The Take-off of Israeli High-Tech Entrepreneurship During the 1990's: A Strategic Management Research Perspective (Technology, Innovation, Entrepreneurship ... Entrepreneurship and Competitive Strategy)

THE TAKE-OFF OF ISRAELI HIGH-TECH ENTREPRENEURSHIP IN THE 1990’s A STRATEGIC MANAGEMENT RESEARCH PERSPECTIVE

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THE TAKE-OFF OF ISRAELI HIGH-TECH ENTREPRENEURSHIP IN THE 1990’s A STRATEGIC MANAGEMENT RESEARCH PERSPECTIVE AVI FIEGENBAUM Technion – Israeli Institute of Technology, Haifa, Israel

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Printed and bound in The Netherlands 07 08 09 10 11

10 9 8 7 6 5 4 3 2 1

Contents

About the Author

vii

Foreword

ix

List of Tables

xi

List of Figures

xiii

1.

Introduction — Take-off and the Challenge to Strategic Paradigm Development

1

Part I: Globalization, Privatization, and Entry of Foreign Multinationals 2.

Globalization in the World and in Israel

21

3.

Privatization of Governmental Companies

33

4.

The Entry of Foreign Companies into Israel

49

Part II: Israel Infrastructure for Technological Entrepreneurship 5.

Strategic Management Perspectives of Technological Incubators

65

6.

Strategic Management Perspectives of Incubator Startups

83

Part III: New Origins for Startups 7.

Women as Technology Entrepreneurs

8.

Elite Units of the Israeli Defense Forces – The Story of Unit 8200

99 111

Part IV: Competitive Strategic Leadership 9. 10.

Board of Directors and Companies’ Performance

127

Competitive Intelligence

143

vi

Contents

Part V: Development of New Industries 11.

Medical Technology A: Industry Analysis

163

12.

Medical Technology B: Firms’ Analysis

175

Subject Index

193

About the Author

Professor Avi Fiegenbaum, former associate dean and currently the head of the strategic management and entrepreneurship department of the Faculty of Industrial Engineering and Management, Technion, Haifa. Professor Fiegenbaum received his B.Sc. in Industrial Engineering and Management (1979) from the Technion, his M.B.A. (1981) from Tel Aviv University and his Ph.D. from the University of Illinois, Urbana-Champaign (1986). Upon conclusion of his doctoral studies, he conducted research and taught at the University of Michigan, Ann Arbor until 1991, when he joined the faculty of the Technion. Professor Fiegenbaum is the author of numerous scholarly articles and books as well as a frequent contributor to the press. He also lectures at universities worldwide and supervises graduate students in the Technion’s advanced studies program. Professor Fiegenbaum was an owner-partner in Ofer Technologies, where he served as the Chairman of the Board of Directors and he also sits on the boards of several technological incubators and high-tech start-ups.

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Foreword

Avi is currently a senior academic in Israel at the Technion. I should point out, however, that Avi was one of the best doctoral students I have ever had –– he completed his thesis at the University of Illinois at Urbana-Champaign in the mid1980s, when I was James F. Towey Distinguished Professor of Strategic Management there. Avi’s thesis, which went on to win a prize from the Business Policy Division of the Academy of Management, was formally grounded in the field of competitive strategy and provided one of the first and most insightful studies about the concept of strategic and competitive groups in the field of strategic management. He published a series of well-cited papers, some of which I co-authored, in the Strategic Management Journal and the Academy of Management Journal over succeeding years. He also moved from Illinois to a position on the Strategy faculty at the University of Michigan and stayed there until the early 1990s. However, Avi always had the desire to return to Israel and to pass on the results of his research to future generations of students there. He was particularly intrigued with the success and growth of entrepreneurial Israeli firms, particularly in the areas of high technology and medical research. Indeed, not only did he research these companies in depth during the 1990s and early 2000s, but Avi also took part in the management and development of some of these firms as a first-hand participant. This book represents the culmination of Avi’s research and practice in the Israeli high-tech field and is an important volume for those scholars of strategy and entrepreneurship who seek to understand strategy development and growth amongst entrepreneurial, fast-growing firms. The lessons from this study can provide insight for policy makers in the entrepreneurial field but also important research insights for future scholars in the field of strategy and entrepreneurship. I commend this manuscript to you for the depth and quality of its research. Avi has commissioned translators to take the text from Hebrew to English and I think that the resulting text published here will prove to be an important monograph in the development of the field of strategy and entrepreneurship. I wish all readers the same excitement as I received when reading this book and hope it will provide the catalyst for further research in this area. Howard Thomas Dean, Warwick Business School

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List of Tables

Table 1.1 Table 1.2 Table 2.1 Table 2.2 Table Table Table Table Table Table

3.1 3.2 3.3 3.4 3.5 3.6

Table Table Table Table

4.1 4.2 4.3 6.1

Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 7.1 Table 8.1 Table 8.2 Table 8.3

The strategic paradigm applied to the Israeli high-tech take-off — summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Reciprocal relations among the paradigm’s parameters (by analytic level) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Investments of foreign residents in Israel from 1990 through 1997 ($ million, current prices) . . . . . . . . . . . . . . . . . . 23 Investments of Israelis abroad from 1990 to 1997 ($ million, current prices) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Israeli privatized companies and method. . . . . . . . . . . . . . . . . . 37 Summary findings compared with the TASE . . . . . . . . . . . . . . . 41 Summary findings compared with the sector stock index . . . . . . 43 Post privatization and company value . . . . . . . . . . . . . . . . . . . 44 Chemical sector share returns compared to other sectors . . . . . . 44 Percentage return on the major companies compared with other companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Characteristics of the research sample. . . . . . . . . . . . . . . . . . . . 51 List of local and foreign companies . . . . . . . . . . . . . . . . . . . . . 52 Research variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The association between product characteristics and performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 The association between general managers’ attention and startup performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 The association between planning and performance . . . . . . . . . . 93 The association between awareness to customers’ needs and performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 The association between strategic capabilities and performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Association between strategic dimensions and performance . . . 108 Companies in the sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Definition of research variables and statistical characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Impact of social network and industry structure on number of company employees . . . . . . . . . . . . . . . . . . . . . . . 119

xii

List of Tables

Table 8.4 Table 8.5 Table 8.6 Table 8.7 Table Table Table Table Table Table Table

9.1 9.2 10.1 10.2 10.3 11.1 11.2

Impact of social network and internal strategy on change in company market value . . . . . . . . . . . . . . . . . . . . . . . . Impact of social network and external strategy on company sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of social network, external strategy and industry structure on company sales . . . . . . . . . . . . . . . . . . . . . . . Summary: impact of strategic components and correlation with social network on company performance . . . . . . . . . . The impact of board of directors on performance . . . . . . . Discriminant function classification results . . . . . . . . . . . . Topics of competitive intelligence . . . . . . . . . . . . . . . . . . . Organizational obstacles . . . . . . . . . . . . . . . . . . . . . . . . . Improving organizational obstacles. . . . . . . . . . . . . . . . . . Medical technology firms in Israel . . . . . . . . . . . . . . . . . . Research perspectives, variables definition and differences between the two time periods (1998 versus 1995) . . . . . . . .

. . . 120 . . . 121 . . . 121 . . . . . . .

. . . . . . .

. . . . . . .

122 132 135 148 149 150 167

. . . 170

List of Figures

Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 2.1 Figure 3.1 Figure 3.2 Figure Figure Figure Figure Figure Figure Figure

4.1 4.2 5.1 5.2 5.3 5.4 5.5

Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure

6.1 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 8.1 8.2

The research challenge: explaining the take-off of Israeli high-tech. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The competitive model — strategic reference points . . . . . . . . . . 5 A typology of organizational competitiveness based on strategic reference points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 A multi-level paradigm of the Israeli high-tech take-off from a strategic perspective — sequential and interactive effects . . . . . 8 Net export of goods (excluding polished diamonds) from 1990 through 1998 in $million . . . . . . . . . . . . . . . . . . . . . . . . 25 Privatized state-owned enterprises share returns compared to the TASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Privatized company stock returns compared to the sector index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Competitive positioning of foreign and local companies . . . . . . 56 Marketing positioning of foreign and local companies . . . . . . . 57 Incubators’ general information . . . . . . . . . . . . . . . . . . . . . . . 68 Incubators’ competitive strategy approach . . . . . . . . . . . . . . . . 71 Positioning of 19 incubators’ competitive strategy approach . . . . 72 Incubators’ strategic capabilities development . . . . . . . . . . . . . 74 Incubators’ general directors recommendations for improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Startups’ descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . 88 Firm distribution by entrepreneur’s age . . . . . . . . . . . . . . . . . 104 Firm distribution by entrepreneur’s marital status . . . . . . . . . 105 Firm distribution by entrepreneur’s number of children . . . . . 105 Firm distribution by entrepreneur’s educational level . . . . . . . 106 Firm distribution by entrepreneur’s academic background. . . . 106 Firm distribution by industrial sector . . . . . . . . . . . . . . . . . . 107 Firm distribution by firm age . . . . . . . . . . . . . . . . . . . . . . . . 107 Firm distribution by firm location. . . . . . . . . . . . . . . . . . . . . 108 Sample company age distribution . . . . . . . . . . . . . . . . . . . . . 118 Distribution of age of IDF technology unit veteran involved in setting up companies. . . . . . . . . . . . . . . . . . . . . . 118

xiv

List of Figures

Figure 8.3 Figure 9.1 Figure 9.2 Figure Figure Figure Figure Figure

11.1 11.2 11.3 11.4 12.1

Figure 12.2

Distribution of number of IDF technology unit veterans involved in setting up companies. . . . . . . . . . . . . . . . . . Board of directors demographics: high versus low performers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board of directors’ strategic profile: high versus low performers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Age distribution—medical technology firm entrepreneurs Entrepreneurs’ field of study. . . . . . . . . . . . . . . . . . . . . Company age distribution . . . . . . . . . . . . . . . . . . . . . . Cumulative number of companies . . . . . . . . . . . . . . . . . Companies positioning along their internal and external competitive dimensions . . . . . . . . . . . . . . . . . . . . . . . . Strategic frontiers advancement attempts . . . . . . . . . . . .

. . . . 118 . . . . 133 . . . . .

. . . . .

. . . . .

. . . . .

134 168 168 169 170

. . . . 177 . . . . 190

Chapter 1

Introduction — Take-off and the Challenge to Strategic Paradigm Development 1.1. The Challenge — Understanding Take-off The year 1990 represents a watershed for the State of Israel. Numerous events related to the political, security, social, and economic situations infused optimism into the lives of Israelis and neighboring states in the Middle East. The United States and its allies in the Gulf War had brought the Iraqi army to its knees. In his victory speech, President George W. Bush, Sr. declared that this military triumph would open the door to a new world order. After the war was over, President Bush did in fact push for accelerated movement toward peace between Israel and the Arab states, a process that culminated in awarding the Nobel Peace Prize to Israel’s Shimon Peres and the late Yitzhak Rabin as well as to the Palestinian Authority’s Yassir Arafat. At the same time, a massive wave of immigration from the former Soviet Union swelled Israel’s Jewish population by almost one million. This influx of labor and consumers stimulated aggregate demand and supply, driving Israel’s economic growth. Concurrently, the Israeli government strove to liberalize its capital market and privatize government corporations, steps that intensified local competition. In the context of this dynamic environment, Israeli high-tech was able to take off and carry the nation to heights previously unknown on any international standard. In describing this phenomenon I have chosen to use the term take-off rather than the more moderate term growth because the advancement of Israeli high-tech during this decade was clearly as rapid and precipitous as the split-second ascent of a carrierlaunched aircraft soaring into the stratosphere. Indeed, this rapid ascent was noted by and highly praised in the local and international press, for a number of reasons. First, the number of Israeli firms traded abroad, especially on NASDAQ, increased rapidly. If only five Israeli firms with an aggregate market value of a few tens of thousands of dollars were traded on NASDAQ at the beginning of the decade, by the end of the same decade close to 120 Israeli firms were traded with aggregate market value of about $120 billion(!). A closer look at each of these firms reveals a similar profile. The majority were startups active in various branches of the high-tech industry. Second, although the number of startups in this sector amounted to only a few dozen in the late 1980s, by the end of the 1990’s that number had swelled to almost 4,000. The Israeli government played an important if not pivotal role in this trend by inaugurating the technological incubator program, headed by the Chief Scientist of the Ministry of Industry and Trade. The 27 incubators, established to provide seed conditions for new ventures employing many scientists who had recently immigrated to Israel from the former Soviet Union, helped transform Israel’s entrepreneurial infrastructure.

2

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

High-Tech Performance

Third, this new entrepreneurial technological infrastructure was accompanied by the establishment of new institutions to facilitate the flow of venture capital. The state made a considerable contribution here as well by establishing a governmentfinanced venture capital investment fund that attracted numerous private funds. At the beginning of the 1990’s, total venture capital available equaled $100 million, while by the year 2000 available capital reached the $3 billion (!) mark. In short, we are referring to a unique event by any standards. In less than 10 years, a new infrastructure supportive of technological ventures was constructed. Consequently, thousands of new firms were established, some of which were traded on NASDAQ, the world’s most competitive securities market. Israel consequently earned its place on the international map, becoming a site for pilgrimages by national delegations keen to acquaint themselves first hand with the phenomenon and with Israeli high-tech’s formula for success (see Figure 1.1) In 1991, my family and I returned to Israel after 10 years in the U.S. My first years abroad were spent completing my doctoral studies at the University of Illinois, at Urbana-Champaign, after which, in 1986, I joined the faculty of the University of Michigan at Ann Arbor, where I taught until our departure. During those years, I specialized in global competitive strategies while striving to construct a strategic theory. Concurrently, I empirically investigated events that had transpired in countries and continents other than Israel and the Middle East. Before returning to Israel, I had made a ‘‘strategic’’ decision to continue to dwell on strategic theory construction but

Indices of Success at the Take-off Peak About 120 firms traded on NASDAQ Total firm market value of about $120 billion About 4,000 startups

I. Take-off II. Crash

1990

03/2000

III. Recovery?

2003

Years

Figure 1.1: The research challenge: explaining the take-off of Israeli high-tech.

Introduction

3

to focus my empirical research on Israeli firms. I also decided to conduct comparative research by including foreign firms in the analysis but only when this would contribute to understanding Israel’s economy and promote devising directions for its growth. As a result of my comparative research, I had come to understand that a nation’s economy cannot develop without the entry of foreign firms into the local market. Thus, the first question that intrigued me was why had so few foreign firms entered Israel between 1948 when the state was established and 1990. After all, foreign firms brought with them a wealth of essential resources, including knowledge, accompanied by the possibility of mergers that could offer Israeli firms an opportunity to penetrate domains marked by globalization, far beyond the nation’s borders. In my first study of foreign firm strategic entry into the Middle East, some years before I returned to Israel, my collaborators were Miles Shaver, then a doctoral student, and Barney Young, a colleague who specialized in international economics. Focusing on the period 1986–1990, we managed to locate the 40-odd American firms that had entered the Middle East, only 12 of which had entered Israel. These figures put me on alert and motivated the following research question: What is the strategic profile of foreign firms that opted to enter this politically volatile and often dangerous region? The Arab boycott prevented the concurrent entry of firms into Arab states and Israel. Among those firms that had penetrated the region, what was the strategic profile marking those who chose to enter Israel rather than its Arab neighbors? Our investigation was motivated by the idea that constructing a strategic profile of those firms might assist Israeli firms interested in competing on global market to locate appropriate partners. The resulting study was based on Kahneman and Twersky’s prospect theory and was published in Strategic Management Journal, the leading journal in the field. In this study, my American colleagues and I presented the strategic profiles of the firms maintaining a presence in the countries of the region (Fiegenbaum et al. 1996). Following that study, I realized that the major scholarly challenge awaiting me was to discover how competitive strategy among firms could contribute to understanding economic development in Israel. Most insights to date regarding Israel’s economic growth had been in the context of macroeconomic and demographic/political theories, such as the roles of interest and inflation, immigration from the former Soviet Union, the peace process, and money market liberalization, as well as privatization of state-owned enterprises. Insufficient mention was made of firm strategy and I saw this lacuna as an opportunity. Henceforth, I will focus my future research about Israel’s economic growth on analyzing global competitive strategies. My first study on the entry of foreign firms into Israel and the Middle East thus became the nucleus of an analytic approach toward understanding the growth of Israeli industry, particularly high-tech firms, from the perspective of global competition, a process I now refer to as take-off. The Technion has provided me a fitting platform for completing this mission through the research papers written by my students at all levels of study (BSc, MSc, and DSc.). When I first came to the Technion, I had no clear image of how to focus my research because I could observe no specific trends within Israel economy. I certainly had no inkling of the phenomenon that I would later identify as take-off.

4

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Over the years, my commitment to studying strategy and to empirical investigation of strategic theories within the context of Israeli high-tech has led to disclosing various industry features and trends. At some point in the mid-1990’s I began to grasp just how exceptional this story was, and I began attempting to construct a paradigm to explain the take-off that I had observed. At the core of the paradigm proposed in this volume is a strategic approach rooted in the theory of strategic reference points that I developed together with my colleagues, Professors Stuart Hart and Dan Schendel. This theory has been applied to domains as different as human resources (Bamberger & Fiegenbaum 1996) and marketing (Shoham & Fiegenbaum 2002). The theory’s main insight is that strategic management must be multidimensional and targeted if a firm is to respond to intensified competition. Put simply, this theory argues that a firm must demonstrate improved strategy along the three competitive dimensions of strategic reference points simultaneously.

1.2. A Strategic Approach — Strategic Reference Points The strategic literature focusing on organization management and survival offers a number of approaches. Porter (1980) stresses the importance of positioning the organization in the best place vis-a`-vis its competitors. Based on Porter positioning focus, Fiegenbaum et al.1 proposed a detailed theoretical analysis that incorporates factors of organizational self-definition with positioning, thus explaining how organizations (or firms) can achieve a competitive edge. Utilizing management and economic theories, the authors identified three main dimensions — internal, external, and temporal — all of which capture the entire spectrum of the organizational theoretical strategic options and, effectively, represent the basis for definition of the relevant competitive space (Figure 1.2). A firm’s internal dimension is comprised of two categorical variables — input and output — that in effect encompass all of an organization’s strategic variables. Viewed strategically, output can symbolize an organization’s vision. Although it characterizes organizational economic goals (e.g., return on investment, market share, firm net worth), the theoretical emphasis here is on the long-term output resulting from pooling resources and utilizing them effectively, that is, organizational vision. Alternatively, organizational input (resources) can be considered as strategic capabilities. We argue that complex strategic capabilities, dependent as they are on tangible as well as intangible assets, are the only factors that ensure sustainable competitive advantages that can lead toward fulfillment of the vision. The external dimension consists of three fundamental categorical stakeholders: customers, suppliers, and competitors. An organization wishing to survive in a competitive environment must develop strategic capabilities sufficient for meeting customers’ future needs. Nevertheless, an organization cannot neglect its suppliers, for they provide crucial resources to be exploited when constructing strategic 1

See Fiegenbaum— et al. (1996).

