks to add to the growing literature and further inform practitioners and researchers in managing the front end of NPD by separating the front-end fuzziness (cause) and unclear team vision (effect), and pooling together foundation elements argued to effect success of NPD. Specially, the research questions we address are the following: . What is front-end fuzziness? . What are the consequences of front-end fuzziness for a project's team vision and the character of the firm's product development program? . How can managers best cope with frontend fuzziness?

assessment are responsible for the failure of many new product development projects. Market, technological, and competitive uncertainty can make it difficult for a project team to launch a product concept with internal as well as external integrity (Clark and Fujimoto, 1991). In other words, frontend fuzziness causes an unclear team vision. Team vision is a shared purpose and plan of action that clarifies strategic fit and sets project targets and priorities that are consistent with the firm's design, manufacturing capabilities, and market requirements (Clark and Wheelwright, 1994; Rosenthal and March, 1988). To be successful, the whole team needs a clear vision about what the product does, what the product is, and whom the product serves (Clark and Fujimoto, 1991). Rosenthal and March (1988) indicate that shared team purpose and plan of action are necessary for a team to succeed in product development. Clark and Wheelwright (1994) emphasize that project team should have clear and realistic project targets. Cooper and Kleinschmidt (1996) contend that the project targets must fit the product's strategy. Khurana and Rosenthal (1998) argue that these project targets must also be consistent with the firm's overall development portfolio. In organizational behavior literature, Eden (1988), Latham and Locke (1979), Naylor and Ilgen (1984) explained and confirmed the positive effects of goal setting (team vision) as a motivational technology on the performance. Especially, Rosenthal and March (1988) emphasize that objectivesetting should be separated from actions taken to meet the objectives. It is important to set these objectives reflecting priorities and tradeoffs in advance. These objectives can be used to guide subsequent decisions, and monitor and measure the success of NPD. However, team vision, as a consequence of environmental uncertainty, has not been explicitly studied in the product development context. No research has examined the frontend fuzziness itself as separate from the consequences of fuzziness. The meaning of the term ``front-end fuzziness'' itself is still vague and imprecise, and remains fuzzy. It is often used broadly to refer to both the exogenous causes (i.e. environmental uncertainty) and the internal consequences of

2. Background literature and conceptual model New competition pressure requires accelerating the product development. But it is difficult to accomplish key NPD activities, and most failures of NPD come from the ``fuzzy'' front end (Khurana and Rosenthal, 1997; 1998). Currently there are growing literatures to discuss fuzzy front end; however, most writers mingle front-end fuzziness (cause) and consequences of fuzziness: unclear team vision (effect). Gupta and Wilemon (1990) list the following four factors of NPD failures: (1) the poor definition of product requirements; (2) technological uncertainty; (3) lack of senior management support; and (4) poor project management. They mingle front-end fuzziness such as technological uncertainty and unclear team vision such as poor product definition. Khurana and Rosenthal (1998) distinguish between the front end and NPD execution activities based on phases review or stage gate system (Cooper, 1997). Through case study, they also identify the common NPD problems in front end such as unclear product strategy, inadequate product definition, unresolved 96

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foundation elements are the predictors of success of NPD. It further shows that frontend fuzziness causes less possible the success of NPD directly, and indirectly through challenging the knowledge sharing and team vision building in the project team. At the same time, foundation elements (NPD programs) such as strategic orientation, heavyweight manager, concurrent engineering, platform products, and so on cope with front-end fuzziness to lead to the success of NPD directly, and indirectly through helping achieve shared knowledge and team vision building in the project team. Therefore, the team vision building is a mediating variable for the relationships between the front-end fuzziness, foundation elements and the success of NPD.

technical uncertainties, and so on. But they did not distinguish between front-end fuzziness and fuzziness-caused problems. It is necessary to clarify the cause-and-effect factors in the front end. Front-end fuzziness, which is defined as uncertain information about customer, technology, and competition, is an exogenous variable. It is beyond the management's control while front-end activity (unclear team vision) is a direct effect of front-end fuzziness. Just frontend fuzziness causes a series of work done without desired effectiveness. In addition, in front-end activities the foundation elements such as strategic orientation, concurrent engineering, and so on cut across projects, and form the basis for project-specific activities. For a specific project, the team should focus on the team vision building to ensure strategic fit of project, shared purpose, and a clear project target. Bowen et al. (1994) describe the frontend activities as three kinds of visions about the business, the project, and the product such as idea generation, market analysis, and the link between business strategy and NPD. Bacon et al. (1994) analyzed the characteristics of product definition processes in successful and unsuccessful new products. They found that the creation of the product definition involves assessment of customer needs, of competitive product offerings, and of technological risks and opportunities. The creation of a robust product definition typically requires information and feedback from outside environments and a number of corporate functions, including engineering, R&D, marketing and manufacturing. Such shared information helps the team come up with the clear and realistic target and perfect strategic fit of project, and further achieve success of NPD. Based on the separation of front-end fuzziness and front-end activities, we present a theoretical framework of the fuzzy front end, which is shown in Figure 1. It is based on uncertainty theories (Daft and Lengel, 1986; Gerwin and Tarondeau, 1982; Thompson, 1967). This conceptual model presents the relationships between environmental uncertainty and ambiguity, foundation elements, team vision and success of product development. This model suggests that front-end fuzziness, team visions, and