Introduction

5

Time External

Future

Competitors Present

Suppliers Past

Customers

Inputs: Strategic Capabilitie

Output: Vision

Internal

Figure 1.2: The competitive model — strategic reference points.

capabilities. Furthermore, some of these suppliers-resources are used by the organization to weave networks of strategic partners. The third set of parameters refers to competitors. Strategic development is motivated by the need to reposition the firm more optimally relative to its competitors, whether by means of direct competition or, of late, by strategic entry into joint ventures or partnerships. Time is the third dimension. A strategic perspective must focus on the past, the present, and the future. Organization theorists tend to distinguish between forces of inertia rooted in an organization’s past and future-oriented strategic approaches that stress the organization’s capacity to liberate itself from established routines, innovate, be creative, and take measured risks, as well as navigate toward a future independent of the past. Based on this three-dimensional competitive space delineated by strategic reference points, Fiegenbaum et al. (1996) proposed a strategic theory defined in the same terms. They argued that, essentially, firms that apply this construct more effectively

6

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

are more successful. Based on this conception of competitive space, that is, implementation of strategic actions on internal as well as external dimensions focusing on the future, we propose the following definition of winning strategic management. Formulating a future (time dimension) vision and developing strategic capabilities (internal dimension) that will satisfy future needs of the customers, and will benefit from the supplier network, in a better way than competitors, both local and global wise (external dimension).

Intra-organizational dimension

We suggest a matrix of typologies for assessing the efficiency of a firm’s strategy in terms of strategic reference points (Figure 1.3) The figure presents a firm’s progress toward the future in terms of the two competitive dimensions, internal (firm vision and strategic capabilities) and external (customers, suppliers, and competitors). In order for a firm to be assigned to a specific category or cell, its actions must be characterized as efficient or inefficient along each of the two dimensions. If the firm manages to delineate a vision and secure strategic capabilities (the internal dimension), it will be placed in the efficient (as opposed to the inefficient) category. Similarly, if the firm meets its customers’ future needs and supplies in comparison to its competitors (the external dimension), it will be placed in the efficient (as opposed to inefficient) category. The first type describes organizations that apply inefficient strategies internally as well as externally. Organizations belonging to this category are destined for failure owing to their inability to develop the internal capacities necessary to survive in their competitive environment; hence, we have labeled these failure-prone organizations as myopic organizations (Type 1). In contrast, organizations that have adopted strategies integrating vision with strategic capabilities on the internal dimension, and that aim at meeting the future needs of customers and suppliers better than their competitors, are likely to survive overtime, and are thus categorized as competitive

Efficient

Inefficient

2. Efficient firm

4. Effective firm

(narcissistic)

(competitive)

1. Failed firm

3. Daydreaming firm

(myopic)

(amorphous)

Inefficient

Efficient External Dimension

Figure 1.3: A typology of organizational competitiveness based on strategic reference points.

Introduction

7

organizations (Type 4). Narcissistic organizations, that is, organizations enamored by self-adoration (Type 2), are characterized by a strategy focusing on internal organizational capacities yet ignoring the external competitive environment. Such entities tend to apply strategic approaches aimed at increasing efficiency and improving the internal environment, yet they remain myopic to threats and opportunities posed by the external environment. Diametrically opposed to this type are organizations following strategies aimed at responding to external challenges only; they make no attempt to delineate a vision or construct any strategic capabilities (Type 3). Such organizations are amorphous, meaning they lack any clear self-identity and are constantly searching for mechanisms originating outside the organization to salvage their operations. The ideal scenario for achieving a ‘‘winning strategy’’ is that of the competitive organization (Type 4). In strategic diagnosis of organizations, the goal is to strategically manage the organization in accordance with the competitive organization typology and thus ensure its survival. If such a goal is unfeasible, the organization should at least aim in that direction, as indicated by the arrows in Figure 1.3. When I was writing this book in the Fall of 2003, the history of Israeli high-tech could be encapsulated in Figure 1.1. The 1990’s, until the collapse of the US and other stock exchanges in March 2000, can be considered the take-off period. Currently, we are still in the throes of the collapse; indicators such as market value show that the precipitous decline of the high-tech industry (e.g., a loss of about 80% of the market value of the firms traded on NASDAQ), is so much more rapid than the take-off, and is continuing. We are all eager for Israeli high-tech to take off again attempting to devise strategies to generate the industry’s next period of growth. Yet, before recovery is achieved, and before other books relate the story of this sector’s downward slide and subsequent books portray its recovery, I decided to review my former students’ research on the subject, some supervised in collaboration with colleagues. The result of that review was my decision to write this book, which presents a new, national paradigm to explain the take-off of Israeli high-tech from a strategic perspective. Considered in terms of the paradigm, the majority of the works collected in this volume refer fully or in part to the competitive space as defined by strategic reference point theory.

1.3. The Suggested Take-off Paradigm Figure 1.4 presents a model of the take-off in the Israeli high-tech industry during the 1990’s from a strategic perspective. The paradigm stresses two characteristics: parameters and reciprocal relations. Parameters comprise five major factors: globalization and the entry of foreign forms, national infrastructure supporting technological ventures, new sources of high-tech entrepreneurs, strategic leadership (senior management), and establishment of new firms and industries. Reciprocal relations involve two mechanisms: sequential and interactive. The argument at the core of the paradigm is that when viewed strategically, all the individual parameters

8

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

B. National Infrastructure (National Level)

C. New Sources of Entrepreneurs (Individual Level)

A. Globalization (International Level) Take-off of Israeli High-Tech Entrepreneurship

E. New Firms and Industries (Industry Level)

D. Strategic Leadership (Firm Level)

Sequential Interactive

Figure 1.4: A multi-level paradigm of the Israeli high-tech take-off from a strategic perspective — sequential and interactive effects.

as well as the interactions between the parameters contributed to take-off. The following discussion focuses on the paradigm and its characteristics.

1.3.1. The Paradigm’s Parameters 1.3.1.1. Globalization and the entry of foreign firms (international level) The first parameter discussed in the book relates to global-competitive processes now characterizing Israel’s economy (Bartlett & Ghoshal 1987; Porter 1986; Prahalad 1990). Chapter 2 presents theoretical explanations of globalization in general as well as within the Israeli economy. We conclude that structural changes in Israel’s economy precipitated globalization, competition, and openness to international players, thus

Introduction

9

enabling Israeli firms to take advantage of global opportunities. Chapter 3 discusses the privatization of government corporations. The findings show that while the rate of privatization was slower than planned, nonetheless the level of privatization achieved did create several business opportunities that improved the competitive potential of many Israeli industries on international markets (Fiegenbaum et al. 1997). Chapter 4 discusses the entry of foreign firms into the Israeli market. Research results indicate that the strategic position of foreign firms was superior to that of local firms; hence, the inferior position of Israeli firms motivated them to search for new strategic solutions. In summary, such changes on the global level as increasing globalization, the entry of foreign firms and privatization of government corporations exposed inchoate Israeli high-tech industries into a new international environment whose challenges clearly stimulated the industry’s take-off (see Table 1.1). 1.3.1.2. National infrastructure supporting technological ventures The second parameter, national infrastructure for technological entrepreneurship, stresses the pivotal role of the state in take-off. As the Israeli economy began to feel the effects of globalization (Parameter A), industry and government leaders decided to create new institutions and facilities, forming an infrastructure appropriate to the new competitive environment. Chapter 5 discusses one of these institutions: the technological incubators established in 1990 by Yigal Erlich, then Chief Scientist of the Ministry of Industry and Trade. All told, 27 of these important venture-promoting operations were established. The approach encouraged cooperation as well as competition among incubators, thus helping recruit promising projects and encouraging the incubators to provide improved services to the nascent firms. Chapter 6 expands the discussion to how the startups within these incubators were managed. Findings indicate that in addition to the contribution made by the incubator’s top administration and staff, the best predictors of a venture’s perceived success were the innovativeness of the project’s core idea as well as its capacity to introduce strategic changes and recruit strategic partners. In contrast, the best indicators of a venture’s perceived survival were the ability of the innovative product to reap high profits, the personal risks taken by the project manager, and the firm’s organizational learning capabilities. State intervention in the form of technological incubators was therefore vital to industry take-off. 1.3.1.3. New sources of high-tech entrepreneurs The third parameter of the paradigm presents two different though complementary features in creating new sources of high-tech entrepreneurs. Chapter 7 focuses on women as high-tech entrepreneurs, for example Dr. Orna Barry of Ornet, Roni Ross of Panorama, and Ruth Allon of Netvision. About 80% of the startups headed by women were initiated by established firms, and almost 50% of these ventures survived for at least five years. About half employ fewer than 20 people, and the majority are located in urban areas, with a clear tendency to situate them close to home and in city centers. Moreover, a statistical relationship was identified between the strategic capabilities of the female entrepreneur and the performance of the venture. Chapter 8 discusses another source

10

Part

Chapter (Parameter)

Research (Joint Supervisor)

Introduction: take-off and the challenge to strategic paradigm development 1. Take-off of Israeli hightech: national-level strategic paradigm A. Globalization and entry of foreign firms into the Israel market 2. Globalization in Israel 3. Privatization of Israeli firms 4. Entry of foreign firms into Israel

All students Eran Turkel (Prof. Uri Ben Tziyon) Dovev Lavie

B. National infrastructure supporting technological ventures 5. Technological incubators 6. Management of startups participating in technological incubators

Dovev Lavie Elitzur Cohen

Main Findings Presentation of a national-level strategic paradigm explaining the take-off of Israeli high-tech Challenge: model for managing high-tech take-off; the theory of strategic reference points Global processes transpiring on national level, including privatization and entry of foreign firms as motivating factors Required state intervention Privatization — Encouraging economic efficiency ‘‘Landing’’ — threats and opportunities Establishment of competitive infrastructure for technological incubators, capital recruitment, startup management Competitive market for recruitment and management of startups Competitive market for project recruitment

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 1.1: The strategic paradigm applied to the Israeli high-tech take-off — summary.

C. New sources of hightech entrepreneurs 7. Women as technological entrepreneurs 8. Elite IDF units (8200)

Nira Boneh Eran Baram (Dr. Shaul Gabai)

D. Leadership: senior management and competitive information 9. Boards of directors

Dalit Lisitzky

10. Information about competitors

Yaniv Dinor (Prof. Ben Gilad)

11. Medical technology A — industry analysis 12. Medical technology B — firm analysis

Ezra Cohen

E. Debut of new firms and industries

Lihu Avituv

Women as strategic managers; social networks constructed by veterans of Israel Defense Forces (IDF) technological units An important reservoir of strategic planning capacity A reservoir of strategic planning capacity and exploitation of social networks Strategic management by board of directors aided by collection of competitive information improves performance Strategic management by board of directions improves performance Salience of competitive information for strategic management Strategic and new venture capabilities encourage entry into and creation of new and attractive industries Salience of strategic capabilities and joint ventures Multidimensional strategic actions for improvement of competitive position Introduction 11

12

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

of potential high-tech entrepreneurs: veterans of Unit 8200, the elite technological unit of IDF. The peace process in the 1990’s induced a sense of euphoria, and many newly discharged or recently retired officers joined the ranks of new high-tech entrepreneurs. The research reported here focused on the impact of the strategies and social networks of the Unit 8200 veterans on business performance. It was found that as the firms founded by these veterans improved their strategic capabilities, business performance increased. Similarly, a significant relationship was found between the nature of the entrepreneur’s social networks and the competitive environment in which the ventures operated. For example, it was found that ventures operating in a competitive environment exhibited poorer performance when the social networks of their founders were smaller and more tightly knit (a mechanical structure). Alternatively, ventures operating in a dynamic, complex environment exhibited improved performance levels when the structure of their social network was more organic. That is, the findings indicate that it is not the size of the network that determined venture performance but rather the degree of fit between network structure, venture strategy, and environment characteristics. Put simply, individuals with the appropriate skills, among them women and veterans of an elite IDF technological unit, contributed to a venture’s attractiveness, thus constituting a crucial factor in the growth of Israeli high-tech.

1.3.1.4. Leadership — senior management and competitive intelligence The fourth parameter discusses a firm’s senior management from the perspective of its board of directors as well as with respect to competitive intelligence gathering. Chapter 9 explores the contributions of the board of directors to company performance. Empirical findings of the study indicate significant, positive relationships between a firm’s financial performance and two types of boards’ perspectives: demographic and process issues such as size, diversity, and committees on the one hand and the profiles and capacities of its resources on the other. When the firms studied were divided into successful and less successful groups, the proportion of firm members holding a university degree, board size, number of committees, board members’ reputation, and political connections were found to be higher in the successful than in the less successful firms. Chapter 10 focuses on the contribution of competitive intelligence. Intel’s legendary Andrew Grove once declared that ‘‘only the paranoid survive’’ in a world where technology changes almost instantaneously. The most salient finding of the study was the degree of informality that characterized how Israeli firms gathered competitive intelligence. No orderly system of data collection, analysis, or distribution was identified; in comparison to American firms, Israeli firms lag far behind in this area. Nonetheless, we should not underestimate the behavior of senior Israeli managers in this area. Contrary to their American peers, Israeli managers will roll up their sleeves and get directly involved in intelligence gathering. But it is also clear that when the requisite formal organizational structure is in place, satisfactory intelligence gathering is likely to increase. We cannot escape the conclusion that had Israeli hightech firms succeeded in integrating the intelligence-gathering inclinations of their senior managers with orderly intelligence collection, analysis, and distribution, they

Introduction

13

would have improved their competitive edge. In conclusion, the capabilities developed among the senior management of a high-tech firm, including the ability to gather competitive intelligence, constitute factors essential for industry take-off. 1.3.1.5. Debut of new firms and industries The fifth parameter in the model focuses on new industrial sectors established as the outcome of cooperation between local and foreign firms. Chapter 11 examines Israel’s medical technology industry, with emphasis on strategic management, including management of joint ventures. Based on a sample of 45 firms, the main findings pointed to an environment of persistent change and strategic adaptation. The entrepreneurs’ marketing experience and their strategic research and development (R&D) and marketing capabilities along with a global approach all contributed to improving firm performance. Moreover, local and international joint ventures in the area of marketing were associated with reduced risk, whereas technological joint ventures were associated with increased risk. Chapter 12 addresses the medical technology industry while focusing on a different methodology. We monitored qualitatively six major firms from the time they were established through discussions and interviews with their managers and/or founders: Uziah Galil, Elscint; Dr. Shimon Eckhaus, ESC; Ami Yakhin and Yitzhak Kaplan, Laser Industries; Eitan Miltz and Shaul Dukeman, CMT; Prof. Rafi Bayer, Shosh Friedman, and Amir Lushkov, Instant; Yitzhak Kaplan and Alex Harel, Optomedic. The research findings indicate that on the internal dimension these ventures took similar strategic actions with respect to developing vision and strategic capabilities, while on the external dimension they were more successful than their competitors in meeting the future needs of their customers. In summary, the large number of firms entering several new and attractive global industrial branches served as an important factor in the take-off of the Israeli high-tech industry.

1.3.2. Reciprocal Relations: Sequential and Interactive We propose two models to describe the reciprocal relations among the parameters of the proposed paradigm: the sequential model and the interactive model. The sequential model assumes that one factor influences another, which affects still a third and so on in a sequential order. The model’s basic assumption is that processes develop over time; each level requires its own timeframe for comprehending and responding to the processes exerting some influence on it. In contrast, the interactive model assumes proactive rather than reactive assumptions and strategic thinking. Therefore, the factors involved adapt themselves to the organizational processes, at the same time affecting each other and being affected by each other. The Israeli high-tech industry took off during the 1990’s, at a time when the Israeli economy was undergoing wide-ranging transformations toward liberalization and free competition, an about-face from the centralization that had dominated the country at the beginning of the decade. Hence, the assumption is that among the reasons for adopting the strategic reference points model (Fiegenbaum et al. 1996),

14

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

the simultaneous movement along the internal and external dimensions, is the impact of government intervention. Once liberalization set in and began to be influenced by competition and globalization, it is reasonable to assume the dominance of the interactive model, with each factor influenced by, as well as influencing, the high-tech take-off. At this stage, the danger that a specific parameter would be inappropriately monitored and thereby bring the process to a standstill is minimal. Table 1.2 summarizes the reciprocal relations among each of the paradigm’s five parameters. The first part of each statement in each cell describes the impact of the row parameter on the parameter in the relevant column, whereas the second part describes the reciprocal influence on each row parameter exerted by the parameter listed in the respective column. 1.3.2.1. The sequential mode The first parameter, globalization, and its impact on the Israeli economy, including privatization and the entry of foreign firms, encouraged decision-makers in the economic and technological arenas to suggest innovative directions for confronting new challenges. The political, economic, and demographic changes in Israel during this period must be kept in mind, notably the peace process, economic liberalization, and competition, and immigration from the former Soviet Union. In response, the state made an effort to create appropriate institutions — for example, technological incubators and startup companies (Parameter B) — to support new ventures. This infrastructure encouraged such new actors as women and veterans of elite IDF technological units to enter the high-tech field for the first time. These highly qualified individuals provided their firms with competitive advantages (Parameter C) through the strategies they developed for their firms as well as with the help of their social networks (especially veterans of Unit 8200). In order to implement the competitive strategy that would provide the necessary competitive advantages, a model of strategic leadership was required for senior management. Ventures thus introduced competitive intelligence-gathering as well as constructed and managed their boards of directors to provide the competitive advantages necessary for success (Parameter D). Successful board leadership together with the affinity of senior management to direct their firms toward attractive projects led ventures to concentrate on industries with international growth potential, such as medical technology (Parameter E). In less than a decade, the new industries, the cornerstones of the new global economy, helped Israel’s high-tech industry take off rapidly and reach noticeable international standards. These events affected Israel’s position in the world market, concurrently influencing new global trends (Parameter A). These events, in effect, demonstrate the sequential model suggested here: A. Global transformations - B. Country - C. Individuals - D. Firms - E. Industries - A. Take-off and international position (i.e., global transformations). 1.3.2.2. The interactive model The interactive model assumes that the paradigm’s five parameters are characterized by simultaneous reciprocal interrelations. That is, each parameter affects and is affected by the others. Globalization (Parameter A) had an impact on all the other parameters by introducing threats as well as new

Table 1.2: Reciprocal relations among the paradigm’s parameters (by analytic level). A. Globalization and Entry of Foreign Firms (World)

A. Globalization and entry of foreign firms (world)

B. National infrastructure supporting new ventures (country)

C. New sources of industries and firms (individual)

C. New Sources of Industries and Firms (Individual)

D. Strategic Leadership of Senior Management (Firms)

E. Debut of New Industries (Industry)

Global threats (opportunities) inspire investment in venture-supporting infrastructure, ventures that improve firm’s global position

Global threats (opportunities) inspire entry of new entrepreneurs who affect the firm’s global position

Global threats (opportunities) inspire strategic leadership that affects the firm’s global position

Global threats (opportunities) inspire creation of new industries that affect the industry’s global position

Pro-venture infrastructure encourages entry of new entrepreneurs who reinforce this infrastructure

Pro-venture infrastructure challenges strategic management that reinforces this infrastructure

Pro-venture infrastructure challenges the development of new global industries that reinforce this infrastructure New sources and capacities encourage development of new industries that encourage further new sources and capacities Strategic management encourages development of new industries that encourage further strategic management

New sources and capacities encourage strategic management, in turn encouraging further new sources and capacities

Introduction

D. Strategic leadership of senior management (firms)

—

B. National Infrastructure Supporting New Ventures (Country)

15

16

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

opportunities. These threats motivated policy changes on governmental level (Parameter B), the individual (or entrepreneur, Parameter C), and the firm (i.e., senior management, Parameter D), as well as stimulating realization of the need for startups and industries (Parameter E). The second parameter, venture-supporting infrastructure, served as an important basis for attracting new entrepreneurs (Parameter C), encouraging strategic management (Parameter D), and investing in attractive industries (Parameter E). Similar processes evolved among the remaining parameters, as summarized in Table 1.2. In conclusion, this book presents and discusses a paradigm based on a research stream I had conducted during the 1990’s on ‘‘the take-off of Israeli high-tech in the 1990’s.’’ At the time of incorporating the 10 years of research into a book, mainly during the 2002–2005 time period, the Israeli and global high-tech community has changed dramatically following the March 2000 bubble burst. In contrast to the take-off that occurred in the 1990’s, the current stage is one of decline and restructuring. Many firms have gone bankrupt and disappeared from the industrial map; the market value of the Israeli firms traded on NASDAQ has shrunk relative to the high levels reached before the March 2000 bubble burst. New companies have entered the industry and new strategic forums have evolved. Although this book strives to understand the processes contributing to take-off in the 1990’s, it is also important that future research will focus on the after crash and directions leading to recovery. My hope is that the current comprehensive research, with its historical perspectives, can enrich the insights about the strategic explanations for this phenomenon. Comprehension of the past as well as of the processes that can redirect current trends and lead the industry to recovery can assist firms as well as the country to arrive at a new period of prosperity. Moreover, economic success and cooperative global business ventures between Israelis and Arab states can, indeed must, serve as a major instrument for promoting peace in the war-torn Middle East. The paradigm developed in relation to Israel can also aid other small countries, geographically distant, that have an interest in entering the prosperity zone of the high-tech community. Big nations with strong economies and technological infrastructure can find this perspective as an important challenge in aiding this development as well as providing new sources of growth for their own economies. My intension in writing this historical and longitudinal perspective was to provide insights that can aid academic researchers, company executives and public policymakers. I hope my readers enjoy the outcome of the 10 years of committed research about Israeli high-tech take-off during the 1990’s.