2.1 The front-end fuzziness based on uncertainty theory Gifford et al. (1979) found two general notions of uncertainty which characterize the various approaches ± information load (related to the complexity of the decision situation) and pattern/randomness (distinguishing between patterns and randomness of events). Uncertainty is defined as the inability to assign probabilities to outcomes and risk is regarded as the ability to assign such probabilities based on differing perceptions of the existence of orderly relationships or patterns. These concepts imply that uncertainty will be low if data are available at the time needed and if the decision maker discerns a pattern of regularity among the cues of the data. Lawrence and Lorsch (1976) suggest that environmental uncertainty comprises the three elements: (1) lack of clarity of information; (2) general uncertainty of casual relationships between decisions and the corresponding results; and (3) time span of feedback about the results of the decision. Therefore, uncertainty is defined as lack of information (unavailability of data). Thompson (1967) viewed organizations as open systems faced by ambiguity and uncertainty, but requiring clarity and certainty in order to function in a rational manner. In Thompson's theory (1967) management's role is to reduce existing uncertainties so that the organization may 97

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Figure 1 The fuzzy front end and success of new product development: a causal model

development process, e.g. customers, vendors, and strategic partners.

operate as efficiently as possible. Uncertainty is defined as lack of information on goals, alternatives, and consequences. A good deal of human behavior can be analyzed in terms of efforts to deal with these problems by developing coping strategies which either avoid, adjust to, reduce, or take advantage of the uncertainties. Gerwin and Tarondeau (1982) applied this theory to process technology innovation such as computerintegrated manufacturing systems. However, they did not mention innovation in product development. We believe that this is a significant omission. Product development managers perceive at least three sources of uncertainties: (1) the customer's requirements; (2) the nature of competition; and (3) the changing technology.

Bacon et al. (1994) thought that the development of a product definition requires the collection of significant amounts of information. Successful product development teams understood their business unit's strategic directions, customer and user needs, competitive product offerings, and currently available as well as prospective technologies. Based on prior works on the fuzzy front end and the nature of uncertainty (Gerwin, 1987), we define the front-end fuzziness of NPD as the uncertainty of customers, technology and competition, which is specifically shown in Table I. Different taxonomies of front-end fuzziness need different skills and levels of efforts of the front-end activities of NPD team. Typical customer fuzziness includes portfolio fuzziness (how to choose product combinations), preference fuzziness (how to choose appropriate product characteristics), life-cycle fuzziness (how soon will the product be obsolete), and volume fuzziness (what could be aggregate product amount). When product team starts product development, they face such customer uncertainty. Likewise, they face the technical and manufacturing feasibility of product such as routing, material, specification, and supply fuzziness. Also the product team has to

Gupta and Wilemon (1990) thought that uncertainties and ambiguity come from the following factors: . increased domestic and global competition; . continuous development of new technologies that quickly obsolete existing products; . changing customer needs and requirements which truncate product life cycles; and . increased need for involvement of external organizations in the new product 98

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Table I Taxonomy of fuzziness Fuzziness

Definition

1. Customer fuzziness 1.1 Portfolio fuzziness 1.2 Preference fuzziness 1.3 Life-cycle fuzziness 1.4 Volume fuzziness

Uncertainty Uncertainty Uncertainty Uncertainty

2. Technology fuzziness 2.2 Material fuzziness 2.3 Specification fuzziness 2.4 Supply fuzziness

3. Competitor fuzziness 3.1 Competitor's product development fuzziness 3.2 Competitor's technology adoption fuzziness

Literature of of of of

demand for the kinds of products offered appropriate product characteristics length of product life cycles amount of aggregate product demand

Gerwin, 1988; Bacon et al., 1994; Khurana and Rosenthal, 1997; 1998; Gerwin and Tarondeau, 1982

Uncertainty of meeting raw material standards Gerwin, 1988; Bacon et al, 1994; Gupta and Uncertainty of process functions or input characteristics Mileson, 1990; Khurana and Rosenthal, 1997, specification 1998; Moenaert et al., 1995 Uncertainty of suppliers' design and manufacturing capability Uncertainty of competitors' product development Uncertainty of competitors' technology adoption

Khurana and Rosenthal, 1997; 1998; Narver and Slater, 1990; Gupta and Mileson, 1990; Bacon et al., 1994

goal setting is from the people's intrinsic motivation or desire, not from compliance. Therefore, success of NPD is enabled. In organizational behavioral literature, goal setting as a motivational technique is widely studied. Naylor and Ilgen (1984) examined the positive effects of goal setting as a motivational technology in terms of goal difficulty, specialty and acceptability on the performance of the performers. Latham and Locke (1979) test a goal-setting model that there are positive relationships between goal commitment, goal attributes and good performance. Eden (1988) provides an integrative model that posits that raising and setting difficult goals are mutually reinforcing means that can boost productivity. Therefore, a strong team vision is a main predictor of NPD success. As concurrent engineering and rapid prototyping have helped reduce product development time, management attention has begun to shift to the cross-functional frontend strategic activities (Khurana and Rosenthal, 1997). Khurana and Rosenthal (1998) identified that the common NPD problem areas in the front end include: . unclear product strategy and projects not prioritized (Gupta and Wilemon, 1990); . continually changing customers' needs and unresolved technical uncertainties (Moenaert et al., 1995);

consider the competitors' product development, technology adoption, and new knowledge-driven market changes. Therefore the product team needs shared knowledge about customers, technology and competitors, and further build aligned purpose, and realistic and clear targets. Team vision In order to reduce uncertainty and ambiguity, the organization needs to process information (Daft and Lengel, 1986). Information is processed to coordinate diverse activities and to interpret the external environment. One challenge is how to cope with uncertainty and an unclear environment. One distinguishing feature of organizational information processing is sharing. Decisions are frequently made by teams. But team members may have different interpretations of the same event, may be pursuing different priorities or goals, and hence may be in conflict with respect to data interpretation. Thus, the team has to have clear vision in order to act in a rational way. Team vision, a shared purpose and plan of action that clarifies strategic fit and sets clear and realistic project targets and priorities, creates a sense of commonality that permeates the group and gives coherence to diverse activities. When people truly share a vision they are connected and bound together by a common aspiration. Such aspiration pulls toward some goals which people truly want and commit to achieve (Senge, 1990). Such 99

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.

unclear tradeoff of project objectives and unsuitable assignment of people to projects (Zien and Buckler, 1997); unclear interface of different subsystems and the lack of team members' direction (Larson and Gobeli, 1988).

In order to reduce uncertainty, the core team is responsible for the key activities in the front end. They: . identify customer needs, market segments, and competitive situations; . perform a technology evaluation of current capabilities and requirements, as well as the alignment with existing business and technology plans; . identify core product requirements; . test the concept; . specify the resources needed to complete the project; and . identify key risks and challenges (Khurana and Rosenthal, 1998). Based on the above list of the team front-end activities, we thought a strong team vision is needed to synthesize all the activities. A key task during the front end was to reduce uncertainty (Moenaert et al., 1995), and this is best achieved by the integrated product development that requires the simultaneous involvement of all functions. The different functions have different knowledge about different fuzziness: marketing people have much information about customers and competitive realities. Engineering people have great knowledge about products. Manufacturing people deeply understand the internal manufacturing capabilities and suppliers. If such information-qua-knowledge was kept in an independent department, the product development will remain fuzzy. Therefore, the project team first builds shared knowledge bases (knowledge of customer, supplier, manufacturing capability, market, and products). But the successful product development teams did more than just collect information. The information also had to be communicated to team members and incorporated in the decision-making processes on product design (Bacon et al., 1994). The team should build a common vision (shared purpose, strategic fit, clear project target) based on the shared

knowledge. Specifically, the team vision practices are shown in Table II. Early targets ± measured in product cost, product performance, project cost, and time to market ± set the stage for generating various product concepts. The product definition, an elaboration of the product concept, incorporates judgements about the target market, competitive offerings, and the time and resources for bringing the new product to market based on knowledge bases. An explicit, stable product definition and an understanding of the trade-offs among customer requirements, technology, and resource/cost constraints are important factors for speed and productivity of NPD (Khurana and Rosenthal, 1997). All these tasks are finished through the collaboration process. The innovative productivity of such collaboration comes from connectedness, which requires wide-ranging interests and a profuse network of interactions with others. This takes time, conscious reaching out to different people and skills, and a culture that rewards lateral participation (Zien and Buckler, 1997). Such shared knowledge and the collaboration and aligned purpose of the team are important factors for the success of NPD. 2.3 Success of NPD Much of the prior research on new product development has focused on one of three streams ± rational plan, communication web, and disciplined problem solving (Brown and Eisenhardt, 1995). Although three streams have different emphases, writers mainly use three kinds of dependent variables to measure the success of NPD: process performance, product effectiveness, and financial performance. These variables are shown in Table III. Process outcome is possibly the least understood and least utilized weapon in innovation practice, since some processes are not tangible, clearly defined or easy to measure (Trueman and Jobber, 1998). Consequently, this kind of information may be less accessible for research and analysis to those outside the company. At the same time it may be more difficult to show how process relates to performance. But these factors are important to measure the success of NPD. The process factors range from idea

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Table II The list of team vision variables Team vision variables

Definition

Literature

1. Shared team purpose

The extent of a shared purpose and plan of action for new Rosenthal and March, 1988; Clark and product development Wheelwright, 1993

2. Strategic fit of project targets

The extent of alignment between the team's mission and overall business, technology and product strategy

Cooper and Kleinschmidt, 1987; Cooper, 1985

3. Clarity of project targets

The extent of project targets are clear and realistic

Rosenau, 1989; Clark and Wheelwright, 1993

Table III The list of success variables and definitions Success of NPD

Definition

1. Process outcome 1.1 Time-to-market 1.2 Engineering change time 1.3 Product development cost 1.4 Team work 1.5 Opportunistic learning 1.6 Supplier performance

2. Product outcome 2.1 Product performance 2.2 Product cost 2.3 Value to customer 2.4 Design integrity 2.5 Product specification flexibility 2.6 Product manufacturability

3. Financial outcome 3.1 Market share 3.2 Return on investment 3.3 Profit

Literature

Product development time from concept generation to Rosenthal and March, 1988 market introduction Time to prepare for new engineering design from old Rosenthal and March, 1988 engineering design Costs of developing new products from product concept to Griffin, 1997 manufacturing The extent of collaborative behavior of product Griffin 1997; Truman and Jobber, 1998 development teams The extent of improving team learning through product Clark and Wheelwright, 1992 development process The extent of supplier's meeting the requirements Handsfield and Pannesi, 1996 of product development The extent of the product's technical function and perception of users The cost of materials and labor for manufacturing the product Value of new products in meeting customer needs The extent of producing multiple-generation products from platform product The extent of easiness of modifying products The extent of easiness of manufacturing and assembling new product The extent of product's meeting the target in terms of market share The extent of product's meeting target in term of ROI The extent of product's meeting target in term of profitability

generation and review, to the interpretation, enhancement and communication of any new concept or innovation. Such issues can be directly related to the field of teamwork, company culture, and management of change that is associated with innovation (Clark and Fujimoto, 1991; Griffin, 1997; Rosenthal and March, 1988). Product outcome includes value, image and ease of manufacturing. The concept of value

Clark and Wheelwright, 1992 Clark and Wheelwright, 1992 Slater and Narver 1995 Clark and Fujimoto, 1991 Clark and Fujimoto, 1991 Clark and Fuijimoto 1991