References Bamberger, P., & Fiegenbaum, A. (1996). The role of strategic reference points in explaining the nature and consequences of human resource strategy. Academy of Management Review, 21(4), 926–958. Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New strategic requirements. Sloan Management Review, 29, 7–17.

Introduction

17

Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17(3), 219–236. Fiegenbaum, A., Shaver, M., & Yeoung, B. (1997). Which firms expand to the Middle East. Strategic Management Journal, 18(2), 141–148. Porter, M. (1980). Competitive strategy. New York: Free Press. Porter, M. E. (1986). Competition in global industries. Boston: Harvard Business School Press. Prahalad, C. K. (1990). Globalization: The intellectual and managerial challenges. Human Resource Management, 29(1), 23–27. Shoham, A., & Fiegenbaum, A. (2002). Extending the competitive marketing strategy paradigm: The role of strategic reference points theory. Journal of Academy of Marketing Science, 27(4), 442–455.

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Part I Globalization, Privatization, and Entry of Foreign Multinationals Part I discusses globalization issues as well as the entry of foreign companies into Israel. Chapter 2 considers the theoretical aspects of globalization, particularly in Israel, and Chapter 3 discusses the privatization of government companies as part of a necessary competitive process toward globalization. Finally, Chapter 4 focuses on the entry of foreign companies into Israel, particularly their impact on the positioning and strategic behavior of Israeli companies. The book’s central claim is that global processes (Chapter 2), privatization (Chapter 3) and the entry of foreign companies (Chapter 4) were important factors influencing the Israeli high-tech momentum in the 1990’s.

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Chapter 2

Globalization in the World and in Israel 2.1. Globalization — Theoretical Background In the two last decades of the 20th century, a new reality established itself in the business arena, characterized primarily by economic globalization and global competition (Porter 1986). The term globalization is used to describe the industrial companies’ more and more widespread practice of conducting business activities across geographical borders (The Manufacturers Association of Israel Report 1997). The term globalization refers to the cross-national–cross-continental trend in which the impact of economic, geographical, cultural, and national borders is diminished as a barrier that interferes with business interactions, reinforcing worldwide economic, cultural, informative, technological, and often political integration, and gradually establishing comparable consuming patterns across the globe. Global activities can range from indirect export and import (via intermediaries), through direct export and import via marketing subsidiaries, licensing agreements, and other forms of cooperation, and up to direct foreign investments, mergers, and acquisitions. The extent of globalization in an organization or a state depends, therefore, on the extent and nature of its business activities abroad. Globalization began immediately after WWII and accelerated during the 1980s. After WWII, the world’s economy was marked by regional division of commerce into separate groups, such as the US, the Soviet Bloc, and the communist states of Eastern Europe. Commerce between these regions was difficult, mainly due to high customs duties, strict quotas, and regulation over the transfer of capital and cash, and high exchange rates. Since then, this trend toward separate economic regions has weakened, with a strong opposing trend developing instead toward economic and financial integrations of a large part of the world. The standard of living in countries around the world has become more similar, leading to similar consumer needs and demands. Hence, similar products can be distributed and marketed in different locations worldwide. Moreover, mergers of local capital markets to form a global capital market have led to an increased flow of capital among countries. Furthermore, barriers to international commerce and investments put in place in the 1920s and 1930s in an attempt to protect local products, have begun to be eliminated. These barriers included, among other things, high customs duties on imported goods, which led to a slowdown of world demand and contributed to the recession of the 1930s. Learning the lessons of this recession, Western countries, under the leadership of the US, decided to remove barriers to enable the free flow of goods and services. This decision led to signing the General Agreement on Tariffs and Trade (GATT) agreement. Today’s constant and ongoing technological development contributes to creating communication channels as well

22

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

as establishing stockpiles of information and distributing know-how among various organizations worldwide. Organizations strive to connect with other organizations that have technological know-how in order to attain access to technological resources not at their disposal, and by so doing reduce the costs of acquiring these resources. New technologies also help organizations adapt their products more easily to changing demands and needs of particular regions. An international labor market has developed, which is primarily managerial, professional, and technical. A global network of inter-organizational connections has also come into existence, as more and more organizations connect with other organizations by means of different cooperation options intended to increase their competitive advantage and their strategic capability to operate in the international arena. The World Investment Report (1996) notes a number of indicators of accelerated globalization during the 1990’s: growth of international commerce significantly exceeding growth of world output, trends toward direct investments transcending international borders, and the extent of imports. Between 1980 and 1990, world output increased by 32%, while the scope of international commerce increased by more than 55%. From 1984 to 1989, foreign investments worldwide increased at the rate of 29%; three times greater than the increase in the scope of international commerce. The year 1995 saw an increase of 40% in foreign investments worldwide, amounting to $315 billion. That year, developed countries invested $270 billion outside their borders, and received foreign investments of $203 billion. Developing countries received foreign investments in the $100 billion range, and invested $47 billion outside their borders. The value of cross-border mergers and acquisitions worldwide doubled in the period 1988–1995, totaling $229 billion, $135 billion of which consisted of acquisitions representing more than 50% of acquired company. In 1971, US imports reached 4.1% of the gross national product (GNP), in 1980 — 9.1%, and in 1989 — more than 18%. This was the global background for the Israeli high-tech take-off during the 1990’s.

2.2. Globalization of the Israeli Market While globalization is not new, its implications on Israeli industry began to be felt more and more in the 1990’s (Fiegenbaum et al. 1997). These implications can be divided into two main areas: local and international markets (Globalization in the Israeli Industry 1997). Among the most important implications of globalization on the local Israeli market are the following: an increase in competitive imports, rapid penetration of international brand names, and the entry of foreign companies. In 1994, competitive imports of goods in sectors in which at least 20% are manufactured in Israel as well increased to about 30% of the total industrial products on the local market, compared with 27% in 1992 and 25% in 1990 (The Manufacturers Association of Israel Report 1997). Imported goods totaled $15.1 billion in 1990 versus $28.3 billion in 1995 (Foreign Commerce Department, the Central Bureau of Statistics 1995), representing an increase of 87.5% in imports. These data indicate the extent to which the

Globalization in the World and in Israel

23

Israeli companies are vulnerable to imports from countries with which it has bilateral commercial agreements, as well those with which it does not have such agreements, for example, Third World countries. Nevertheless, note that from 1996 to 1997, the rate of imports decreased. In 1997 imported goods (excluding diamonds) totaled $23.9 billion, compared to $24.8 billion in 1996, representing a decrease of $927 million or 3.7% (The Economic Department, The Export Institute 1997). In the wake of the peace process in the Middle East, penetration of international brand names has accelerated rapidly. These international brand names are either imported to Israel or manufactured in Israel under license agreements. Indeed, in recent years many Israeli companies have chosen to market foreign brand names (The Manufacturers Association of Israel Report 1997). Massive penetration of foreign companies into Israel has been evident since the early nineties. The number of foreign companies entering Israel increased from a few dozens in 1986–1990 to several thousand in 1991–1997 (Fiegenbaum et al. 1996). A partial list of these foreign companies at various stages of entry, provided by the Business Promotion Headquarters in the Ministry of Industry and Commerce, includes more than 50 major companies and is growing all the time (The Manufacturers Association of Israel Report 1997). Foreign companies enter Israel in different ways and for different reasons, aided by the positive climate established in the region in the wake of the peace process; these ways include establishing plants, acquiring ownership of Israeli companies, establishing joint ventures, and cooperating with Israeli companies. Among the multinational companies and corporations that have entered the Israeli market are Unilever, Danone, Nestle´, McDonalds, Office Depot, Motorola, Vishay, Intel, Microsoft, and others as well. Foreign investments in real sector Israeli corporations grew from $170 million in 1993 to $903 million in 1995, and then dropped to $584 million in 1996. Real sector investments of foreign residents in private placements and mergers of Israeli companies abroad increased from $270 million in 1993 to $470 million in 1996. Furthermore, in 1996 74% of foreign residents’ real sector investments in Israel were in industry (Bank of Israel 1997). Table 2.1 presents

Table 2.1: Investments of foreign residents in Israel from 1990 through 1997 ($ million, current prices). Year

Total

Marketable Securities

Direct Investments

1990 1991 1992 1993 1994 1995 1996 1997

81 366 505 756 626 1,975 2,441 3,406

20 15 35 176 183 386 331 712

98 375 519 560 415 1,516 2,029 2,569

Source: Bank of Israel Foreign Currency Supervision, Central Bureau of Statistics (1998), and Bank of Israel.

24

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

the scope of investments of foreign residents in Israel between 1990 and 1997, demonstrating an increasing trend in foreign investments in Israel. Globalization has also led to increasing the activities of Israeli companies on international markets, as seen in a number of signs and trends: an increase in the investments and activities of Israeli companies abroad, an increase in capital mobilization abroad, a major increase in exports, and gradual changes in the global strategy of Israeli companies. The Bank of Israel Report (1997) identifies several main trends pointing to an increase in investments and activities of Israeli companies abroad. The net real sector investments of Israeli companies abroad increased from $664 million in 1993 to $766 million in 1996. From 1993 through 1996, ten Israeli companies from different industrial sectors acquired holdings in companies abroad totaling around a billion dollars, representing about half of the foreign acquisitions for 1996. The number of Israeli companies that own companies abroad increased from 177 in 1991 to 489 in 1996. The number of companies operating abroad that are held by Israeli industrial companies reached 1,037 in 1996. The average investment abroad in industrial companies amounted to $5.4 million per company in 1996. Significant differences can be found among the industrial sectors, with $8.5 million in investment in the electronics and communications industry and $3.8 million in the food industry. Table 2.2 shows the scope of Israeli investments abroad in the period 1990–1997, indicating the increase in investment activity both in stocks and in direct investments. From 1990 to 1994, Israeli companies raised more than a billion dollars abroad. In 1996 alone, Israeli companies raised $1.2 billion abroad (The Manufacturers Association of Israel Report 1997). Figure 2.1 clearly shows the major increase in exported goods (excluding diamonds) in 1990–1998. Industrial exports increased from $3.3 billion in 1980 to $12.3 billion in 1995, with the major growth emanating from electronics and machinery, which increased from $1.25 billion in 1980 to $6.3 billion in 1995, and from chemicals and plastics, which increased from $851 million in 1980 to $3.2 billion in 1995. This growth trend continued in 1996 and 1997 as well,

Table 2.2: Investments of Israelis abroad from 1990 to 1997 ($ million, current prices). Year

Total

1990 1991 1992 1993 1994 1995 1996 1997

152 769 1,577 684 433 630 667 821

Marketable Securities 14 345 926 79 303 15 76 150

Direct Investments 165 423 651 763 735 646 743 670

Source: Bank of Israel Foreign Currency Supervision (1990–1996), Central Bureau of Statistics, Bank of Israel.

Globalization in the World and in Israel

25

Figure 2.1: Net export of goods (excluding polished diamonds) from 1990 through 1998 in $million. Source: Israel Export Institute International Media Division 1997.

although at a more moderate rate. Exported goods (excluding diamonds) in 1997 amounted to $15.7 billion, compared to $14.4 billion in 1996 (an increase of 17% compared to 1995), i.e., an increase of $1.3 billion or 9.1%. Industrial exports (excluding diamonds) in the first six months of 1998 amounted to $8.3 billion, indicating the following three points. First, there was no decrease in the growth rate of about 10% per year, surprising in light of the crisis in Southeast Asia. Second, the accelerating trend of increasing exports in labor-intensive sectors was noteworthy: 18.3% for half a year. Third, the distribution of exports by countries showed some changes: a major increase in exports to the US and the European Union totaling $5.1 billion or 87% of the total exports. In the 1990’s, gradual changes in the global strategy of Israeli companies became apparent. Increasing competition on world markets, shorter product life cycles, rapid technological changes, along with a shortage of technical and professional manpower on the one hand and cheap manpower available abroad on the other have forced Israeli companies to shift large segments of their business operations to foreign countries. This shift involves manufacturing abroad, as well as acquiring, merging with or somehow working together with foreign companies. Young high-tech companies that developed unique products have been forced to supplement their strategic capabilities, primarily by marketing through cooperation with companies abroad. The Manufacturers Association of Israel Report (1997) lists Israeli companies in various sectors that have implemented a global strategy. These examples illustrate the gradual changes in global strategic thinking among Israeli companies. The peace process has offered a new opportunity to the Israeli textile industry: transferring plants from Israel to neighboring countries with which Israel signed peace agreements, for example Egypt and Jordan. In these countries the cost of labor is lower than in Israel, a significant advantage in the labor-intensive textile sector. As a result, about 59 sewing workshops in Israel have closed in recent years, with a similar number of plants rapidly opening in Egypt and Jordan. Lodzia-Rotex opened a branch in Jordan, Delta Galil opened one plant in Irbid in Jordan and another in Egypt, and swimwear plants owned by Oberson and Gottex transferred some of their activities to Jordan. Textile imports to Israel have increased significantly in recent

26

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

years, constituting about 25% of clothing goods (The Manufacturers Association of Israel Report 1997). With the aid of strategic consultants from Harvard, Strauss has begun to think strategically as well as to introduce changes in its organizational structure as required by the peace process. One of the main conclusions of this strategic thinking is that in the near future the borders between Israel and its neighbors will be open, and the Middle East will be a free trade region. This conclusion, together with the difficulty involved in penetrating US and European markets, led the company to the conclusion that they must continue to focus on Israeli and Middle Eastern markets. In an attempt to protect its interests in the ice cream sector, where it has a tremendous share of the market, it decided to cooperate with the giant foreign company Unilever, among other reasons to reduce Unilever’s threat to Strauss’ business operations. Elite is a multinational company, with a major share of its sales abroad. The company has 15 manufacturing plants in seven countries and marketing centers in eleven countries. In 1992 Elite acquired the European companies Excella for manufacturing sweets and Union for manufacturing coffee, thus helping it enter European markets. ECI Telecom has begun optimizing its business operations. For a number of its production lines, for example DCME (Digital Circuit Multiplication Equipment) development and manufacturing is carried out in Israel, while marketing is executed via agents abroad. For other products that are not niche products, the company develops, manufactures, and markets through joint ventures or through its subsidiaries abroad, in order to survive in the competitive market. About a third of ECI Telecom’s employees are not Israelis, but rather employed by its subsidiaries in different locations worldwide. Globalization at Elscint can be seen in its marketing operations only. Elscint develops and manufactures its products in Israel and markets them through its subsidiaries in 14 countries around the world. About 40% of Elscint’s employees are abroad. The findings of a survey called ‘‘Globalization in Israeli Industry’’ shed light on the implications and scope of globalization on the Israeli market. This survey, carried out in October–December 1996, was initiated and directed by the Committee for Strategic Thinking and the Economics Division of the Manufacturers Association of Israel, and was planned and analyzed by M.A.P Planning and Marketing Counseling Ltd. Respondents included senior executives from 134 Israeli companies. The survey showed that the decisive majority of executives (79%) indicated that globalization is very important or important for their companies. Executives of medium and large companies (companies with a sales turnover over $10 million and more than 100 employees) indicated that globalization was very important, more than did executives of small companies. Its importance was perceived as particularly high among hightech sector executives, and lower (although still important) for the consumer goods sectors, including food, textile, and clothing. The survey also provides some objective data. For example, 80% of the companies are still active abroad, mainly through exports; about a third have manufacturing subsidiaries abroad; 30% of the companies also operate abroad by acquiring control of foreign company; approximately 50% of the companies are highly involved in joint ventures with foreign companies; around a third anticipate they will make foreign investments of over $5 million in the

Globalization in the World and in Israel

27

coming five years. As expected, the survey showed that big companies are planning large investments, in excess of $10 million.

2.3. Factors Accelerating Globalization in Israel Lavie (1997) presents a broad overview of economic, political, technological, business, and cultural attributes of the State of Israel that have helped attract foreign companies to Israel in particular and accelerate globalization in general. Several positive economic indicators can be seen in the Israeli market in the nineties. While the Israeli economy has had its ups and downs, the bottom line is that its achievements surpassed its failures. These achievements are measured mainly by comparing the level of contemporary Israeli economy and to its level at its inception. The population of Israel has increased six-fold since 1949, to about six million, representing an average annual growth rate of 3.7%. The GNP today (2003) is about $100 billion, with per capita income of $17,000. In 1950 the GNP stood at $4.5 billion (in current prices), and average per capita income was $3,500. That is, the GNP average annual growth rate is 6.8%, and the average per capita income growth rate is 3.4%. Israel’s economic structure has also undergone far-reaching changes. In its early years, the Israeli economy was characterized by a large agricultural sector employing 22.5% of the total number of business sector employees. The industrial sector consisted of traditional industries, which sold their products mainly to the local market and employed 27% of the total number of business sector employees. In the late 1990’s, only 4% of the business sector employees work in the agricultural sector. The percentage of employees working in industry has reached 25%, with about half employed in the high-tech sector. About 48% of industrial production is intended for export, with around two-thirds emanating from the high-tech sector. As the Israeli economy has matured, service industries have grown significantly, constituting about half of the business output in the market and half the jobs. The public sector in Israel comprises about 30% of the total number of jobs. This is relatively large compared with other countries in the world, and it points to the central role that this sector has played in the course of Israel’s history. Over time, the size of the public sector has been decreasing, and this trend is likely to continue. Israel’s modern and diverse infrastructure provides Israeli companies the opportunity for rapid and innovative technological development. The country’s top institutions of higher education, among them the Technion, Tel Aviv University, the Weizmann Institute, and the Hebrew University in Jerusalem, support these companies through research and by training future employees in technology, administration, and the sciences. Israel’s business-supportive environment features well-established industrial parks, venture capital funds for financing high-tech companies, and major funds for supporting joint ventures. All these help accelerate globalization in Israeli companies. An educated and skilled workforce is likely to improve the reputation of Israeli companies when negotiating with companies abroad to achieve cooperation agreements, acquisitions, or mergers. Israel is ranked the most educated country in the

28

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

world with respect to the percentage of the population who are university graduates. Israel has 140 engineers and technicians per 10,000 employees, compared to around 80 in the US and 75 in Japan. The massive immigration from the former USSR countries in 1991–1992 brought an infusion of educated manpower, including thousands of scientists and engineers bringing new knowledge and technologies to Israel. Israel’s commercial ties and legislative system serve to enhance the globalization process. Israel has free trade agreements with the US as well as with the countries of the European Union and of the European Free Trade Association (EFTA). Moreover, Israel has entered agreements to avoid double taxation with developed industrial countries such as Great Britain, Germany, France, Denmark, Sweden, Argentina, and others, and has preferred customs arrangements with Japan, Canada, Austria, Finland, and Norway. Israel offers government assistance and incentives, including bi-national funds that provide financing for approved joint R&D projects between Israeli and foreign companies, thus helping companies more easily establish technological cooperation relationships with foreign companies. The peace process has helped accelerate globalization in Israel. The signing of the Oslo Accords in September 1993 brought about a change in Israel’s status in the Middle East in particular and in the world in general. In the wake of the Oslo Accords, Israel signed a peace treaty with Jordan, and began establishing relations on different levels with the Gulf emirates and other Arab countries. The peace process has gradually turned Israel into a legitimate commercial partner in many countries worldwide, and has given Israel market exposure in countries with which it does not have bilateral commercial agreements. The political process even reduced the level of Israel’s security risk, and lowered expectations that war would break out in the region. In 1996–1997, Israel’s international status changed to some extent; the standstill in the political process, as well as negative economic indicators such as the slowdown of market activity, decelerated globalization processes in Israeli companies, both locally and internationally. Locally, entries of foreign companies slowed down. The 1997 data from the Investments Center of the Ministry of Commerce and Industry showed a decrease of 30% in foreign investments in Israel. Internationally, imports grew more slowly, as did export profits, as a result of high market interest rates. In a survey initiated by the Committee for Strategic Thinking of the Manufacturers Association of Israel Report, executives were asked about the main factors enhancing globalization and those obstructing it. The survey sheds light on the importance of certain factors in catalyzing or blocking the process. The three main enhancing factors, as indicated by the entire sample regardless of sector, company size, or level of international involvement, are as follows, according to order of importance: size of market and international opportunities it offers, possession of up-to-date technology or R&D, and existing ties with international companies. The three obstructing factors are: shortage of funds or lack of insurance against political risk, the political situation in Israel and in the peace process, and the harsh competition with companies in the target countries. The survey’s results are to some extent congruent with those factors in the Israeli society serving as catalysts for the globalization. The political process appears as an

Globalization in the World and in Israel

29

obstructing factor in the survey, since the survey was conducted at the end of 1996, when the process was at a standstill. Government incentives and grants for developing new technologies and for R&D, along with enhanced technological infrastructure and skilled manpower indeed helped, according to the survey, accelerate globalization. The executives claimed that the existence of up-to-date R&D and technologies served as a catalyst for accelerating the process. Yet the executives believe there have not been sufficient financing sources to encourage direct investments abroad.