Cooper and Kleinschmidt, 1994a Griffin and Hauser, 1996 Clark and Fujimoto, 1991

underpins the ultimate company goal of developing high-quality products that meet customer expectations. In fact, the perceived value of products relates very much to quality and standards in terms of finish, appearance and meeting working standard requirements for efficient operation. This dimension conveys the message of quality, reliability and value for money. Likewise, product image follows the notion of perceived value but is

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very much in the field of aesthetics, appearance, style and identity (Clark and Fujimoto, 1991; Clark and Wheelwright, 1994; Slater and Narver, 1994). Financial outcome is widely used because profitability, market share, ROI, and cash flow are main yardsticks for most stakeholders. Usually, performance success is measured with three kinds of outcomes compared with competitors, compared with the past of its own organization, or compared with organization's planned objectives. Rosenthal and March (1988) thought that target-setting should be clearly separated from actions taken to meet the targets. The targets and priorities need to be specified in advance to guide subsequent decisions. Furthermore, owing to the fact that some process outcomes are not easy to compare with others, here a successful product development was defined as one that met the established objectives by the project team in the early planning stages (Bacon et al., 1994; Clark and Wheelwright, 1994; Rosenau, 1988; Rosenthal and March, 1988). The gap of the expected objectives and real outcome could be an important standard to evaluate the success of NPD. 2.4 Foundation elements Just because front-end fuzziness is not controllable by management, we need to manage foundation elements or NPD programs to cope with front-end fuzziness, come up with clear team vision, and thus increase the possibility of success of NPD. We thought these variables, shown in Table IV, as

the context of NPD are important factors, which reduce uncertainty for front-end activities of design team and contribute to success of NPD. 2.4.1 Strategic orientation Product strategy and portfolio plans should drive the complete new product development effort, in conjunction with the capabilities and competencies of the product development organization, with its inherent assumptions about roles, communications, and culture. These elements are thus preconditions or foundations for the explicit activities in new product development. Ansoff and Stewart (1967) developed a typology of strategies based on the timing of entry of a technological firm into an emerging industry. Miles and Snow (1978) created four strategic types based on the rate at which a firm changes its products or markets in response to its environment. More recently, Cooper (1985) identified five strategic types based on factors that contribute to new product success. Barczak (1995) studied the different new product strategy (first-tomarket, fast followers, later entrants), NPD structure and process have different effects on the performance. Despite the usefulness of these strategic types in specific environment, they do not correspond to the types of frontend fuzziness of NPD. Narver and Slater's (1990) concept of strategic orientation is useful for this study. They defined the ``strategic orientation'' as the strategic directions implemented by a firm

Table IV Foundation elements and definitions Contextual variables

Definition

Literature

1. Strategic orientation

The extent to which the firm implement the strategic directions to create the proper behaviors for the continuous superior performance of its business The extent to which product and process design is concurrent and integrated The extent to which customers are involved in product development and problem solving early The extent to which product managers have significant clout The extent to which suppliers are responsible for product development effort The extent to which multiple generation products are based on the basic core that is enhanced with different features

Cooper, 1994; Narver and Slater, 1990; Slater and Narver, 1994

2. Concurrent engineering 3. Customer involvement 4. Heavyweight project manager 5. Supplier involvement 6. Platform products

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to create the proper behaviors for the continuous superior performance of its business. It presents evidence that a firm's strategic orientation is a significant indicator of its performance (Cooper and Kleinschmidt, 1994a; Narver and Slater, 1990; Slater and Narver, 1994). The emphasis is on establishing the importance of the three types of strategic orientations: customer orientation, technological orientation, and competitive orientation. Customer orientation is the firm's sufficient understanding of its target buyers in order to be able to create superior value for them continuously (Narver and Slater, 1990). Competitor orientation can be defined as the ability and the will to identify, analyze and respond to competitor's actions (Narver and Slater, 1990). Technological orientation are strongly R&D-oriented, are proactive in acquiring new technologies, and use sophisticated technologies in the development of new products (Cooper and Kleinschmidt, 1994b; Cooper, 1985). However, managers should be careful about which measures are applied to the project and when they are relevant. Product and process measures (e.g. technical success, development cost, speed to market) and financial measures (e.g. return on investment) are often applied. But customer considerations, which are captured by acceptance and satisfaction measures, ultimately decide the fate of the product and thus should be contemplated throughout the development process by customer-oriented firms. The competitororiented firm typically evaluated success of NPD based on the comparison with competitors. Firms in technologically-intensive industries, which are responsible for a good deal of discontinuous innovation (Cooper, 1985), especially the process as it pertains to radical new products, is as yet not well understood. Reflected in all of the new product development models is an emphasis on upfront activities (e.g. building market knowledge) and clear product and opportunity definition. Radically new products often require intensive technology development and protracted development times that may span five to ten years. The market opportunities for these types of products are often unpredictable.

Conventional market research techniques, along with reliance on lead users early on in the process may be of little help in the early development of these products, because customers have nothing to compare the product to. A degree of flexibility in identifying and applying measures in project targets and goals that reflect the critical determinants for the product's success is needed. 2.4.2 Heavyweight manager Pawar and Riedel (1994) thought various organizational forms or structures can be identified, depending on the degree of integration of the team leader/product manager within the functional organizational structure. This variation extends from functional managers having full authority over product development, through balanced authority in a matrix structure, to team leaders having full authority in a project team structure. Heavyweight product manager is usually senior in the organization or functional managers. He has direct access to working level engineers, and may lack formal authority, but exercises strong influence. He is responsible for internal coordination and product planning, and concept development. Therefore, he functions as general manager of products (Clark and Fujimoto, 1991). Rochford and Rudelius (1997) suggest that an innovation requires both the sponsorship of someone in the organization who has political influence and someone who has access to necessary resources. It also requires championing by someone who is an enthusiastic salesperson for the new idea. Such champions guide innovation through the organization decision-making process, and their presence is important throughout the development process (Pawar and Riedel, 1994). Clark and Fujimoto (1991) thought that the ``heaviness'' of product managers facilitates an efficient and effective alternative to the traditional functional structure, since the heavyweight manager has significant clout in the organization to make things happen. 2.4.3 Concurrent engineering NPD literatures roughly classify NPD schemes into two categories: (1) phased product development (PPD); and (2) integrated product development (IPD).

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Historically, PPD approach derives its concepts from the phased program planning (PPP) used by NASA to develop missiles and other large-scale development programs. Today's industry users have modified NASA's PPP approach, such as ``Phased Development Process'', ``Structured Development Process'', ``Stage-gate'', or ``Phased Review Process''. The basic tenets, however, are similar (Anderson, 1996). The proponents of PPD point to many benefits for this approach: . A phased approach provides a disciplined system, ensuring that steps are not skipped, quality stays high, and technical and marketing risks are controlled by senior management. . PPD emphasizes gaining early market information and underwrites screening winners from losers in the product pipeline. . Teams drawn from the various departments or functions develop new products with consistency and adhere to an approved process template that is uniform throughout the company. The IPD approach establishes its development path using concurrent and overlapping development practices that accent early planning and decision making. The focus is on intense communication and information gathering among team members. This allows development to move swiftly using partial information, thus blurring structured phases of development. The advantages are as follows: . Empowering teams to be responsible for project concept, resources, and delivery allows the freedom to overlap and integrate development activities in an innovative way. . Focusing on the early stage of development coordinates product and process design and includes up-front whatever functions and outside resources have a stake in a product's design and execution. . Multifunctional integration and development time-to-market are enhanced by the team's decision control, funding control, and commitment to results that they own.

If PPD comes from the more hierarchical, and functionally-segmented organization, while IPD stems from the independent, innovative, team-oriented, informal development company, the core difference between the two approaches to product development is that PPD is activity oriented, whereas IPD is information and decision oriented. PPD leads to viewing new product development as a structured activity chain-breaking activities into a predetermined, step-by-step flow chart. The mindset is: How do we control this complex process and delineate it into progressive, rational steps and activities as a product's development matures? IPD starts from a different focal point, perceiving development as an invisible information and decision-making process rather than a tangible compartmentalization of building-block activities along a product maturity curve. The mindset is: What information is needed for development decisions, and how efficiently can information be gathered to make critical decisions as early in the development process as possible? The concurrence entailed becomes the platform for systematizing the product development process and guides the way people interact and exchange information within it. 2.4.4 Customer involvement Lengnick-Hall (1996) thought that customers can not only receive what an organization produces and delivers, but they also can directly and indirectly influence the operations and outcomes of an enterprise. From an input-transformation-output system perspective, two customer roles are at the input, or upstream, side of organizational activity: the customer as resource and the customer as co-producer. Three roles cluster at the downstream or output side of the system: the customer as buyer, the customer as user, and the customer as product (Lengnick-Hall, 1996). Therefore customer involvement can reduce uncertainty from the input and output side of product development. Customer orientation means organizational commitment to customers such that customers and firms share interdependence, values, and strategies over the long term. To do this, firms foster direct customer contact, collect information from customers about their needs, and use customer-supplied

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information to design and deliver products and services (Bowen et al., 1994). Customers' sophistication and knowledge are increasing. As expectations rise, customers' attention to detail and ability to articulate gaps between expectations and experiences increases. Therefore, customers are viewed as important potential co-designer and co-producer, since they can make an effective contribution to production activities (Chase and Tansik, 1983; Lengnick-Hall, 1996). As customers are the final stakeholder and arbiter of product, involving customers in product design and production can reduce uncertainty from customers. Otherwise, the firm can produce perfect product but cannot guarantee selling. 2.4.5 Supplier involvement Handfield and Pannesi (1995) found some support that supplier involvement in design can reduce the uncertainty from the material quality, the timing of material arrival, and supplier design and manufacturing capabilities so as to speed the product development. Malhotra et al. (1996) suggest that suppliers are critical team members who assist through initial product design suggestions, technological contributions, and quality assurance considerations, all of which contribute to efficient manufacturability and minimization of the design to make market cycle time. In industrial systems, suppliers were looked upon with suspicion and a broad supplier base was retained to assure competition and low prices. Suppliers, being considered as outsiders, were only given as little information as possible and only got involved in the development process after product design and specifications were determined. This was in accord with the overall sequential product development process. As the environmental uncertainty increases, suppliers get involved early during the development process (Doll and Vonderembse, 1991) and it is not uncommon for suppliers to be responsible for the development of whole subassemblies for their customers. Few suppliers are used but they are viewed as long-term partners. In the Japanese system, suppliers are an integral part of the development process: they are involved early, assume significant responsibilities and communicate extensively and directly with product and process engineers. The ability of the Japanese firm to