2.4. Globalization and Managerial Challenges The trend toward globalization offers fascinating business opportunities for management. Yet at the same time, companies operating in the global arena must cope with a number of new pressures and demands they did not have before, and must consequently reexamine their strategy and adapt their operating strategies to the new reality. Before the 1980s, organizations tended to adopt one-dimensional strategies that focused on efficiency, response capability, or development of learning skills. The growing trend toward globalization calls for adopting new, multidimensional strategies adapted to a new business environment characterized by complexity and high uncertainty (Bartlett & Ghoshal 1987). Fiegenbaum et al. (1996) proposes such a multidimensional strategy. They argue that companies operating in the global arena should look for a strategy that provides them with a relatively competitive advantage, one that defines the output-vision and the input-strategic capabilities to help in achieving this vision. This should be accomplished so as to satisfy customers’ future needs and meet the future requirements of interested parties better than competitors, from both the local and the global perspective. The uniqueness and complexity of global operations is competently reflected in the major managerial problems facing executives in the global arena (Yehezkel 1993). Porter (1986), and Prahalad (1990) specify several such problems: seeking ways to integrate networks operating in different geographical regions under one organizational responsibility; achieving a competitive advantage in the international market; establishing strategic partnerships in the international arena, in many cases with competing organizations; developing organizational strategies adapted to the different countries in which the organization operates, while considering political, economic, and cultural factors. Local companies operating in a global business environment must face new pressures. These pressures come from the local and global markets at the same time — pressures exerted by customers, competitors, and other interested parties. One is the pressure to reduce costs; technological changes as well as improvements in communication and computer systems enable organizations to become more efficient, and therefore customers exert pressure to reduce prices. The entry of new competitors to the local and the global arenas along with the drive to encourage new innovation lead to constant pressures to improve product quality. A company operating in many

30

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

markets must satisfy different customers, each exerting its own unique pressures. McDonalds, for instance, was obliged to sell ‘‘kosher’’ products in some of its branches in Israel, due to pressures from the orthodox religious sector. The pressures exerted by interested parties on companies operating in the global arena differ from country to country, and include, among other things, governmental demands for royalties in return for permission to operate in their country and bank requirements regarding credit lines, guarantees, and loan-return periods. One strategic solution to the challenges posed by the above-mentioned reality is organizational cooperation in a variety of forms. In recent decades, such cooperation has become common and popular. Small organizations enter into cooperation agreements with large corporations and multinational organizations in order to enhance their strength and their resources. Their size enables them to adjust relatively easily to the new environment and respond quickly to rapid changes. This may explain why so many small and medium companies have entered into international strategic cooperation agreements (Lawrence & Vlachoutsicos 1993). In summary, globalization and the Middle East peace process constituted important factors affecting the new business infrastructure in the 1990’s. These forces created a broad and well-situated field for global activity of all sorts of companies, particularly those in the high-tech field. Technological companies focused their attention on product and capital markets outside Israel. Strategic partnerships with multinational corporations provided a convenient springboard for rapidly entering the global arena, despite the difficulties in managing partnerships of this kind.

References Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New strategic requirements. Sloan Management Review, 29, 7–17. Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17, 219–235. Fiegenbaum, A., Shaver, M., & Yeoung, B. (1997). Which firms expand to the Middle East. Strategic Management Journal, 18(2), 141–148. Israel Export Institute International Media Division (1997). Healthy growth in health care, January. Lavie, D. (1997). Foreign entry to Israel: Marketing perspectives of strategic reference point theory. MSc thesis. Technion — Israeli Institute of Technology (in Hebrew). Lawrence, P., & Vlachoutsicos, C. (1993). Joint ventures in Russia: Put the locals incharge. Harvard Business Review, Boston, 71(1), 44–51. Porter, M. E. (1986). Competition in global industries. Boston: Harvard Business School Press. Prahalad, C. K. (1990). Globalization: The intellectual and managerial challenges. Human Resource Management, 29(1), 23–27.

Hebrew Sources Bank of Israel — Foreign Currency Supervision (1990–1996). Annual survey.

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Globalization in the Israeli Industry (1997). The report of the committee for Strategic Thinking in the Manufacturers Association, June. The Central Bureau of Statistics (1998). Data taken for the internet site. Yehezkel, A. (1993). A connection between differentiation in structural– managerial and cultural variables of the parent organizations of the international common venture, and the effectiveness of the venture. Unpublished doctoral dissertation, Tel Aviv University, Tel-Aviv.

Chapter 3

Privatization of Governmental Companies1 This chapter investigates the privatization process in Israel in the period 1986–1995 from a number of perspectives, including the response of investors in the capital market. The main findings of the research show privatization during that period not very intense, focusing primarily and focused mainly on smaller companies operating in traditional sectors, such as minerals, service industries, and the building trade. It also shows the negative return to stock purchasers in privatized companies compared to a control group, as indicated, for example, by market average and/or average return per sector.

3.1. Privatization of Government Companies in Israel Privatization of governmental companies has accelerated in recent years, constituting a central issue in the global economy as well as in Israel. The first country to institute a large-scale privatization program was Great Britain, which since the early 1980s has privatized major governmental companies, such as telephone companies, automobile manufacturing companies (Jaguar, Rolls Royce), and the gas company. In Israel, the process is in its early stages, and until this research only about 20 companies (out of 160) have been privatized, among them Paz, Shikun U’Pituach, and Bezeq (partially privatized). Privatization has several major goals: reducing government involvement in the economy, increasing company efficiency, increasing competitiveness, strengthening the capital market, and raising capital for financing the budgetary deficit in many countries worldwide. Privatization is also important to the Israeli high-tech take-off, as it constitutes the infrastructure for sector competitiveness, providing services and raw materials to high-tech companies. Competitive prices as well as availability of quality raw materials depend upon broad competitiveness, which in turn is dependent on the level of privatization of government companies. In 1986 the government of Israel decided to reduce the share and influence of governmental companies in the Israeli economy by privatizing them. Since 1986 the government has sold shares in government companies totaling over $2 billion. Nevertheless, an analysis of the development of the economy in 1990–1994 shows that the government has not succeeded in reducing the share of government companies in the GDP, and most of the large government companies have not yet been 1

This chapter is based upon the thesis of Eran Terkel (1996) as part of the requirements for the MSc degree. The thesis supervisors were Prof. Uri Ben-Zion and Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion – Israel Institute of Technology in November, 1996.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

privatized. In this section we examine and compare theories and findings about privatization worldwide with Israeli privatizations in 1986–1995, including method, percentage, type of privatization, size of privatized companies, and line of business. The history of privatization in Israel can be divided into three periods: (1) 1970–1977: In May 1970, the government decided to investigate the need for continuing its ownership of some government companies. Following this decision, the Government Companies Authority suggested formulating criteria for determining which companies should remain under government ownership and which should be sold, but the proposal met with political and ideological resistance. In fact, during this period the government sold shares in 46 governmental companies, but most were small companies with the government holding only a small percentage of their share capital. (2) 1977–1981: In the 1977 political upheaval, the Likud party came to power. Even before the elections, the Likud’s political platform made a commitment to introduce sweeping changes in the structure of the Israeli economy, including encouraging competition, reducing bureaucracy, and decreasing government involvement in the economy. In March 1978 the new government decided to sell 48 government companies, with the goal of raising $100 million within one year. Difficulties were encountered in implementing this program, and during the period shares were sold in 16 governmental companies, raising $42 million. The main companies privatized during this period included the following (percentage of shares sold in parentheses): The Maritime Bank of Israel Ltd (100%), Haifa Chemicals (52%), Vitko Chemicals (40%), El-Op (50%), Bank Tefahot (7%), Arkia (50%), Orlite Industries (100%). (3) 1981 and after: Based on the progress of privatization worldwide, especially its expansion in Great Britain, the Israeli government decided in 1986 to privatize companies. This government decision had two components: (1) formulating a program for privatizing the government companies, and (2) immediately beginning the sale process. It was determined that the Government Companies Authority, which reports to the Ministry of Finance, would handle the project, so that the minister in charge of privatization policy was the Minister of Finance. The government refrained from establishing a special entity (privatization administration) to deal exclusively with this project, as is customary in many countries. This decision likely stems from the fear of establishing yet another governmental body as well as from internal Ministry of Finance motives. Yet, conflicts of interests could arise within the authority, in its capacity as responsible for and supervising government companies on the one hand and its role in the privatization process on the other. The goals of privatization, as defined by the government, are2: First, removing government from involvement in business, broadening the economy, and increasing

2

From the decision of the Ministers’ Committee on Privatization — January 1993.

Privatization of Governmental Companies

35

competition within the economy. Second, improving government monopolies and making them more efficient. Third, attracting foreign investments and integrating the Israeli economy in international business and economic activities. Fourth, receiving appropriate return for sold assets/companies, to be used as a source for reducing the internal debt and channeling resources to investments in infrastructure and in investment assets. Fifth, making the labor market more flexible on the one hand, and having company employees share in the ownership, on the other. Sixth, developing and enlarging the capital market. One of the goals of privatization is to raise capital for the state budget. ‘‘Receiving appropriate return for sold assets/companies, to be used as a source for reducing the internal debt and channeling resources to investments in infrastructure and in investment assets.’’ In the period 1986–1995, the state raised capital3 in the amount of $2,038 million from privatizing companies, and most of it was transferred to the state’s budget (only a small part was invested in the companies). In addition, in the above period the state sold part of its shares in the banks for the amount of $1,396 million. The distribution of income over time shows that income was on the rise (except in 1994, when the trend was stopped due to the stock exchange crisis). The increase in income over time is typical of privatization. For example, Vickers & Yarrow (1988) indicate that at the beginning in Great Britain, relatively small companies were privatized, and the sums of money raised increased over time, when shares in large governmental companies were sold, for example the telephone company, British Telecom. During the 1970–1983 time period, British companies were sold in an average sum of 300 million pounds per annum, whereas in the years 1984–1987, the raised sum grew to 2,000 million pounds per annum.

3.2. Research Questions Privatization means that the state sells part of its assets. One of the central issues in examining privatization worldwide is whether the government received reasonable payment for selling the companies (assets). Evaluating the financial consideration received from selling companies that are not traded on the stock exchange is complicated and is usually based on an accounting test of the company’s total assets (equity) plus expected future profits. The daily share price determines the company value for publicly traded companies, and therefore it is easy to check whether the payment that the government received for the company was reasonable based upon its market value after privatization. The literature discusses this issue in depth. According to Valentiny et al. (1992), most of the government companies in Great Britain were sold at a low price, leading to criticism of the privatization process by the National Audit Office. Jenkinson & Mayer (1988) examined the return on shares of privatized companies in Great Britain 3

All the sums of income from privatization are stated in dollars according to the reporting method used by the Government Companies Authority.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

and France in the days following privatization. Their findings show that the return on shares of these companies was 10% higher than the average return on private companies issued in these countries. Moore (1992) notes that the British government preferred to sell the companies to the public at a low price in order to promote privatization and encourage the public and entrepreneurs to acquire shares in government companies. Menyah et al. (1995) examined the long-term return (400 days) in a sample of privatized companies in Great Britain and found that privatized companies were a good investment over the long term. On the other hand, Levis (1993) examined the return on companies issued on the stock exchange, including 12 privatized government companies, and found out that shares in government companies, as in private ones, were issued at a high price and that their long-term return, up to three years, was negative. The Israeli government denoted one of the goals of privatization as receiving an appropriate payment for the companies sold, to be used as a source for reducing the internal debt and freeing resources for investments in infrastructure and investment assets. This study examines the payment that the government received for selling the companies by testing the rates of return, from one month to one year, for purchasers of the shares of Israeli government companies. The rate of return for every share offering is examined compared to the rise of the TASE (Tel Aviv Stock Exchange) index, as well as to the index for the sector of the company’s area of operations.4 If, the evidence shows that the rates of return are significantly higher than the increase of the TASE and sector indexes, this would point to a loss for the government, since it is likely that the company could have been sold for a higher sum had the governmental companies been managed more strategically. In summary, the low price indicates the competitive inefficiency of the government companies. Specifically, the following questions were considered: First, was the investment in government company shares worthwhile? Second, are there significant differences in real return resulting from company characteristics or the privatization characteristics, such as sector, company size, privatization method?

3.3. Research Method 3.3.1. Sample Data were collected for a total of 25 privatization transactions in the period 1986–1995. Data about transactions since 1991 were gathered from the Noga database. Of the 25 transactions, 15 were executed via TASE share offerings. In 16 of these transactions, the impact on the company’s value of the announcement regarding pursuance of the privatization could be examined (from available data about the share price one month prior to share offering). Table 3.1 presents the transactions 4

In this paper, the long run for share sholdings is defined as one year, as opposed to acquiring a share for a few days only.

Privatization of Governmental Companies

37

Table 3.1: Israeli privatized companies and method. Privatized Company

Sector

Privatization Method

Year

Previous Month Share Price Available

1

Shekem 1

Commerce

Public offering

1993

2 3

Shekem 2 Lapidot

Commerce Oil

Investor Public offering

1994 1994

4

ICL 1

Chemistry

Public offering

1992

5 6

ICL 2 Ashot

Chemistry Metals

Investor Public offering

1995 1992

7

Bezeq 1

Services

Public offering

1990

8 9

Bezeq 2 Nafta 1

Services Oil

Public offering Public offering

1991 1989

10 11

Nafta 2 Periclas 1

Oil Chemistry

Public offering Public offering

1993 1986

12 13 14

Periclas 2 Periclas 3 Cavley Zion

Chemistry Chemistry Metals

Public offering Investora Investor

1991 1995 1988

15

Calcalit 1

Real estate

Public offering

1987

16 17

Calcalit 2 Maman 1

Real estate Services

Private investor Public offering

1989 1989

18 19

Maman 2 Taasia 1

Services Real estate

Investor Public offering

1991 1988

20 21 22

Taasia 2 Taasia 3 Haifa Chemicals

Real estate Real estate Chemistry

Public offering Investor Investor

1989 1993 1986

None — first share offering Yes None — first share offering None — first share offering Yes None — first share offering None — first share offering Yes Yes — company’s shares were traded on the stock exchange before 1986 Yes None — first share offering Yes Yes Yes — the company’s shares were traded on the stock exchange before 1986 None — first share offering Yes None — first share offering Yes None — first share offering Yes Yes Yes — the company’s shares were traded on the stock exchange before 1986

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 3.1: (Continued). Privatized Company

Sector

Privatization Method

Year

Previous Month Share Price Available

23

Deshanim 1

Chemistry

Public offering

1994

24 25

Deshanim 2 Magen

Chemistry Oil

Investora Investor

1995 1993

Yes — the company’s shares were traded on the stock exchange before 1986 Yes Yes — the company’s shares were traded on the stock exchange before 1986

a

Part of sale of ICL to the Eisenberg Group.

examined in this research. It should be noted that for a company that was privatized in several stages, each stage is numbered separately, by numbering Maman 1 for the first privatization stage, Maman 2 for the second stage, etc. 3.3.2. Calculation of Returns Every privatization transaction involving a state-owned enterprise carried out since 1986 was assigned to one of the following groups: (1) share offerings (for example, issuing 35% of the shares of Shekem in 1993); (2) selling shares of a state-owned enterprise traded on the stock exchange to a strategic investor (for example, the sale of the controlling interest in Israel Chemicals to the Eisenberg Group in 1995 at a time when the public held 25% of the company’s shares); (3) selling shares in companies not traded on the stock exchange to a strategic investor (for example, sale of Shikun U’Pituach). Since there are no data regarding the value of companies not traded in the stock exchange (category 3), these companies are not included in the statistical analyses. Based on the data, the per share return was calculated relative to the TASE index as follows: Rij ¼

ðPij  Pi0 Þ ðM ij  M i0 Þ  Pi0 M i0

where Rij ¼ return on share i relative to the TASE after j months. Pij ¼ share price after j months after the shares were issued. Pi0 ¼ share price on the day the shares were issued. Mij ¼ TASE j months after the company’s shares were issued. Mi0 ¼ TASE on the day the shares were issued

ðA:1Þ

Privatization of Governmental Companies

39

For instance, on January 1, 1993, the government offered 20% of the shares of Company A (i ¼ 1) to the public. The offering price was NIS 100 per share, and the TASE index on the day of the offering was 200 points. After one month (j ¼ 1), the share price was NIS 105, i.e., an increase of 5% and the TASE was 202 points, i.e., an increase of 1%. Therefore, according to formula (A.1) the excess return is R11 ¼ 4%; i.e., after one month the increase in the share price exceeded the increase in the TASE by 4%. In addition to comparing the per share return to that of the TASE, the per share return was also compared to the index of the sector to which it is attributed, as follows: S ij ¼

ðPij  Pi0 Þ ðBij  Bi0 Þ  Pi0 Bi0

ðA:2Þ

where: Sij ¼ return on share i relative to the index for its sector after j months. Pij ¼ share price after j months after the shares were issued. Pi0 ¼ share price on the day the shares were issued. Bij ¼ sector index j months after the company’s shares were issued. Bi0 ¼ sector index on the day the shares were issued. We continue the previous example, and here assume that the company was in the commerce sector. On the day that the shares were issued, the sector’s share index was 400 points, and a month later it was 412 points, an increase of 3%; hence S11 ¼ 2%, i.e., the return on the company’s shares one month after the shares were issued was 2% higher than the return on the shares in its sector (and 4% above the TASE index). Subsequently, an average Rij and an average Sij were calculated for each j for all transactions, as well as an average for each type of sale (public offering and sale to a strategic investor). For example, for j ¼ 1 (one month after the public offering/sale to a private investor), the following returns are calculated relative to the rise of the TASE index:  compared to the TASE, one month after the sale/ 1. The average excess return Ri offering for the transactions. 2. The average excess return compared to the TASE, one month after the offering for public offering transactions only. 3. The average excess return compared to the TASE, one month after sale of shares to a strategic investor.  is calculated for each j. The results as dependent on time elapsed ( j) Similarly, Si are presented graphically, both in relation to the TASE and to the sector index. In order to check whether the results are statistically significant, a t-statistics is calculated to test the following two questions: 1. Do the resulting averages differ significantly from zero? That is, does the resulting return at a specific time for privatized companies differ significantly from the return on the TASE/sector index? 2. Is there a significant difference in return between the different types of sales?