operate efficiently while using a larger fraction of unique parts is due in significant part to the capability of the supplier network (Clark and Wheelwright, 1992). Responsibilities for the Japanese supplier include product and process design and in some cases prototype development (Clark and Fujimoto, 1991). Collaborative supplier relations are seen as the way to reduce uncertainty, speed the pace of new product introduction and sustainable long-term performance. 2.4.6 Platform products Sony has successfully used platforms from which to spin out its product variety. The platforms provide a basic core that is altered and enhanced to produce variants with different features or external appearances. Each of these platforms optimizes a particular design goal that is matched to market needs. Small and frequent innovation, with little uncertainty about technology and market, is based on the platform products that enable future generations of products to be accommodated. Such innovation strategy enables the firm not only to bring products to market faster but also to incorporate the newest technology as it becomes available. New features are added as customer needs change and technology becomes available. Moreover, incremental innovation fosters organizational learning and the process is repeated with greater frequency. Clark and Fujimoto (1991) explain how the incremental or ``rapid inch-up'' works. They state that a new design tends to be a small jump from its predecessor but the rate of design renewal is relatively high. The ``rapid inch-up'' or ``evolutionary'' strategy of Japanese firms offers some potential advantages over the ``infrequent great-leapforward'' or ``revolutionary'' strategy Western forms have tended to follow. Because nextgeneration design use established processing concepts, firms may avoid start-up uncertainty and confusion. Moreover, repetitive and frequent changes of technology enable the product development organization to establish a ``rhythm'' of development, streamline the development process, and orient the entire organization to continual learning and improvement.

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3. Propositions The conceptual framework suggests the relationships among front-end fuzziness, foundation elements, team vision, and success of NPD. The hypothesized relationships and their directions are depicted in Figure 1. A: The front-end fuzziness has a significant negative relationship with the success of NPD. The ambiguity and uncertainty of customer, technology, and competition make the organization less possible to function rationally. Customer fuzziness such as ``uncertainty of demand for the kinds of products offered'', ``uncertainty of appropriate product characteristics'', ``uncertainty of length of product life cycle'', and so on, makes product development difficult. Maybe a firm can develop a good product but less valuable to customers, which leads to failure. Technology fuzziness such as ``uncertainty of process functions or input characteristics specification'', ``uncertainty of suppliers' design and manufacturing capability'', and so on, make fuzzy the timeto-market, product integrity, product development cost, and so on. Such fuzziness, if not being reduced, makes less controllable the product development. Likewise, the uncertainties and ambiguities of a competitors' product development, technology adoption, and so on, directly threaten the focal firm's product market, thus profitability of product, market share and so on become uncertain. Therefore, we hypothesized that the front-end fuzziness has a significant negative relationship with the success of NPD. B: The front end fuzziness has a significant negative relationship with team vision. The environmental fuzziness, including customer, technology and competitor's uncertainties make difficult the design team activities such as a team's shared knowledge of customers, suppliers, competitors, internal capabilities and products. These inherent customer uncertainties including: ``How are customer needs changing?'', ``Which features are most valued by target customers?'', ``How customers make purchase decisions?'', and so on, makes such knowledge less available and less shared among team members. Likewise,

technology fuzziness such as supplier's design and process capability, internal manufacturing capabilities, product's technological and cost history, and so on, is the barriers for a team to share knowledge. Competitor fuzziness, such as competitor's products and technology, advantage and disadvantage, bars a team from sharing knowledge. Such uncertainties prevent a team from building and sharing team purpose such as product concept, project mission, project work plan, and so on. Especially, due to uncertainty, a team has difficulty in targeting a project consistent with customer requirements, competitive situation, manufacturing and supplier capabilities, and even overall business and technology strategy. Thus project targets become unclear, less understood, less communicated among team members. C: Team vision has a significant positive relationship with the success of NPD. Those who have high contact with customers may have high degrees of changing needs of customers, the customer value attributes, and levels of satisfaction of customers to the products (Daft and Weick, 1984). However, the key of product development success is how much other product development team members understand the customer needs, requirements and use (Clark and Wheelwright, 1994). The more the knowledge about the needs of current customers and potential customers in the future is shared among product development members, the better chance it has to formulate a customer-focused mission with a real understanding of the product concept. Such shared knowledge will enable members to have project objectives that are based on more realistic customer requirements. Such share also provides the basis of creating value for customers. Knowledge of internal capabilities will identify project objectives consistent with manufacturing capabilities which, in turn, increase development productivity and decrease product cost. Knowledge of products helps set realistic project objectives (tradeoffs between cost and time) and control development cost. Knowledge of suppliers is essential for timely and cost-effective decision making in IPD (Griffin, 1997), thus allowing

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team members to set a more realistic project objective (e.g. consistent with suppliers' capabilities), helpful in improving product performance (e.g. improvement of its technical and overall performance) and in reducing manufacturing costs. Knowledge of competitive realities helps define a team's mission, understand strategic fit, and enhance team empowerment. Thus it is helpful in developing products with appropriate time to market (e.g. get products to market ahead of competitors and develop products on schedule) with high values to customers (e.g. work on product's success in the marketplace), improve product performance (e.g. overall performance of the product better than competitors). Innovative collaboration demands strong alignment at two levels: (1) to the individual's own goals in life (for creativity); (2) to others in the team (for collaboration) (Zien and Buckler, 1997). The process starts by focusing equally on the overarching organizational purpose that bonds members of the team and on talented people's intrinsic desire to collaborate with others in order to create something truly new and of value in the world. Then leaders and members align their own goals and team mission, and make team vision clear. Furthermore, clear targets motivate the team members to work hard to improve productivity. Such shared knowledge, aligned purpose and clear targets promote team work, opportunistic learning (Clark and Fujimoto, 1991), productivity, which in turn reduce time-to-market (Griffin, 1997) and engineering change time (Blackburn et al., 1996). Such a good product and process outcome will be accompanied with a good financial outcome, since the team has knowledge of competitive realities and customer markets. D: the front-end fuzziness has a significant positive relationship with foundation elements. Facing ambiguity and uncertainty of customer, technology, and competition, in order to function in a rational manner the organization needs clarity and certainty. Therefore, the organization develops coping mechanisms which either avoid, adjust to,