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

3.4. Results Because the shares of Magen and of Deshanim suffered heavy losses that led to delisting during part of the period under examination (Deshanim 1, Deshanim 2), there were downward irregularities in the data and it was decided to remove them from the study.

3.4.1. State-Owned Enterprise Return Compared to the TASE The average return on the studied companies (after offsetting changes in the TASE) is presented in Figure 3.1. This figure shows that shares in state-owned enterprises were sold at a high price and caused investors losses over the long run relative to the average return on the stock market. The main part of the loss occurred within a specific period of time during which the share was traded, in particular from three months to one year after the date of privatization. In contrast, no major change was seen in the share’s price immediately after privatization. Whoever purchased shares in a state-owned enterprise on the day of a public offering that did not involve transferring control in the company from the government to a private enterprise lost an average of 28% after a year, compared to someone who purchased stock in such a company (publicly traded) on the day it was sold to a private investor. To test the significance of the results compared to the H0 hypothesis that the return on the examined shares did not differ from the TASE, statistical tests were conducted on the hypotheses. Their main results are presented in Table 3.2. The

Figure 3.1: Privatized state-owned enterprises share returns compared to the TASE.

Privatization of Governmental Companies

41

Table 3.2: Summary findings compared with the TASE. Characteristic

Hypothesis

Result

(a) All privatized companies

Purchaser experiences a loss after a month Purchaser experiences a loss after three months Purchaser experiences a loss after six months and onward Negative return from one month to one year after share offering Loss after six months and onward

Not significant

(b) Privatization through share offering (c) Privatization through sale to investor (d) Difference between privatization types: share offering versus sale to investor

Loss in period from one month to one year Purchaser experiences loss Positive return between six and 12 months After one year from date of transaction, return is preferable when selling to a private investor

Significant at 90% confidence level Significant at 95% confidence level Significant at 95% confidence level Significant at 95% confidence level Significant at 95% confidence level No significant result Significant at 90% confidence level Significant at 95% confidence level

hypotheses tested refer to the following questions: 1. Is the total share performance lower than the TASE? 2. Does the share performance in each method individually (share offering/investor) differ from the TASE? 3. Is there a significant statistical difference in share performance between the two privatization methods?

3.4.2. A Comparison versus the Sector Index The average return compared to the sector share index is presented in Figure 3.2. Returns on shares in privatized companies compared to their sector index are similar to those presented in comparison with the TASE: an average loss for investors, where the main part of the loss occurred a relatively long period (about three months) after the privatization, and a greater loss for purchasers of shares in public offerings. A comparison of the figures shows that the average return compared to the sector index (Figure 3.2) is higher. For example, after a year, the average return compared to the TASE is 14%, while compared to the relevant sector it is 9%. That is, the relative return for shares issued on the stock exchange compared to the sector index was significantly higher than compared to the TASE. For example, after

42

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Figure 3.2: Privatized company stock returns compared to the sector index.

a year, the share return on shares issued on the stock exchange compared to the sector index was 10%, while compared to the TASE it was 24%. For sales to a private investor, the results are opposite. Therefore, in Figure 3.2 the difference in the results for the two methods of sale (share offering/private investor) is small and insignificant. Table 3.3 presents the main significance tests for the results shown in Figure 3.2. Most of the results compared to the sector index are insignificant, yet the tendency toward significance found in the comparison with the TASE exists. Note that the sector index is much more affected by share performance than the TASE index, for big companies such as Israel Chemicals and Bezeq, which have a significant impact on their sector indices. Hence, it was expected that the results in Figure 3.2 would be less significant.

3.4.3. The Impact of Privatization on Company Value For a company privatized in stages, the question arises of how the shareholders will respond to an announcement of the intention to continue privatizing the company. There are several main stages in the privatization process, depending on how the government chooses to sell the shares (share offering/sale to an investor). 1. The government announces its intention to sell company shares. 2. A bid is offered/a prospectus is prepared. 3. A buyer is chosen (in case of a strategic investor)/a share offering is floated.

Privatization of Governmental Companies

43

Table 3.3: Summary findings compared with the sector stock index. Characteristic

Hypothesis

Result

a. All companies

The return after half a year is lower than the average return per sector The return after a year is lower than the average return per sector Investor experienced a loss in the period between a month and a year from the sale Return is lower than average Return is lower than average There is a difference in return between the methods

Significant at 90% confidence level

b. Privatization via share offering c. Privatization via sale to a private investor d. Difference between types of privatizations: offering versus sale

Not significant Not significant (significant at 88% confidence level) Not significant for any period of time Not significant for any period of time Not significant for any period of time

At any stage, the government can reconsider its intention to sell shares in a company. Examining the impact of each of the above announcements on company share prices is quite complicated because data are not always available. Moreover, in some cases several announcements were made, as well as announcements of deferral of the privatization. Another way to evaluate the impact of the sale process is to examine the rate of return from a specific date prior to the sale (before completing the process and choosing a purchaser) until the day the privatization is executed. In this section we examined company return in the month prior to privatization relative to the TASE and the sector index. Of a total of 13 transactions (see Table 3.1, after excluding Deshanim and Magen), in eight the shares were sold at the end of the same month to a strategic investor (and control of the company was transferred to this investor), and in the remaining five, the government offered additional shares to the public (without transferring control). The results are presented in Table 3.4. The results indicate that the average share prices declined in the period leading up to the share offering. Tests of outcome significance (for all transactions) show that this outcome is significant at a 95% confidence level (in both cases). In addition, the tendency in share return after sale (see Figures 3.1 and 3.2) shows a preference for selling to a strategic investor rather than a share offering, especially compared to the TASE index. Due to the small sample, results are not significant. The trend toward no increase in share prices even in cases of selling to a private investor indicates that shareholders did not expect that transferring the company to private control would bring about a significant improvement in company performance, so the company’s market value did not rise.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 3.4: Post-privatization and company value.

(a) All companies (b) Privatization via public offering (c) Privatization via sale to investor

Compared to TASE

Compared to Sector Index

7% 1% 16%

7% 6% 10%

Table 3.5: Chemical sector share returns compared to other sectors.

  a

Chemicals and Oil Exploration

Other Sectors

24% (30%)a 14% (22%)

7% 5%

Compared to the TASE index Compared to the sector index

Including Deshanim 1, Deshanim 2, and Magen.

3.4.4. The Impact of Company Characteristics on Investors’ Returns This section examines return rates a year after the date of sale according to characteristics of the privatized companies. Since the number of transactions in each group is small, the results are usually not significant, but do represent an existing trend. 3.4.4.1. Sectors’ impact About half of all privatizations are companies from the sector dealing with chemicals and oil exploration (12 out of 25, including Deshanim and Magen). The performance for the companies in the chemicals sector versus those of all of the privatized companies is presented in Table 3.5. The indicated trend is that the return on companies in the chemical sector is lower. This outcome is consistent both compared to the TASE index and to the sector index. 3.4.4.2. Company size impact In privatizing the large companies (Bezeq, Israel Chemicals, Shekem, and Paz), the state raised 52% of the total capital raised by privatization to that point. The percentage of capital raised by large companies traded on the stock exchange was even higher, amounting to 63%. But beyond the financial importance, the result of issuing the large companies on the stock exchange has a significant impact on the success of the entire privatization process. Thus, it is reasonable to assume that the government will try to make the share offering a success by lowering the price, so that the return on these companies will be relatively better. In Great Britain, issuing British Telecom shares on the stock exchange formed the basis of the success of the entire privatization process, and according to Moore (1992), the government granted 10% bonus shares to purchasers among the public (‘‘small investors’’) for holding these shares for a period of three years, with the aim of encouraging the public to hold these shares for a long period of time. In Israel, the Bezeq and Israel Chemicals share offerings were the largest issues of shares on the stock exchange until that time, and the Government Companies

Privatization of Governmental Companies

45

Table 3.6: Percentage return on the major companies compared with other companies.

 

Compared to the TASE index Compared to the sector index

Large Companies

Other Companies

6% 2%

17% 11%

Authority attributed great importance to their success. But, unlike the British policy of encouraging the public to purchase and hold these shares for a long period of time, a similar attempt was not made in Israel. Table 3.6 shows the returns of the large companies (Bezeq, Shekem, and Israel Chemicals) after a year compared to other privatized companies. Though the big companies seem to show a better return, this result is insignificant. An examination of this return shows that except for an exceptional positive return from Shekem’s first share offering (a return of about 60% above the TASE index) and the sector index, the remaining returns are negative, and if we do not take the Shekem share offering into consideration, the return to investors on buying shares in the big companies is identical to that attained from medium and small companies. Israel Chemicals’s share offering resulted in an especially negative return (30% versus the two indices), and these losses damaged the public’s trust in the entire privatization process. Since that share offering, the government has not tried to raise funds of such magnitude on the stock exchange. 3.4.4.3. Time period impact The privatizations in the years 1986–1995 were divided into two periods: 1986–1991 and 1992–1995. This division into periods is appropriate both for the number of transactions (13 in the first period, 12 in the second period) and for the change in the political leadership in Israel in 1992. Calculating the rates of return during the two periods shows that there was no significant difference between them. 3.4.4.4. Unprofitable companies impact Privatizing unprofitable companies is problematic, as explained in the previous section. While privatization may serve to rehabilitate some of the unprofitable companies, on the other hand, the privatization and the consequent withdrawal of government support may lead the company to bankruptcy. Therefore, an investor in shares of such companies takes a greater risk than when purchasing shares of profitable companies, on which he can expect to attain a higher average rate of return. As indicated, to date the government has begun privatizing only a few unprofitable publicly traded companies, among them are Shekem, Deshanim, and Ashot. Due to the small number of unprofitable companies, no statistically significant conclusions can be drawn; hence each company is examined separately below. Ashot: 30% of the company’s shares were issued in 1992. After the offering, it became evident that the company’s condition was more serious than both the

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

government and the buyers had thought, and the share price declined by 60% in comparison with the TASE index (51% in comparison with the sector index). Shekem: The company was privatized in two stages: first by offering 35% of the share capital to the public, and a year later by selling the remaining shares to a strategic investor. The return for buyers in the share offering was the best achieved to date from purchasing shares in a state-owned enterprise (60% compared to the two indices). This return may be the result of purchaser assumptions that the government sold the company for a low price (relative to prices for similar companies in the sector, such as Supersol), and that the recovery process after privatization would be rapid. About a year later, the government sold the remainder of its holdings in the company to a private investor at a price similar to the market price at that time. But right after this sale, the share price declined by about 15%. The reason for this decline in value may stem from the public’s understanding that the recovery process (as seen in recent reports) would be long, even though privatization had been completed. Deshanim: Deshanim shares were traded on the stock exchange prior to 1986. In 1994 the government sold 5% of the company’s shares5 and in 1995 control in the company was transferred to the Eisenberg Group as part of the privatization of the parent company. In 1994–1995 it became evident that the company was experiencing difficulties and that its ability to continue operating was uncertain. As a result, the share price dropped drastically. The company’s shares have decreased by more than 70% since 1994 compared to the TASE index. In summary, the apparent trend is that the unprofitable companies were sold for a high price, and that the purchasers became aware that recovery for these companies was more complicated and time-consuming than expected. On the other hand, note that the sample is very small, so it is not correct to draw decisive conclusions based solely on these companies.

3.5. Summary This research has examined the payment that the government received from publicly selling traded government companies by testing the real return rates of the shares of these privatized companies during a period of one year after the date of sale. The main findings are summarized below. First, the return to buyers of shares in privatized companies was lower than the average return on these shares on the stock exchange. Second, the returns on shares of companies sold to a strategic investor were higher than those on companies issued on the stock exchange. Third, the return on buying shares of companies in the chemical sector was lower than the return on shares from other sectors. Fourth, the return on buying shares in large government companies was not different from that of shares of medium or small companies (and it was negative). Fifth, the drop in 5

A major part of these shares were purchased by ICL, the parent company.

Privatization of Governmental Companies

47

share prices of government companies took place from three months to a year after sale, rather than immediately after the offering. Sixth, an announcement of follow-up privatization, in companies privatized in several stages, led to a decline in company value in the period from one month prior to privatization until the day of privatization. These findings are contrary to the research expectations, since most studies that have surveyed share performance of privatized companies (in Great Britain and France) showed high rates of return. In addition, reports of the State Comptroller in 1989 regarding the sale of Paz and the Jerusalem Economic Corporation claimed that these companies were sold at a high price, and it can be assumed that this trend characterized the other privatizations as well. Perhaps the main reason for the decline in share prices after a relatively long period of time was the public’s expectation that after privatization the company would immediately and drastically improve its performance, and hence they estimated company value accordingly. But since the change in company performance did not meet the expectations, the public revised the company value, leading to a decline in share price. The fact that the trend of declining share prices was focused in shares of companies whose control was transferred reinforces this claim for the following reasons. First, the public’s knowledge of these companies at the time of sale was limited, since most had not been traded on the stock exchange. Second, some of the privatized companies, such as Bezeq, were unique in the Israeli market, and it was difficult for the public to evaluate their value prior to privatization, whereas the Government Companies Authority was more familiar with these companies and could sell them for a high price. Third, the prospect of improving performance of companies that remained under governmental control was small. In companies that were sold to a strategic investor, privatization did not bring about an increase in company value. A possible explanation is that these companies were publicly traded at least a year prior to their sale to a strategic investor, and therefore were well known to the public, who probably assumed that privatization would not lead to a significant change in their performance in the short run. In addition, in companies that had been publicly traded for a long time, it is unlikely to find assets that have not been priced correctly at the time of sale,6 mainly real estate assets that might have brought a high return to the investor. The findings of the current research show that the government received fair compensation from selling its assets and perhaps extra. But the fact that the return to the purchaser of the shares on the stock exchange was negative led to a slowdown in privatization and a lack of support on the part of the investing public in the process. These results, and particularly the losses experienced by the buyers of Israel Chemicals’s shares in what was the largest government company share offering to date, probably damaged the government’s ability to raise large amounts of money by

6

In many cases of issuing governmental companies for the first time, there is an expectation to ‘‘discover’’ assets which have not been cost accounted correctly at the time of determining the price of the stock issue.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

selling companies on the stock exchange. Hence, in future large stock offerings, the government will have to exert great efforts to convince the public that investing in the shares will be profitable. To summarize, in the short run the government gained at the expense of the investor. This finding may have an impact on the future success of privatization, which in turn will negatively affect the level of sector competitiveness and ultimately influence Israeli high-tech sector’s ability to continue to soar.

References Jenkinson, T., & Mayer, C. (1988). The privatization process in France and U.K. European Economic Review, 322, 482–490. Levis, M. (1993). The long-run performance of initial public offers: The U.K. experience, 1980–1988. Finance Management, 22, 28–41. Menyah, K., Paudyal, K., & Inyangete, C. G. (1995). Subscriber return, under pricing and long-term performance of U.K. privatization initial public offers. Journal of Economics and Business, 47, 473–495. Moore, J. (1992). British privatization — taking capitalism to the people. Harvard Business Review, 70, 115–124. Terkel, E. (1996). Testing the influence of privatization of Israeli firms performance. MSc thesis, Technion — Israeli Institute of Technology (in Hebrew). Valentiny, P., Buck, T., & Wright, M. (1992). The pricing and valuation of public assets: Experiences in the UK and Hungary. Annals of Public and Cooperative Economics, 63, 601–620. Vickers, J., & Yarrow, G. (1988). Regulation of privatised firms in Britain. European Economic Review, Amsterdam, 32(2,3), 465–472.

Chapter 4

The Entry of Foreign Companies into Israel1 Since the early 1990’s, foreign companies have entered the Israeli economy in unprecedented numbers. The literature discussing the entry of foreign companies is comprehensive and varied, but it makes almost no mention of the Israeli market. The aim of the current research is to examine whether the entry and positioning of foreign companies in Israel poses a threat and/or an opportunity to Israeli companies. The study compares foreign and local companies with respect to marketing and strategic positioning, as perceived by Israeli customers of both Israeli and foreign companies during the period 1995–1996. A total of 406 questionnaires were distributed, out of which a sample of 104 companies was constructed, 56 Israelis companies and 48 foreign companies. A comparison between the foreign and local companies shows that Israeli consumers attribute better strategic capabilities to foreign companies than they do to local companies, as well as greater investment in satisfying customers, relating to their needs, and making more varied changes in their operations.

4.1. Theoretical Background and Research Hypotheses The number of foreign companies entering Israel has increased, from a few dozen in the period 1986–1990 (Fiegenbaum et al. 1997), to several thousands in 1991–1997. Foreign companies have entered by a variety of means, among them establishing subsidiaries, purchasing ownership in Israeli companies, purchasing shares in Israeli companies, establishing joint ventures, and granting franchises and import licenses for manufacturing and marketing international brand names through local representatives. As part of this trend, international companies and corporations such as Unilever, Danone, Nestle´, McDonalds, Pepsi, L’Oreal, Johnson & Johnson, Ha¨agen-Dazs, Office Depot, Motorola, Intel, Microsoft, and others as well have entered different sectors in the Israeli economy. The motivation behind the entry of foreign companies is wide and covers many aspects: The Middle East peace process, the curbing of the Arab Bocott in the wake of the Gulf War, the growth of the Israeli market, privatization of government companies, encouragement of foreign investors by means of the Law of Encouraging

1 This chapter is based upon the thesis of Dovev Lavie (1997) as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion–Israel Institute of Technology in October 1997.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Capital Investments, accumulated international experience in Israel, and strategiccompetitive motives of foreign companies (Porter 1986; Prahalad & Doz 1987). The entry of foreign companies and international brand names into Israel exposed the local consumer to a wide variety of products, and posed difficulties but also challenges for local companies stemming from the need to cope with international companies. Only a few studies have examined the characteristics of foreign companies operating in Israel. Fiegenbaum et al. (1997) examined the characteristics of American companies operating in the Middle East and in Israel from 1986 to 1990, and showed that the companies operating in Israel were significantly smaller than those operating in the Arab countries. It can be assumed that the Arab boycott prevented international corporations from entering Israel, so it is reasonable that during the research period, when the impact of this boycott has been curbed, that large corporations such as Pepsi, McDonalds, L’Oreal, and others have begun operating in Israel as well. In addition, the companies that entered Israel, compared to American companies that entered the Arab countries, are R&D intensive, make lower investments in advertising, and have a relatively larger scope of international activity. The current research is a followup that explores the massive entry of foreign companies to Israel and their strategic positioning during the mid-1990’s. The basic theoretical argument is that large and competitive multinationals had entered the Israeli market and hence they will be better positioned than their Israeli counterparts (Prahalad & Doz 1987). We compare Israeli companies and multinational foreign companies that entered Israel on three main issues: business performance, market positioning, and competitive strategy. The first hypothesis, which refers to business performance, is that the local customers of foreign companies will be more satisfied than customers of local companies (Samiee 1994). The second hypothesis is that the local customers of foreign companies will position their products at a higher level of quality and price than will customers of local companies (Kotler 1991). The third hypothesis is that the local customers of foreign companies will perceive the competitive strategy of foreign companies as preferable to that of the local companies (Dunning 1981; Porter 1986; Bartlett & Ghoshal 1987).