reduce, or take advantage of the uncertainties (Gerwin and Tarondeau, 1982). Such coping mechanism (foundation elements) includes strategic orientation, heavyweight manager, concurrent engineering, customer involvement, supplier involvement, and platform products. In order to reduce the uncertainty from customers, the firm builds customer orientation to sufficiently understand its target buyers in order to be able to create superior value for them continuously (Narver and Slater, 1990). It is the set of beliefs that puts the customer interest first. Therefore, the firm is willing to identify, analyze, understand, and answer user needs, which reduce the customer fuzziness. Competitor orientation makes the firm to identify, analyze and respond to competitor's actions. This includes the identifications and construction of competitive advantages in terms of quality or specific functionalities and enables the firm to position the new product well. Thus it reduces the competitor fuzziness. Technological orientation are strongly R&Doriented, are proactive in acquiring new technologies, and use sophisticated technologies in the development of their new products (Cooper and Kleinschmidt, 1994). Therefore, technological orientation reduces the technological fuzziness. Likewise, environmental uncertainty requires the firm to have flexibility to respond to it in time. Thus the heavyweight manager, with enough authority, can coordinate all the functions as a whole nimbly to deal with rapid changes. Concurrent engineering blurs all the boundaries of phases and speeds the product development by its overlapping nature. Customer fuzziness requires the firm to get customers involved in product development so that the firm can reduce customer uncertainty to the greatest extent. Supplier involvement can reduce technological uncertainty about the supplier's design and manufacturing capability, quality of material, and so on, to the greatest extent. Platform product is a small-and-frequent incremental innovation strategy, which reduces the uncertainties ranging from customer, technology and competition. E: the foundation elements have significant positive relationships with team vision.

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The firm builds customer orientation to sufficiently understand its target buyers in order to be able to create superior value for them continuously (Narver and Slater, 1990). Competitor orientation makes the firm to identify, analyze and respond to a competitor's actions. Technological orientation are strongly R&D-oriented, are proactive in acquiring new technologies, and use sophisticated technologies in the development of their new products (Cooper and Kleinschmidt, 1994). Therefore, strategic orientation can help the team have more knowledge about customer, technology, and competitors, such shared knowledge in turn helps to build team vision such as aligned purpose, strategic fit of project targets and clear project targets. As external integrators, the heavyweight manager cultivates direct and continuous contact with customers. They supplement the ``cooked'' market information they received from the marketing group. In the role of concept creator, product managers need imagination and active, holistic ways of thinking. First-hand involvement with customers stimulates imagination more effectively than abstract market data. As a multilingual translator, the heavyweight manager must be fluent in the languages of customers, marketers, engineers, and designers. He can translate an internalized equivocal product concept into unequivocal expressions in each of the languages in order for all members of the team to understand it. As an engineer coordinator and concept infuser, he is responsible for assuring consistency of product design and conformance to concepts and plans (Clark and Fujimoto, 1991). Therefore, the heavyweight manager is a facilitator for knowledge sharing and team vision building in the front end of NPD. Concurrent engineering helps team members to share knowledge about customers, suppliers, products, competitors, and internal capabilities. Especially, customer and supplier involvement is necessary for the team to share knowledge about customers, suppliers and internal capabilities. Such sharing makes a team align purpose with each other, and align project targets based on realistic suppliers' and internal capability, and boundary-free knowledge.

Platform products, small and frequent innovation, foster organizational learning and the process is repeated with greater frequency. Such continuous improvement helps the team to share knowledge of customers, suppliers, competitors, products and internal capabilities, and build vision such as aligned purpose, since only across different people in different functions in the team can innovation be realized. F: The foundation elements have significant positive relationships with the success of NPD. A firm's strategic orientation is a significant indicator of its performance (Cooper and Kleinschmidt, 1994; Narver and Slater, 1990; Slater and Narver, 1994). Customer orientation makes product more valuable to customer; technology orientation makes structure of product rational, thus reduce product cost; competitor orientation reduces time-to-market. In order to respond to changes and uncertainty, the heavyweight manager, as a ``multilingual'' with enough authority, can coordinate all the functions to flexibly speed product to market, thus decrease cost, reduce engineering change time and improve productivity. Small and frequent innovation strategy enables the firm not only to bring products to market faster but also to incorporate the newest technology as it becomes available. New features are added as customer needs change and technology becomes available. Moreover, such platform products foster organizational learning and the process is repeated with greater frequency. The most cited reason for delays and low productivity in product development projects in manufacturing systems is engineering change orders (Balachandra and Friar, 1997). This occurs when designs and parameters about the product do not match manufacturing capabilities and/or customer expectations, and/or materials are unavailable. Designers may find out that manufacturing cannot meet the specifications or that the specified material is unavailable or that customers are not satisfied. Time and cost are wasted when physically separate functions need to communicate. Therefore, the concurrent engineering, customer involvement, and supplier involvement in the development process provides an avenue for

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various interest groups to express their concerns and to provide their input early into the process. Design characteristics such as manufacturability, complexity, and design for quality can be improved through greater cross-functional involvement, leading to shorter manufacturing lead times later in the product life-cycle (Gerwin, 1993). Customer involvement makes the product have more value to the customer, thus increase customer satisfaction. Supplier involvement makes possible joint design and production to improve quality, decrease cost, reduce timeto-market, improve supplier performance, and so on. Manufacturing can also inform design engineering about its existing manufacturing capabilities so that design can take these capabilities into account in the product design (e.g. machine tolerances). Taking such capabilities into account during the product design phase reduces the chance that designers will have to modify the design late in the product development cycle. The benefits are derived from fewer mismatched between product characteristics and existing process capabilities. These mismatches are due primarily to the designer's ignorance of existing factory capabilities. Manufacturing may also suggest ways to design the product for ease of manufacturing. Manufacturing may suggest how products can be designed with fewer parts, assembled or tested more easily, or accommodated to automated equipment. Gerwin (1993) suggests the early involvement of manufacturing, bringing manufacturability issues into light, can reduce lead time from design conception to delivery of the product. This early involvement of constituents begins as early as the concept stage. It is plausible that potential problems can be identified early enough to avoid costly delays later.