4.2. Research Methodology 4.2.1. The Sample The sample comprises local and foreign companies operating in Israel. For the purposes of this research, Israeli companies under foreign ownership, local franchisees of brand names of foreign companies, and imported products are all categorized as foreign companies. The companies included in the sample operate in various sectors, and were divided into seven categories: food, cosmetics-toiletries, textileclothing, high-tech, marketing and distribution networks, chemicals, and aviation. The number of questionnaires distributed in each sector for local and foreign companies is presented in Table 4.1. Overall, 406 questionnaires were collected, from

The Entry of Foreign Companies into Israel

51

Table 4.1: Characteristics of the research sample. Israeli Companies Sector Food Cosmetics-toiletries Textile-clothing High-tech Marketing and distribution networks Chemicals Aviation Total

Foreign Companies

No. of No. of No. of No. of Companies Questionnaires Companies Questionnaires 17 11 6 12 6

74 40 28 23 28

20 8 5 5 6

74 32 28 31 28

2 2 56

2 8 203

2 2 48

2 8 203

which a sample of 104 companies was constructed, which comprised 56 Israeli and 48 foreign companies. The research questionnaires were completed by Israeli customers of the companies included in the sample during the period 1995–1996. The sampled companies were chosen randomly among the companies operating in the different sectors. The companies in the sample are listed in Table 4.2.

4.2.2. The Questionnaire and Research Variables The questionnaire distributed among the subjects included the statements specified in Table 4.3, together with 7-point response scale, with 7 indicating full agreement, 4 indicating neutrality, and 1 indicating complete disagreement. The questionnaire also included an identification of the company name and the sector it belonged to, its classification as foreign/local company, and the subject’s demographic details, such as age, education, income, and extent of familiarity with the company. In examining the demographic differences among subjects regarding foreign and local companies, there have been found no significant differences that can explain the variance of answers in this category. Table 4.3 presents the variable definition (first column), and a description of the variable (second column). The third and fourth columns present the averages of local versus foreign companies, to be explained in the results analysis. The variables were divided into five categories, covering a wide range of business activities. Categories A, B, and C refer to the three competitive dimensions of the strategic space, i.e., internal, external, and time, respectively (Fiegenbaum et al. 1996). The category D refers to market positioning (Kotler 1991), and the category E refers to company performance (Porter 1980). A scale was constructed for each category, including a number of questions representing the specific aspect.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 4.2: List of local and foreign companies. Company Name

Sector

Company Name

Sector

Tempo-manufacturer of Maccabi Tene-Noga/Tnuva Barkan Wines Golan Heights Winery Carmel Olefin Petrochemicals Carmel Mizrahi Michlol McDavid Mashov—manufacturer of Magic Meshubach Matim Li Necca Chemicals

Drinks

A. Local (Israeli) Companies Ahava

Cosmetics

Osem El-Al Elbit Amir-Tafnukim

Food Aviation Electronics Diapers

Arkia Burger Ranch Gazoz Geotech

Aviation Fast food Textile Communication

Gali Gan-Li Grinberg

Shoes Toys Marketing network Ice creams

Dr. Lek Dr. Fisher Dvir Software Products Dagesh Dorel Delta Vita Vitko Home Center

Cosmetics Software

Ice cream Drinks Drinks Chemistry Drinks Office equipment Fast food Software Food Textile Toilet products

Sod cosmetics and cleaning products Steimatzky Elite

Toilet products Books Food

Polgat Popolo Castro Kravitz Careline Strauss

Textile Fast food Textile Office equipment Cosmetics Food

Tadiran Telma (Tami) Tamam Trima — manufacturer of Materna

Electronics Food Communication Food

Neft-Ptil Jeneusse Cosmetics Hogla Hashavshevet

Software Computers Textile Food Cosmetics Marketing network Chemistry Cosmetics Diapers Software

Tower

Semi-conductors

Company Name

Sector

Entry Mode

Country of Origin

Food Marketing network Drinks Ice creams Textile Drinks Aviation Fast food

Local import Franchise Local import Franchise Franchise Local import Local representative Franchise

Ireland USA

B. Foreign Companies Abbott Ace Antinory Winery Ben & Jerry’s Benetton Barton & Guestier British Airways Burger King

USA Italy France Great Britain USA

The Entry of Foreign Companies into Israel Table 4.2: (Continued ) Company Name

Sector

Entry Mode

Country of Origin

CPC

Food

Germany

Calvin Klein Carlsberg Ciba Geigy Colgate Delrina Dow Chemical General Electric Ha¨agen-Dazs Heinz Herbalife Intel Kellogg’s Lancome Lever Levis Lin Litton L’Oreal

Textile Drinks Hygiene Toilet products Computers Chemistry Electronics Ice creams Food Hygiene Electronics Food Cosmetics Cosmetics Textile Books Communication Cosmetics

Ownership in a local company Franchise Franchise Local import Franchise Franchise

McDonald’s Microsoft Mondavi Winery Motorola Naf Naf Nestle´

Fast food Software Drinks Electronics Textile Food

Nutrasbit Office Depot P&G pampers Pierre Smirnoff Pizza Hut Reebok Revlon Sans England Shapeware Sony Super-Office Toys R Us TWA Unilever

Food Office equipment Diapers Drinks Fast food Shoes Cosmetics Chemistry Computers Electronics Office equipment Toys Aviation Food

Universe Club Vin & Spirit Wrigley

Marketing network Drinks Food

Local import Franchise Franchise Franchise Subsidiary Local import Franchise Franchise Franchise Franchise Ownership in a local company Franchise Subsidiary Local import Subsidiary Franchise Ownership in a local company

USA Denmark Switzerland USA Canada USA USA USA USA USA USA USA France Germany USA Russia USA France USA USA USA France Switzerland

Franchise Franchise Local import Franchise Franchise Subsidiary

USA USA USA USA USA USA Great Britain

Local import Franchise Franchise Local representative Ownership in a local company Franchise Local import Local import

Japan USA USA USA USA USA USA

53

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 4.3: Research variables. Variable Definition

Variable Description

Local Average

Foreign Average

4.24

5.26

3.91

4.98

4.19

5.11

3.99

4.42

The company better adjusts itself to competition than its competitors

4.22

5.08

The company constantly makes small changes The changes are made along a number of dimensions simultaneously (advertisement, reductions y)

4.57

4.69

4.49

4.87

4.05

4.72

4.29

5.21

4.78

4.70

4.01

4.68

4.42

4.54

A. Internal dimension Strategic capabilities in 1. Marketing The company has better marketing capability than its competitors 2. R&D The company has capability to develop (present) new products better than its competitors 3. Manufacturing The company has capability to manufacture products better than its competitors 4. Human resources Level of human resources in the company is higher than that of its competitors B. External dimension 1. Competitor activities C. Time dimension 1. Frequency of changes 2. Variety of changes

D. Market positioning 1. Price 2. Product quality 3. Service efficiency 4. Advertising policy 5. Company’s positioning

Prices of products (services) are higher than those of competitors The products (services) are better than those of competitors I waste time standing in line to purchase product or receive service The company’s advertising influences my decision to purchase from the company The company’s location influences my decision to purchase from the company

The Entry of Foreign Companies into Israel

55

Table 4.3: (Continued ) Variable Definition

Variable Description

Local Average

Foreign Average

6. Payment policy

The installment payments policy influences my decision to purchase from the company Special sales promotions influence my decision to purchase from the company

3.89

3.43

4.58

4.59

4.64

4.80

4.49

5.25

5.05

5.75

4.93

5.31

4.00

4.20

7. Promotion policy

E. Company Performance 1. Service satisfaction I am satisfied with the service given by the salespeople 2. Purchasing I enjoy purchasing from the satisfaction company 3. Repeated I’ll go on buying from the purchasing company in the future 4. Satisfaction with I am treated courteously by the company’s attitude company 5. Brand loyalty I vacillate between the company and its main competitor

4.3. Research Results Table 4.3 describes the averages for the two groups. First, the differences between the foreign and local companies were examined along a matrix of strategic reference points (SRP): internal dimension (strategic capabilities), external dimension, and time dimensions (categories A, B, C). For the internal dimension, the findings show that the foreign companies have, on average, better marketing capabilities than the local companies, as well as more preferable R&D capabilities. In addition, the manufacturing capabilities of the foreign companies are better than those of the local ones, and they also have better human resource capabilities than do the local companies. Since for all the strategic capabilities examined, a significant preference for the foreign companies was found, it may be said that consumers in Israel attribute better strategic capabilities to foreign companies marketing their products on the local market than to local companies, in the areas of R&D, manufacturing, marketing, and human resources. Regarding the external dimension, the findings show, at a sufficient confidence level, that the foreign companies better adjust themselves to competition than do the local companies. Furthermore, the foreign companies invest more thought in satisfying customers and in catering to their needs. Hence, the findings support the existence of an advantage to the foreign companies on the external dimension of the SRP matrix. Regarding the time dimension, although the average of the foreign companies is higher than that of the local companies, statistical testing showed no

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

significant difference between the groups with respect to frequency of changes made by foreign companies versus local companies. On the other hand, for the variable that refers to the distribution of changes over the different dimensions, the foreign companies were found to have an advantage over the Israeli companies at a sufficient confidence level. Hence, it can be said that the findings to some extent support the notion that the foreign companies are more dynamic than the local ones. In summary, the findings referring to differences in competitive strategy indicate an obvious advantage for the foreign companies over the local companies on the SRP matrix, hence pointing to preferred strategic capabilities, an advantage in forward thinking along the external axis, and also an advantage along the time dimension. The classification presented in Figure 4.1 illustrates differences between the competitive strategy of the local companies versus that of the foreign companies. According to this classification, the foreign and the local companies are situated along the two competitive dimensions, i.e., the internal dimension (strategic capabilities) and the external dimension (competitors). Each dimension was divided at the average, resulting in four cells. The upper right cell describes companies that are competitive because they are characterized by high inward (into the organization) and outward relations. The left bottom cell, in contrast, represents companies below the average of the two dimensions; organizations in this cell are myopic and hence doomed to failure. Organizations falling in the upper half of the internal dimension but in the lower half of the external dimension are narcissistic organizations. In contrast, organizations that are above average in relation to the external dimension but below average on the internal dimension is myopic. Topology of Sample Company Averages Sample Average

6.0 Amorphous

Effective

External Dimension

5.0

Sample Average

Foreign Company Average

5.5

Local Company Average

4.5 4.0 3.5 Myopic

Narcissistic

3.0 3.0

3.5

4.0 4.5 5.0 Internal Dimension

5.5

6.0

Figure 4.1: Competitive positioning of foreign and local companies.

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57

Figure 4.1 shows the advantage of the foreign companies over the local companies. On average, the foreign companies are more adaptive and competitive (upper right cell) relative to the local companies, which are perceived as myopic (bottom left cell). A ‘‘myopic’’ organization is an organization with a high probability for failure, since it has neither the internal nor the external capabilities to satisfy its customers better than its competitors. In contrast, a competitive organization that looks inward as well as outward to its competitors and customers is capable of adjusting itself to the changing environment. The results show very clearly that the foreign companies have a competitive advantage over the local ones. The study also examined the market positioning of the foreign and local companies (category D in the questionnaire). The position of the foreign and local companies along the price/quality matrix presented in Figure 4.2 and statistically examined. The figure indicates that the foreign companies positioning was higher quality but also higher price. The statistical tests showed that the quality as well as the price of the foreign companies was significantly higher than those of the local companies. This indicates that there is no dominate strategy that will eliminate the other. One indication for validating the finding of an ownership advantage for the local companies can be found in the variable referring to the installment payment policy in the price component. The results show that the installment payments policy of the local companies is more effective than that of the foreign companies, though the finding is not significant. The findings of the statistical tests also indicate that the advertisement policy of the foreign companies is more effective than that of the local ones. With respect to the other marketing policy components, among them efficiency of service, sales promotion, and placement, no significant differences were found between the foreign and the local companies. But although no difference was found in the customers’ perceived effectiveness, this finding points to preferred effectiveness in positioning for the foreign companies. Local companies are more responsive to market needs; they have a superior infrastructure for local coverage and are familiar with the local market. But despite all this, the positioning policy of the foreign

5.5

Topology of Company Market Positioning Sample Average Foreign Company Avg.

Sample Average

Quality

HIGH 5.0 4.5

LOW

Local Company Avg.

4.0 4.0

4.5

LOW

Price

5.0

HIGH

Figure 4.2: Marketing positioning of foreign and local companies.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

companies is still as effective as that of the local companies, hence pointing to the superiority of the foreign companies. The study also examined the performance differences between foreign and local companies (category E in the questionnaire). For each of the variables representing customer satisfaction, a higher average was found for foreign companies’ customers compared to local ones. Foreign companies have an insignificant advantage with respect to customer satisfaction with service. A significant difference, however, was found in the courteous attitude of foreign companies toward their customers versus that of the local companies. Regarding customer satisfaction from the process of buying in the company, the findings showed significantly higher satisfaction among customers of foreign companies compared to those purchasing from the local companies. Foreign companies also show an advantage over the local ones regarding the variable representing intention to make a repeat purchase.

4.4. Summary and Conclusions This study presents results illustrating the differences between foreign and local companies from the consumer’s point of view. The findings show that the competitive strategy of the foreign companies is preferable to that of the local companies, as is evident in their development of preferable strategic capabilities in R&D, manufacturing, marketing, and human resources, as well as their emphasis on customer needs and competitor behavior. Finally, the foreign companies have proven to be more dynamic through their implementation of broader changes and competitive adjustments along the time dimension. These obvious differences between foreign and local companies in their competitive strategy lead to differences in performances as well (Fiegenbaum et al. 1997). The foreign companies are more adaptive than are the local companies, and therefore can adjust themselves better to the competitive environment and hence implement a more effective strategy. An examination of the source of the strategy differences between the foreign and the local companies showed that the foreign companies have some fundamental characteristics lacking in the local companies, which in turn contribute to developing a successful strategy along all the SRP dimensions. These characteristics may possibly include advantages of size, international experience, unique organizational structure, and others as well. The results reveal a significant advantage for the foreign companies over the local ones along the main dimensions of marketing policy effectiveness, and none of the findings point to an advantage for the local companies. The foreign companies also exhibit an obvious advantage regarding positioning of their products along the price/ quality matrix. On average, the foreign companies offer more expensive products and services, but this is not sufficient to define a competitive advantage/disadvantage in the eyes of the customers. This finding, together with the finding regarding quality of products/services quality, where the foreign companies have a clear advantage as well, indicates that ultimately the foreign companies have an advantage over the local companies based on customer calculations of price/effectiveness. A local product will be more

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expensive than a foreign product of the same quality, even though in general local products are cheaper than foreign ones. Hence, the research identifies a difference in competitive positioning among the foreign companies, with the local companies focusing on cheaper and lower quality products than the foreign products, which are perceived as more prestigious. An additional dimension of this marketing mix, in which the foreign companies have an advantage over the local ones, is their advertisement policy. The foreign companies’ advertisement policy is more effective than that of the local companies, but this effectiveness is not merely from the gigantic international advertising budgets at the disposal of the multinational companies. Rather, it derives from their preferred competitive strategy, which identifies customer needs while using a variety of outstanding strategic capabilities in order to meet customer needs better than local competitors. Note that on the other two dimensions of the marketing mix, positioning, and sales promotion, no significant difference was found between the foreign and the local companies. These areas are the only ones, with the exception of price, in which the local companies have tools to compete with the foreign companies. The local companies have an inherent advantage in positioning, due to their familiarity with the market and existing infrastructure for accessing customers, providing them the means for a good local response. Nevertheless, the local companies have not managed to implement any of these advantages or offer a more effective marketing policy than that of the foreign companies. The contribution of the current research is not merely academic. Executives of foreign and local companies operating in Israel can make efficient use of its conclusions in order to improve their performance and identify the areas for improving their competitive advantages. The research also provides tools and means for applying a strategy that may lead to achieving a competitive advantage under the new competitive conditions in the Israeli market in the wake of globalization and the entry of foreign companies. Because the current study examined unique aspects of foreign and local companies operating in Israel, it can be used as a basis for strategic recommendations to foreign companies operating or planning to begin operations in Israel, as well as for local companies that must cope with multinational foreign companies in the Israeli market. The research findings point to a competitive advantage for the foreign companies over the local ones. Hence, the recommendations for foreign companies will focus on how to maintain their competitive advantage and improve their performance in areas where they have no advantage. The recommendations for the local companies, on the other hand, will focus on how to improve their positioning to achieve a competitive advantage that will enable them to survive and even succeed in light of the new global market reality. 4.4.1. Strategic Recommendations for Foreign Companies  To maintain their superior strategic capabilities through the transfer of knowledge

and international experience while exploiting existing capabilities for operating in the local market.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

 To recruit local partners, establish joint ventures, or acquire local companies as a

means of increasing local responsiveness to the unique needs of the local market.  To emphasize prestigious positioning for establishing their reputation.  To make local service more efficient, for instance, by selecting leading franchisees.  To improve their positioning in the marketing mix, for example by using well-











established local distribution channels or distribution companies and local marketing networks. To improve effectiveness of sales promotion operations, for example, by using local public relations companies who are more familiar with the behavior and preferences of local customers. To offer a more attractive pricing policy after establishing themselves in the local market, in order to apply an overall strategy to reach customers with a lower price threshold as well. To use preferred means of advertisement in order to develop loyalty to the brand name, thus overcoming the consumption habits of local customer who are accustomed to local brand names. To establish strategic ties with local suppliers and customers, mainly governmental and institutional bodies, that can contribute to the foreign company’s Israeli operations. To make use of government support, Israel’s foreign commerce connections, and high quality human resources in order to optimally develop their Israeli operations.

4.4.2. Strategic Recommendations for Local Companies  To develop long-term strategic capabilities in R&D, manufacturing, marketing,

and human resources.  To apply a niche strategy, i.e., to focus on niches where the local company has a

     

 

competitive advantage, or where there is no significant threat from multinational companies. To cooperate with and establish joint ventures with foreign multinational companies. To cooperate with and establish joint ventures with leading local companies, and to implement acquisitions and mergers. To redefine the borders of their activities and reexamine the profitability of staying in a sector. To look toward the global market and adopt a global strategy with the aim of penetrating the global market. To emphasize the advantages of Israeli products compared to foreign ones. To examine competitors’ activity in light of the entry of foreign companies, and to constantly monitor changes in customer needs and competition characteristics in the local market. To improve responsiveness, take the initiative, adopt a dynamic policy, and be capable of making quick changes, to improve company strategy along the time axis. To exploit the competitive advantage of being familiar with the local market and customers in order to better meet customer needs.

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 To exploit the advantage of cost, while emphasizing the advantages of purchasing

 

 

local products, and at the same time improving the quality of products and services, as well as their perceived quality through enhanced advertising and sales promotion activities. To enhance the quality of products and services, and to make efficiency the most important strategic goal. To allocate larger budgets for advertising and sales promotion, while associating local products with international attributes, thus positioning the local companies in line with the multinational companies from the customer’s point of view. To exploit the advantages of location, easy customer access and local distribution channels in order to achieve better performance. To emphasize service and orientation to the customer in order to improve satisfaction and develop loyalty to the brand name.

Despite the theoretical and potential applications, a number of possible limitations must also be taken into account. The basic model did not consider sector classification except for the distinction between high-tech and other sectors. Moreover, the use of subjective customer evaluations should be considered. An alternative would have been to use evaluations of company executives, or objective data regarding company performance, such as rates of sales, market share, profitability, and so on. These alternatives have their own disadvantages, and do not provide a fuller picture within the marketing context investigated in the current study. Another limitation with respect to possible business applications is that the study did not examine the level of the single company. Future research can provide direct and more detailed recommendations to executives of foreign and local companies operating in a specific sector.

References Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New organizational responses. Sloan Management Review, 29(1), 43–54. Dunning, J. H. (1981). International production and the multinational enterprise. London: Allen and Unwin. Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17, 219–235. Fiegenbaum, A., Shaver, M., & Yeoung, B. (1997). Which firms expand to the Middle East. Strategic Management Journal, 18(2), 141–148. Kotler, P. (1991). Marketing management. Englewood Cliffs, NJ: Prentice-Hall. Lavie, D. (1997). Foreign entry to Israel: Marketing perspectives of strategic reference point theory. MSc thesis. Technion — Israeli Institute of Technology (in Hebrew). Porter, M. E. (1980). Competitive strategy. New York: Free Press. Porter, M. E. (1986). Competition in global industry. New York: Free Press. Prahalad, C. K., & Doz, L. Y. (1987). The multinational mission. The Free Press. Samiee, S. (1994). Customer evaluation of products in global market. Journal of International Business Studies, 3, 579–602.

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Part II Israel Infrastructure for Technological Entrepreneurship Part II presents issues related to the state of Israel infrastructure in terms of the government technological incubators program. We explore the strategic management aspects of both technological incubators (Chapter 5) and their startup companies (Chapter 6).

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Chapter 5

Strategic Management Perspectives of Technological Incubators1,2 5.1. Background and Research Questions The technological incubator program has been operating since 1991 under the auspices of the Chief Scientist of the Ministry of Industry and Trade. Despite the fact that incubators have been operating in Europe and the US for many years, the program in Israel is unique in that it was established in the actuality of the immigration of scientists from the Former Soviet Union to Israel and it focuses on technological projects. Within a very short period, within the decade of the 1990’s, Israeli technological incubators and their startup companies became known worldwide. Incubators are a major source of growing new firms worldwide. According to the US National Business Incubation Association, there are approximately 950 business incubators in North America, an increase of 160% over the last five years; 37% are classified as technology incubators and 25% are sponsored by academic institutions (Linder 2003, Phan et al. 2005). Fry (1987) outlined the profile of a typical incubator. The average American incubator is two years old. It engages in some eight projects; on an average one fails and one or two more will be marketed and stand on their own merit in commercial companies. An average project has approximately 31 employees and in most cases one person is in charge of the incubator’s administration. According to the European Commission’s Enterprise Directorate General, there were 850 business incubators in the European Union, as of 2001. In Asia there are more than 200 science parks with a major growth rate, with Japan topping the list at 111 parks.

1

This chapter is based upon the research of Dovev Lavie (1995) as part of the requirements for the BSc degree. The project supervisor was Prof. Avi Fiegenbaum, and it was submitted at the Technion — Israel Institute of Technology in October 1995. 2 I would like to thank the following for cooperating on this research that allowed us to learn about this project and get data that was used for the analyses: Yehoshua Gleitman, the Chief Scientist of Israel Minister of Industry; Rina Pridor, in charge of the technological incubators; Yossi Tur-Caspa, Director of the Altam incubator, Matam, Haifa; Ami Levenstein, Director of the Technion incubator, Nesher Science Park; Yehuda Yarmot, Director of the Altam project, Matam, Haifa; Dr. Lev. Diamant, Director of the Golan Entrepreurial Center incubator, Katzrin; Yossi Dar, Director of the Arad technological incubator; Yoel Varshavsky, Director of the Patir incubator, Jerusalem; Dan Rogel, Director of the Nayot incubator, Upper Nazareth; Jacque Azran, Director of the technological industries incubator, Ashkelon; Avraham Afori, Director of the initiatives incubator, Granot Technological Center, Emek Hefer; Yirmi Agrat, Director of the business incubator at Mt. Hotzvim, Jerusalem; Clara Oren, Director of the Kiryat Yam incubator; Abir Mulad, Director of the Hamaniya incubator, Netanya.

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The technological incubators program in Israel was set up following mass immigration from the countries of the former Soviet Union. In 1995, only four years after the establishment of the government program, there were 26 technological incubators and a few hundred projects had graduated the incubators, with 45% success rate. The total private investment obtained thus far is in excess of US $773 million (Shefer & Frenkel 2002). In the Israeli model the government is a full partner in setting the incubator process. Within the framework of the technological incubators the entrepreneurs are supported with a wide range of offerings including, financial resources, professional guidance, and administrative assistance. During its two years support within the incubator, a startup company is established and meant to turn its abstract ideas into products of proven feasibility, innovative advantage, and competitiveness in the international marketplace. The entrepreneur’s stay in the technological incubator provides him with legitimacy, which assists him to attract additional financial investment required for extending the product development and production after the two ‘‘incubation’’ years. From a financial point of view, the office of the Chief Scientist provides 85% financial grants of the approved budget for a period of two years. In the mid-1990’s, the commitment of the government for the startup was about $125,000 per year. However, the requirement is that the startup company raises a match up of private money for the other 15%. This way the government assures that private money and investors share the risky nature of the project. The equity of the startup is split in the following way. The entrepreneur gets 50%, the incubator gets 20%, the private investors get 20% (although they invest the equivalent of 15% of the budget), and the startup employees get 10%. Although the government does not get shares in the startup, in case that the startup succeeds and has sales in the future, it receives royalties of 3%, which are reinvested in the incubator. Given that the research was done in the mid-1990’s, only four years after the establishment of the technological incubators, the current study explores in a descriptive manner (compared to normative manners) the strategic management model of technological incubators. It is too early to link the strategy of the incubators with the economic success of the projects. We hope that future studies will take this challenge into account and will explore the impact of the strategy on long-term success. The long-term success indicators can include the survival rate, the percentage of Israeli ownership (in contrast to foreign ownership in case they were sold), market value, and the number of employees. The study presents four different but complementary research questions: First, we explore some general descriptive information about the incubators regarding the projects, employees, and the financial aspects. Second, we explore the strategic approach of the incubators along the three competitive dimensions of the SRP’s space (Porter 1980; Fiegenbaum et al. 1996). Third, we explore the various types and characteristics of incubators’ strategic capabilities (Barney 1991). We also explore the type of resources that are most important for their development as well as the impact of various stakeholders, such as general directors, board of directors, and the Chief

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Scientist’s Office, to their development. Finally, we present strategic management recommendations for the technological incubators as suggested by their general directors.

5.2. Methodology Data were collected in 1995 over a number of stages. In the first stage, personal interviews were conducted with people involved in the incubators. These included project managers, incubator directors, and the Chief Scientist’s Office’s referents. After developing the research questions, it was decided that the major research tool would be a structured questionnaire and that the research population would include the directors of all the incubators. Second, pilot questionnaires were completed by two general incubator directors and the questionnaires were updated in light of their comments. Third, a meeting took place in attendance of the research team, the Chief Scientist, and the person in charge of the incubator project. Formal authorization to distribute the questionnaires was essential in order to achieve a sufficient response. Finally, following the Chief Scientist’s approval, the questionnaire was distributed to the incubator general directors. In a letter attached to the questionnaire, the directors were guaranteed confidentiality of both the executives and the incubators all for the purpose of ensuring a reasonable response and reducing bias. The final sample included 19 incubator directors, or 68% of the entire population. This is a representative sample, but is nevertheless a statistically small sample. This fact determined the nature of the exploratory statistical analysis where means and standard deviations were calculated.

5.3. Results and Discussion 5.3.1. Research Question 1: General Information Figure 5.1 summarizes the first research question’s findings concerned with the incubators’ general information and it is categorized into three aspects: projects, employees, and finance. 5.3.1.1. Projects The first two questions explore the scope of incubator’s activities related to the projects. On an average, 9.15 projects are operating in each technological incubator. The general directors reported that 4.63 projects are still operating after they graduated the incubator’s two-year staying. The third question indicates that during their stay in the incubator, 0.89 project ceased operations. This figure demonstrates the advantage of the technological incubator in promoting projects at the startup stage. In discussions with incubator directors the point was raised that the accumulated experience and learning from the many projects contributed greatly to improving the incubator’s performance at a later stage. A case was described of a

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s A. Projects 1. Number of projects in the incubator: (9.15, 2.77) 2. Number of "graduated" projects that are still operating: (4.63, 3.53) 3. Number of projects that ceased operating during their stay in the incubator: (0.89, 0.93) 4. Type of Incubators' offerings to the projects: Scale of 1 (low) and 10 (high)1. Working areas 2. Administrative

(8,15, 2.00) (9.26, 1.04)

3. Scientific equipment

(5.94, 3.70)

4. Scientific advises 5. Business support

(6.68, 3.41) (8.63, 1.11)

6. Marketing support 7. Legal support

(8.36, 1.01) (8.68, 1.41)

8. Contacts in the community 9. Contacts in academia 10. Assistance in finding a strategic / financial partner 11. Complementary financing sources 12. Taxation relief 13. Assisting immigrants’ education and knowledge 14. Technological database

(8.36, 1.06) (7.26, 2.72) (8.42, 1.12) (8.36, 1.92) (5.42, 3.89) (5.73, 3.12) (7.78, 2.50)

B. Employees 5. Number of employees in the incubator: (41.52, 13.5) 6. Number of new immigrants among the employees: (30.84, 11.49) C. Finance 7. The incubator’s overall annual budget (NIS): (750,000, 400,000) 8. Incubator’s sources of financing, and their relative share: 1. The Chief Scientist: (68.6%) 2. Other (specify): (31.4%) 9. Number of projects currently operating in the incubator that have found: 1. A financial investor only: (16%, 0.23%) 2. A strategic investor only: (0 %, 0 %) 3. A financial investor who is also a strategic investor: (16%, 22%) 10. Number of "graduate" projects that have found: 1. A financial investor only: (26%, 22%) 2. A strategic investor only: (9%, 21%) 3. A financial investor who is also a strategic investor: (16%, 22%)

Figure 5.1: Incubators’ general information. Note: Means and standard deviation in parentheses, respectively. project that failed and the lessons that were drawn contributed to the success of a project that began operating later in the same incubator. The fourth question focuses on the incubator’s offerings to the projects and it covers 14 perspectives. The highest contribution of the incubator is in terms of administrative services (item 2; 9.26). The incubator also provides a high level of business (item 5; 8.63), marketing (item 6; 8.36), and legal support (item 7; 8.68). The contribution of the incubator is also significant in making contacts in the community (item 8; 8.36), in providing assistance in finding strategic/financial partners (item 10; 8.42), and finding complementary financing (item 11; 8.36). Reasonable but not exceptional quality of service can be found on several other perspectives. Because there are incubators that have relatively little contact with academic institutions (item 9; 7.26) or connection to a technological database (item 14; 7.78), these services do not obtain as high an average as those services mentioned above. With regard to access to scientific equipment and laboratories (item 3; 5.94), scientific advise (item 4; 6.68), taxation relief (12; 5.42), and the promotion of the

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immigrants’ education and knowledge (item 13; 5.73), the incubators’ performance was relatively low. A number of logical justifications can be offered for this situation. Some incubator directors claim that it is not the incubator’s role to supply R&D services to projects that are functioning independently in his incubator. Tax relief is dependent on the policy of the local authority in whose area of jurisdiction the incubator is located, while the promotion of the immigrants’ education and knowledge is not the most necessary service in that it does not contribute directly to the performance of the projects. Nevertheless, a number of incubator directors whom we interviewed did mention in-service training courses for the project employees, especially Hebrewlanguage enrichment and managerial knowledge. This type of activity is not generally undertaken in most of the incubators. 5.3.1.2. Employees The average number of employees in an incubator is 41 of whom 30 (74%) are new immigrants from the former Soviet Union. This figure is higher than the 50% minimum requirement determined by the Chief Scientist. On an average each incubator contains about 9 projects, each project employs three to four people. It is highly respected that the governmental project was able to establish a new entrepreneurship infrastructure and at the same time to provide the Russian immigrants with a wonderful economic challenges. 5.3.1.3. Finance Questions 7 and 8 relate to the total budget of the incubators and their sources. The average incubator budget is NIS 750,000 (question 7), in which participation by the Chief Scientist’s Office is 68% (question 8). Some incubators are content with the Chief Scientist’s financing, while the budget in other incubators can reach NIS 1 million. An incubator that manages to raise a higher budget is more successful. On an average, the participation by the Chief Scientist in the incubator’s budget is 450,000 while a number of financing sources (usually 2 or 3) make up the remaining 31.4% of the budget. Complementary financing sources include the Jewish Agency, the local authorities, private companies, donors, and various organizations. A sponsor’s donation is not only expressed in money terms. Governmental and private companies, academic institutions and various consultants contribute access to laboratories, business consultation, their reputation, and other means that promote the activity of the technological incubator. One of the goals of the incubators’ management is to turn the incubators into economically independent entities maintaining themselves from the proceeds of the projects and with support from private investors. The results show that the technological incubators are moving in this direction, despite the fact that they are currently dependent to a large extent on financing from the Chief Scientist. Questions 9 and 10 focus on the project’s, not incubator’s, fund sources. An important index of the incubator’s performance is its ability to attract investors and strategic partners for its projects, in view of the risk in the initial stages of their development. The results show that on average 16% of the projects operating in the incubator found a financial investor, and a similar percentage found a financial

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

investor who is also a strategic partner. On average, 32% of projects operating in incubators found an external partner or investor (question 9) during the two years of incubation within the incubator. Applying the same indicator to mature projects (question 10) shows that on average 26% of these projects found a financial investor, 9% found a strategic partner, and 16% found a financial investor who is also a strategic partner. Overall, 51% of the mature projects found a financial investor or a strategic partner. The fact that a project has not found a partner or an investor does not necessarily point to its being unattractive. On the contrary, a project might succeed in standing on its own feet and financing its continuing operations from the proceeds of its sales, or is not interested in sharing ownership with an outsider at an early stage. It is noteworthy that 100% of the mature projects in some incubators found a financial investor or a strategic partner.

5.3.2. Research Question 2: Competitive Strategy Approach A competitive strategic approach based on the SRP space is defined as the attention paid to developing and exploiting strategic capabilities (internal dimension) in a way that will satisfy the needs of the projects and respond to the stakeholders’ requirements in a better manner than their competitors (external dimension). This process should consider both past experiences and future intentions (time dimension). The results of the incubators’ competitive strategy approach are presented in Figure 5.2. 5.3.2.1. Internal dimension (A) Regarding internal factors, we examined the activities of the incubator’s director with respect to several aspects. The general directors have paid most attention on staying close to the project (item 3; 9.63) and slightly below it they paid attention to projects’ marketing needs (item 1; 9.00). This is fully understandable given the small size of the startup team and their lack of marketing skills and experience. The lowest attention was paid to business plans (item 2; 6.57) and guidelines from the suppliers (item 7; 6.58). This is probably because of the changes needed at this early stage and the limited time the directors have that need to be shared among many projects. The other aspects were between the two and they include attention to future milestones (item 4; 8.10), budget (item 5; 8.58), and guidelines from the Chief Scientist (item 6; 8.63). 5.3.2.2. External dimension (B) Regarding external factors, we examined the activities of the incubator’s director with respect to the stakeholders, including incubators’ competitors. Major attention was devoted to identifying and assimilating new projects (item 4; 8.84), as well as attracting investors (item 5; 8.57). With regard to working with the various stakeholders, it seems that the incubator directors adopt a selective approach and prefer to focus on whom they see as the more important stakeholders. Much attention was devoted to working with the Chief Scientist’s Office (item 1; 8.68), and we can conclude that it is this contact that led to obtaining

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1. Internal Dimension: The general director focuses on the following activities: 1. Have a marketing orientation 2. Work according to a detailed business plan 3. Am closely in touch with the projects in the incubator 4. Devote considerable time to future milestones 5. Manage to keep within the budget and the time schedule 6. Obtain the required guidelines from the Chief Scientist 7. Obtain the required guidelines from the suppliers

(9.00, 1.05) (6.57, 2.14) (9.63, 0.60) (8.10, 1.33) (8.58, 1.38) (8.63, 1.42) (6.58, 2.77)

2. External Dimension: The general director focuses (attention) on the following stakeholders 1. Chief Scientist’s guidelines 2. Suppliers needs 3. Local community's needs 4. New projects initiatives 5. Investors 6. Incubator’s competitors 7. -Best incubator 8. -Similar incubators 9. -Not as good as mine

(8.68, 1.67) (7.57, 2.91) (4.00, 2.77) (8.84, 1.01) (8.57, 1.07) (3.27, 2.58) (3.52, 3.42) (4.21, 3.08) (2.47, 2.58)

3. Time dimensions: The general director focuses on: 1. Work according to past experience 2. Work according to future programs and directions

(8.90, 1.00) (9.15, 0.90)

4. Market values: An assessment of the projects' average expected value by the end of their stay in the incubator ($1,000,000). (1.77, 2.02)

Figure 5.2: Incubators’ competitive strategy approach. Note: Means and standard deviation in parentheses, respectively. the required assistance from the Chief Scientist, and which led to the projects meeting their budgets and time schedules. Less attention was devoted to working with other suppliers. Particularly scant attention was devoted to the needs of the local community (item 3; 4.00), and most incubator directors did not view this as relevant given their tight schedule and other missions. In regard to incubator’s competitors, we found a low level of devoted attention. There is little awareness of the positioning of the incubator or the activities of other incubators (item 6; 3.27). More specifically, incubator directors pay little attention to the best incubator (item 7; 3.52), similar ones (item 8; 4.21), and the worse one (item 9; 2.47). We were informed of cases of cooperation between a number of incubators for promoting joint projects.

5.3.2.3. Time dimension (C) Incubator directors’ decision-making process is a function of their past experience on the one hand (item 1; 8.90) and their plans and future directions on the other (item 2; 9.15). The results show that there are no significant differences of awareness in either direction on the time axis, and both directions are viewed as important. On average, the future-based activity is regarded as more important than what happened in the past, but not significantly so. These

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

conclusions are corroborated by the response to the question posed to the directors of the extent to which they devote time to future planning. 5.3.2.4. Positioning of incubators’ competitive strategy approach Figure 5.3 presents the positioning of the incubators on the external–internal surface of the SRP matrix. It is less important to consider the time dimension in that the incubators are neutral in the sense that their past and future foci are similar. The figure reveals the strategic approach of the 19 incubators in the sample. The 1–10 scale indicates the awareness of stakeholders on the external dimension, and capabilities attention on the internal dimension. The more the incubator is located in the upper right-hand quadrant direction on the strategic map, the better is its strategic approach. From the viewpoint of internal capabilities, we cannot characterize failing incubators. But regarding the attitude to stakeholders some of the incubators are borderline. Besides one incubator with a weak approach on the external dimension and three with a dominant approach on this plane, most incubators are concentrated around a similar positioning on the strategic map. The upper-right quadrant represents ‘‘adaptive’’ incubators whose chances of success are theoretically the highest. 5.3.2.5. Market value (D) Finally, incubator directors were asked to asses their expectation about the monetary value of the projects at the end of their stay in the incubator. This figure could be an important indicator of success, despite the fact that the assessments are subjective and cannot be used as a reliable measure for startup economic performance. The project’s expected market value goal at the end of its stay is valued on average at about 1.77 million dollars. Of course this is their intention-expectations and probably wishful thinking and we leave this parameter

External

10

5

1 1

5 Internal

10

Figure 5.3: Positioning of 19 incubators’ competitive strategy approach.