4. Implications and conclusions The difficulties and uncertainties associated with new product development are increasing along with the pressure to develop more new products (Gupta and Wilemon, 1990). To succeed, companies are finding that they need to develop better new products (high quality, low cost and differentiation) and they need to

do it faster (speed and flexibility). Thus, a firm's competitiveness in world markets depends on its ability to develop quickly and market new products that customers value. Most failures come from the fuzzy front end of NPD; however, the previous literatures do not provide a clear concept of ``fuzzy front end''. The front-end fuzziness and consequences of fuzziness are mingled. This paper contributes to the literature with the separation of cause-and-effect variables in the front end. Just the front-end fuzziness such as customer fuzziness, technology fuzziness and competitive fuzziness, which is beyond management's control, cause the front-end problems: unclear team vision. It is necessary to separate the front-end fuzziness and fuzziness-caused problems because different kinds of fuzziness need different kinds of focus. For example, in customer fuzziness categories, for preference fuzziness, a team has to collect information about customervalued characteristics; for portfolio fuzziness, a team has to know what combination of products it needs to provide; for volume fuzziness, a team has to know how many products it can sell so as to justify its investment, and so on. For technology fuzziness, a team has to monitor technological changes and know clearly suppliers' and its own internal capability. For competitor fuzziness, a team has to have knowledge about degree of competition and possible competitors' actions. In order to develop new products successfully, the project team has to deal with the uncertainty from customer, technology and competitors. Although the front-end fuzziness is beyond management's control, at least the project team can focus on clear team vision building and knowledge sharing. Such team vision comes from members' intrinic aspiration and desire. Successful leaders tap into these intrinsic motivations and align extrinsic opportunities and incentives to encourage members of the team. Both clarity of purpose and alignment of organizational and personal purpose are vital to sustaining the passion and commitment of a culture of innovation. Active alignment of purposes can lead to much more creative outcomes and a self-renewing process within the enterprise. If a particular product concept fits to overall strategic direction, it has better chance of

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success, since it is easy to get senior management's support with necessary resource allocation (Rosenthal and March, 1988). In response to front-end fuzziness, team vision is inducive to a team's collecting and sharing timely, reliable information on customer requirements, technological changes, and competitors' actions. Projects for which the development team did not develop or receive such information, or the available information was not well communicated among team members, rarely succeeded. In contrast, if a team focuses more on team vision building and knowledge sharing, the fuzzy front-end problems are more manageable. Product quality and manufacturing cost are mainly determined by the end of the product concept stage, before most of the design begins. Therefore, a clear team vision, a final gate to proceed NPD, is very important. In most cases, NPD process delays are due to the failure to give NPD program priority, continually changing requirements, and poor intergroup relations. In order to make the fuzzy front end manageable, IPD is advocated. The team establishes its development path using concurrent and overlapping development practices that accent early planning and decision making. The focus is on intense communication and information gathering among team members. This allows development to move swiftly using partial information, thus blurring structured phases of development. In order to come up with clear team vision, two conditions in the front end of NPD are important: (1) total interconnectivity among individuals; and (2) permeable boundaries across all systems and work groups, even those external to the firm itself. Knowledge, not necessarily people, is what needs to cross organizational boundaries. Hence, creating productive knowledge interactions among individuals is where the emphasis is needed. Most important, in order to cope with front-end fuzziness (an exogenous variable), the organization must focus more on managing NPD program issues besides building specific, clear team vision. Foundation elements cut across projects and

provide basis for the project team to build clear vision. Strategic orientation can help teams focus on collecting and sharing knowledge about customer, technology, and competitors. The heavyweight manager can coordinate and infuse concept, and assure consistency of product design and conformance to concepts and plans (Clark and Fujimoto, 1991). Platform products foster organizational learning, since the process is repeated with greater frequency. Likewise, concurrent engineering, customer involvement, and supplier involvement facilitate to share knowledge and further align purpose. Although all the foundation elements are important for team vision building and the success of NPD, which factor is the most critical one needs to be explored in the future research. In summary, in order to cope with frontend fuzziness and achieve success in NPD, the project team should have a clear vision of product lines and platforms for specific markets. Then core front-end team involves representatives from manufacturing and outside people, apart from R&D, engineering and marketing, and come up with project priorities consistent with product strategy and resource availability based on information of customer, technology and competition. Furthermore, product definition should be explicitly developed and documented, and project targets (time, cost, quality) and relative priorities should be clear (Khurana and Rosenthal, 1997). In order to reduce chaos and the unpredictable, some knowledge bases and team vision must be emphasized, although some experiments are encouraged. Once the front end becomes clear from fuzzy, product development process needs to be disciplined with important teamwork, focus on some specific quantitative measurements, and commit to the goal. Finally, market activities should seek predictability and order with strong financial orientation, and commit to established values and businesses.

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The fuzzy front end and success of new product development

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Qingyu Zhang and William J. Doll

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Further reading Smith, P.G. and Reinertsen, D.G. (1992), ``Shortening the product development cycle'', Research Technology Management, Vol. 35 No. 3, pp. 44-9.

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