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for future studies that will link the strategy and market value expectations of the incubators with indicators of objective indicators of economic performance. 5.3.3. Research Question 3: Strategic Capabilities With respect to strategic capabilities, the exploration is divided into four major aspects as summarized in Figure 5.4. First, we explore their various types. The second and third perspectives explore the contribution of various resources and partners, respectively, toward the building of strategic capabilities. Finally, we explore the practices and contributions of the board of directors. 5.3.3.1. Types of strategic capabilities (A) Based on the pilot studies that we performed with the incubators, we identified a wide range of 16 types of strategic capabilities that are oriented toward assisting the projects. The highest capability reported by the general directors is that of providing administrative services to the projects (item 10; 9.00). The incubators are also proficient in constant learning (item 3; 8.94) and their ability to develop and implement new ideas for the projects (item 4; 8.94). Additional capabilities characterizing the incubators, albeit to a lesser extent, are those of developing special services for projects (item 5; 7.570), flexibility in the face of external changes (item 6; 7.68), and attracting investors (item 12; 7.68) and partners (item 13; 7.57). The incubators’ capability of providing R&D services (item 11; 6.90) and managing an information system (item 14; 7.05) is lacking. In sum, the general directors report that they have provided a wide range of assistants that is considered to be important strategic capabilities. 5.3.3.2. Resource contributors to strategic capabilities (B) Based on the pilot study, we have split the resources into two groups: The first four items relate to the incubators in general while the other four relate to the general director as a major resource since he is the experienced guy and that the stuff of the incubator is very limited. The results revel that all eight items reveal high levels. The most important resources include reputation (item 1; 8.94) and general directors experience (item 6; 8.94) and skills (item 1; 8.94). Objective data collected to support the nature of incubator directors’ personal skills show that the average general director has a postgraduate degree and 10–12 years of professional and managerial experience. 5.3.3.3. Partners contributors to strategic capabilities (C) Another important aspect in understanding the process of building strategic capabilities is that of identifying stakeholders’ contributing to the incubator’s success. It transpires that most of the stakeholders contribute significantly to the success of the incubator, and in some cases this contribution is decisive. The most important contribution is that of the incubator’s general director (item 3; 9.31), followed by that of the project managers and employees (item 4; 9.00). The Chief Scientist’s Office is important for the incubator’s success (item 1; 8.73), but here we need to differentiate between two kinds of contribution. The Chief

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s A. Types of Incubator's Strategic Capabilities: Contributing the projects along: 1. Ability to initiate and execute changes (8.58, 1.12) 2. Ability to take risky decisions (8.42, 1.12) 3. Ability for constant learning (8.94, 0.85) 4. Ability to develop and implement new ideas (8.94, 0.91) 5. Ability to develop special services (7.57, 2.03) 6. Ability to respond to external changes (7.68, 1.73) 7. Ability to locate projects (8.00, 1.56) 8. Ability to finance (8.26, 1.88) 9. Ability to provide marketing services (8.21, 1.13) 10. Ability to provide administrative services (9.00, 1.00) 11. Ability to provide R&D services (6.90, 2.90) 12. Ability to attract investors (7.68, 1.25) 13. Ability to attract strategic partners (7.57, 1.17) 14. Ability to manage information systems (7.05, 2.24) 15. Ability to meet deadlines (8.36, 1.11) 16. Ability to reduce costs (8.21, 1.84) B. Resource contributors to Incubator’s Strategic Capabilities: 1. The incubator’s reputation 2. Integration and internal coordination in the incubator 3. Information and control in the incubator 4. The incubator’s organizational culture 5. General director's knowledge and formal education 6. General director's practical experience 7. General director's skills 8. General director's personal contacts

(8.94, 0.97) (8.05, 1.61) (8.11, 1.60) (8.05, 2.12) (7.52, 2.39) (8.94, 1.17) (8.94, 1.13) (8.26, 1.99)

C. Partners' contributors toward building the Incubator’s Strategic Capabilities: 1. Chief Scientist’s Office (8.73, 1.24) 2. Incubator’s Board of Directors (7.78, 2.15) 3. Incubator’s Director (9.31, 0.67) 4. Project Managers and Employees (9.00, 0.94) 5. Suppliers (6.68, 2.33)

D. Board of directors practices and contribution: 1. Frequency of meeting of the board of directors during the year 4-8 times 3 9-12 times 4 More than 12 times 1 1-3 times 2 (1.89, 0.73) 2. Average duration of meeting: One to Two to More than 4 hours 1 Less than 2 3 4 1 hour two hours four hours (3.00, 1.45) 3. The contribution of the incubator’s board of directors to the success of the projects in the areas detailed below: 1. Management (6.31, 2.68) 2. Marketing (5.15, 2.16) 3. R&D (5.42, 2.71) 4. Legal aspects (5.84, 2.45) 5. Recruiting strategic partners (5.68, 2.03) 6. Recruiting financial investors (6.36, 2.43) 7. Reputation (7.42, 2.50)

Figure 5.4: Incubators’ strategic capabilities development. Note: Means and standard deviation in parentheses, respectively. The scale is 1 (low) and 10 (high).

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Scientist’s financial input is essential, without which the incubator could not succeed. Regarding the non-financial contribution, opinions among incubators are mixed. Most incubator directors feel it is less important than the financial contribution. The contribution of the incubator’s board is somewhat marginal (item 2; 7.78), while that of the suppliers is the least important (item 5; 6.68), probably because they are not directly involved in the incubators’ day-to-day activities. 5.3.3.4. Board of directors and strategic capabilities (D) The questionnaire provides more detailed data on the activity of the incubator’s board of directors. The results show that the board convenes two to three times a year (item 1) for two to four hours (item 2). The third question explores the contribution of the board of directors to the success of the projects considering various aspects of the projects. In contrast to the previous questions, the general directors assigned relatively low levels of directors’ contribution in the range of 5–7. The most important contribution is directors’ reputation (item 7; 7.42), and the least important is their contribution to the marketing activities of the projects (item 25; 5.15). Their ability to attract financial investors (item 6; 6.36) and strategic partners (item 5; 5.68) also received relatively high values.

5.3.4. Research Question 4: Suggested Improvements This last research question is based on suggestions raised by the incubator general directors. The questionnaire included questions pertaining to possible improvements in policy and at the level of the Chief Scientist’s supervision of the incubators and the projects operating within them. These questions were formulated in the wake of preliminary research in which we interviewed a number of incubator directors and other involved stakeholders. The questionnaire includes also an open question in which incubator directors are asked to make additional suggestions for improvement. The responses to the structured questions are presented in Figure 5.5 and a discussion on the figure and the open question is next presented. A. Budget: Flexibility in determining a different budget for each project B. Salary: Flexibility in determining the salary paid to the projects’ workers C. Immigrants: Flexibility in determining the percentage of new immigrants in the projects D. Project Duration: Flexibility in determining different lengths of stay for each project in the incubator E. Ownership: Flexibility in determining the structure of ownership of the projects F. New Projects: Flexibility in determining the process of choosing new projects for the incubator

(8.05, 2.34) (7.78, 2.39) (6.84, 2.83) (7.94, 2.46) (6.94, 2.85) (4.41, 3.26)

Figure 5.5: Incubators’ general directors recommendations for improvements. Note: Means and standard deviation in parentheses, respectively. The scale is 1 (low) and 10 (high).

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5.3.4.1. Budget flexibility for each project (A) The incubators’ general directors attribute the highest importance (8.05) to this suggestion. When the research was conducted, the Chief Scientist provided about $125,000 per project for each of the two years, without differentiation. In reality, some projects require more funding than others. The differences are a consequence of the complexity of development, the field the project is in, marketing and administrative needs, the scale of the equipment required, etc. A suggestion was raised in the interviews that the incubator would receive a budget (or a budget ceiling) based on the number of projects it is working on, and the decision on allocating the budget would be predicated on objective criteria of the project’s needs. This suggestion would entail expanding the authority of the incubator’s general director, but this person does have the required qualifications to assess the needs of the projects he manages. A second possibility is that a committee in the Chief Scientist’s office would decide objectively on the size of the budget for each project. These changes would not necessitate increasing the Chief Scientist’s budget for projects, and could lead to a more equitable division of the budgetary pie. It might even be possible to save money in that some projects demand the budgetary ceiling even though they do not require it. The current system is not sufficiently flexible in this regard, and despite the difficulty of implementing the change, it should be seriously considered.

5.3.4.2. Salary flexibility for each project (B) This suggestion was considered as relatively important (7.79). Two aspects underlie this problem. Initially, claims were made that the existing salary ceiling is too low and does not allow the incubator to employ workers with a sufficient level of expertise for developing new products. The result is that the project employs new immigrants who are prepared to work at lower salaries. The problem is that the inventory of new immigrants with the appropriate skills is diminishing. The other aspect is the absence of differentiation between employees. The salary ceilings are uniform, but each worker contributes differently to the project. In the current situation the R&D leader (sometimes the entrepreneur) enjoys no salary differentiation from the other workers. The salary ceiling needs to be adapted to the contribution each worker makes to the project, possibly to be decided by the project manager. The importance of this suggestion lies in the demand to improve the quality of personnel working on the projects. Projects that wish to reach the technological cutting edge have to employ people with exceptional knowledge and expertise. The structure of the current salary ceiling is not attractive to this target population. It is impossible to hire some professionals because the salary they are offered outside the incubator is far greater. There is also a danger that the relatively high salaries offered outside will lead to a brain drain from the incubator. The financial contribution of a specialist employee to a project far exceeds the extra cost of employing him. Against the above claim is the argument that the percentage of ownership granted to the employees constitutes a supplementary incentive beyond salary (the employees receive 10% of the ownership). However, some general directors feel that this incentive

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is insufficient, and that it is too distant a goal for both the entrepreneur and the workers. Greater flexibility in determining salaries for project workers could answer the problems that have been raised. 5.3.4.3. New immigrants flexibility in each project (C) This suggestion obtained a score of 6.84. At present, as the Chief Scientist requests, at least 50% of the employees in the incubator have to be new immigrants. In reality, about 75% of the incubators’ employees are new immigrants. The problem is complex because the salary level makes it virtually impossible to employ anyone other than a new immigrant. The real problem, however, is that the number of new immigrants with the necessary expertise is declining, while the low salaries do not allow the required quality of personnel to be employed. The incubator program was inaugurated during a period of massive intake of newcomers chiefly from Russia, and it is now (1995) necessary to examine the role of the incubator from a slightly different perspective. It will obviously not be possible to obtain government financing for a program that is not based on assistance for new immigrants. Still, other suggestions should be examined in these veins, which are compatible with the business needs of the program in general and of the projects in particular. A problem that emerged from an analysis of this suggestion is not one of employment constraints but rather a budgetary problem. The budgetary constraints are what dictate the existing situation regarding the employment of new immigrants. While the Chief Scientist, on his part, has met the incubator directors halfway by modifying the definition of what constitutes a ‘‘new immigrant’’ and has extended it to more longstanding immigrants, a more fundamental solution is required. Not all the incubator general directors, however, view this suggestion for improvement as essential, because de facto the budgetary constraint dictates the employment constraints. 5.3.4.4. Project duration flexibility (D) This suggestion obtained one of the highest scores among incubator directors (7.95). Each project can spend two years in the incubator. There are many instances of projects requesting an extension of the time in the incubator. No differentiation regarding the length of stay is made between projects with different needs. Thus, for example, some software projects require less than a year to complete their initial development, while others in the biotechnological field usually continue for more than two years. There should be room to allocate each project a period of stay according to its needs. The authority for deciding on this issue could be delegated to a committee in the Chief Scientist’s Office, taking into consideration the opinion of the incubator’s director. An outgrowth of this issue is the question of funding the projects that are granted an extended stay. It is thus necessary to combine the flexibility in determining the projects’ financing with that of determining time schedule limitations. Some incubator directors feel that most of the projects require more than two years, and

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recommend extending the stay in the incubator to 2.5 years. We also should not ignore other considerations affecting the extension of stay in the incubator, such as budgetary limitations and the desire for the project to operate independently as soon as possible. The danger exists that if the period of stay is extended, projects will continue the R&D stage beyond what is necessary and will not cut back on costs. The most appropriate framework thus needs to be found for making decisions about projects’ time of stay in the incubator. One of the incubators is built according to a slightly different mode (a business incubator) and has flexibility of the type suggested. We could use the accumulated experience in this incubator when making decisions concerning this suggestion for improvement. 5.3.4.5. Ownership structure flexibility for each project (E) This suggestion obtained a relatively high score (6.95) from the incubator managers. During the research, the ownership structure of a project is fixed and uniform. The entrepreneur owns 50%, the incubator up to 20%, an external investor up to 20%, and the workers at least 10%. The fact that the division of ownership is not under the discretion of the incubator director and the project manager leads to difficulties in conducting negotiations with external investors who are fully aware of the limitations under which the project manager operates. Sometimes there is a need to reduce the entrepreneur’s share in order to attract a strategic partner. Some claim that entrepreneurs do not always deserve 50% ownership when their contribution is limited. There are other problems as well, such as when one of the project workers leaves and continues to hold a percentage of ownership, etc. Flexibility in determining ownership percentages has considerable ramifications. The limitation sometimes dictates an unnatural division of the shares of the project. This limitation also has advantages, but a way needs to be found to reduce the disadvantages of the method. Each project is an independent entity, so that the division of ownership should be decided on its merits, thereby neutralizing the problems caused by the current limitations. Because of the danger of creating anarchy, this suggestion for improvement should be considered taking all the expected ramifications into account. There is flexibility in this area, but it is insufficient. The issue of ownership should be reexamined and decisions on change in the ownership structure should be based on accumulated experience. 5.3.4.6. New projects selection flexibility (F) This suggestion obtained the lowest score (4.41) among incubator general directors, their general response being ‘‘there is sufficient freedom’’. The suggestion arose in the context of granting the incubator director more authority in the selection process. Incubator directors seem to feel they have sufficient freedom, and do not have any limitations in the process of filtering new projects. In some cases, the incubator directors proposed accepting a project that was rejected by the examining committee in the Chief Scientist’s Office, but the ultimate decision was made on the basis of objective considerations. The real problem, according to a number of incubator directors, is the insufficient opportunity to conduct in-depth feasibility examinations for all new projects entering the incubator.

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The program does not allocate special funds for conducting preliminary examinations of this kind, and the incubator director has to grapple with deciding whether to undertake preliminary examinations with the incubator budget, or to dispense with some of the examinations. Possibly, a budget addition for this purpose could save future expenses on problematic or failing projects. As mentioned, while the incubator directors feel that they have sufficient freedom for choosing projects in the current situation, they do not always find the financial resources to reach optimal decisions.

5.3.5. Suggestions for Improvement — Open Question The suggestions in this section are drawn from interviews with the directors of the incubators and their responses to the open-ended question in which they were asked to offer suggestions for improvement. The following discussion relates to their suggestions and offers a wider perspective to that gleaned from the closed questions in the questionnaire. The major problems raised and discussed are time schedule limitations, budget, and bureaucracy. Regarding time schedule, the trend was to extend the stay of the project in the incubator for various reasons. One approach claims that in the initial organizational stages, the entrepreneur/project manager is required to assemble a team of workers and to undertake preliminary preparations even prior to starting the R&D. These preparations take time, so that the effective period of stay in the incubator is even less than two years. Possibly for this reason it is important to extend the stay in the incubator and to allocate time for preparatory activities of this kind. Beyond this, they felt that the stay in the incubator should be determined according to the specific needs of the projects. A variety of streamlining suggestions flowed from the budgetary problems. Almost all incubator directors complained about the budgetary framework’s rigidity. The Chief Scientist’s Office does not permit sufficient flexibility in transferring from one budgetary section to another, a situation that could result in wastage in one area and a shortage of funds in another. Possibly more discretion should be given to the incubator’s director to transfer from one budgetary section to another. This view dovetails with the claim of allowing flexibility in the budget allocated to projects, and of raising the existing budgetary ceilings. Special attention was focused on marketing. The incubator directors feel that the marketing services should be concentrated in the incubator (the marketing budget is currently dispersed among the projects), that the budget earmarked for this purpose should be increased, and that greater discretion should be given to the incubator director in using this budget. It is possibly worth considering the appointment of an assistant/deputy incubator director with a marketing-economic orientation. The problem of the salary ceiling recurs constantly. The salary is insufficiently attractive for employees with expertise in the areas required for the projects. The supply of workers (especially new immigrants) with appropriate skills who are willing to work at the proposed salary is extremely low. Outside the incubator they are

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offered far higher salaries. Even then, according to the incubator directors, the salary paid to project managers is too low. An additional budgetary suggestion is to permit a non-uniform division of the project budget between the first and the second year. The expenses incurred in developing the project are not uniform and change with the progress of the project. A situation could arise in which a project does not exploit its budgetary ceiling in the first year and experiences financial distress in the second. Possibly, the unspent budget could be transferred from the first to the second year. Finally, the incubator directors claim that the existing bureaucratic procedures should also be improved. The budgetary and time schedule limitations lead to a situation in which every deviation is bound up with bureaucratic procedures and an unnecessary workload. A decision to increase flexibility will reduce the bureaucratic pressure on the incubator’s director, and enable him to channel his energy in more productive directions. Reducing the amount of paperwork required for the financial reports is inextricably bound up with increasing budgetary flexibility. In addition to the absence of budgetary flexibility, the problem was raised of authorizing trips abroad by the project manager for promoting the project. In many cases this is a vital need, which encounters bureaucratic delays on the part of the program’s administration. In addition to the above specific suggestions, the incubator directors feel that the program’s learning mechanisms should be improved. These mechanisms did not exist previously because the program was still in its infancy, but it is now possible to use the accumulated experience in the incubators for the benefit of all of them. The experience obtained in the incubator program can be used to implement similar components for supporting startup companies that operate with the direct support of the Chief Scientist’s Office. Possibly too, concerted action could be taken by the incubators’ administration to deal with problems that all the incubators face, such as: obtaining authorizing to exempt them from municipal taxes, tax relief for financers and supporters of the incubators, business courses for incubator directors and project managers, increasing awareness on the part of the government’s economic representatives in Israel and abroad of the incubator program’s potential, establishing a business information system or links to international information networks, etc. We emphasize that despite the suggestions for improvement, incubator directors feel that the existing mechanism is well organized and efficient. They praise the Chief Scientist and the role of Rina Pridor (August 22, 1991) that leads this program for their willingness to assist and for their understanding of the issues on the agenda. The special incubator framework should be maintained because of its outstanding contribution to absorbing new immigrant scientists, and because of its development of innovative projects of the first order for Israeli industry.

5.4. Summary The results reveal four important strategic aspects of the technological incubators. The first research question reveals some general information about the incubators.

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Probably the most interesting findings out of this part is the relatively high average projects per incubator (about 9), and the high success rate, in terms of survival, following the two years within the incubator (about 50%). In regard to the second research question, the data reveals that most of the technological incubators have applied a competitive strategy approach along internal, external, and time dimensions. Namely, general directors have paid attention to building internal capabilities as well as external stockholders. However, it should be noticed that the directors reported that they do not see the other incubators as competitors nor do they consider their relative strategic positioning. Although they are competing on receiving new projects and attract investors and strategic partners, they have reported the high cooperative mode and support that they provide to each other. In regard to the third research question, we have revealed that the general directors have addressed a wide spectrum of strategic capabilities and they were able to identify both their resources and partners’ contributions. However, the contribution of the board of directors to the capabilities building received relatively low levels. This is where future management improvements can aid to strengthen the incubators’ strategic capabilities. The last research question focused on strategic improvements suggested by the general directors. While all responded revealed their high respect to the way that the government runs this activity, they have also provided detailed suggestions for further improvements along: budgetary, timing, and bureaucratic perspectives.

References Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17, 219–235. Fry, L. F. (1987). The role of incubators in small business planning. American Journal of Small Business, 12, 51–61. Lavie, D. (1995). Technological incubators in competitive strategic approach. Final project submitted towards BSc degree. The Technion — Israel Institute of Technology (in Hebrew). Linder, S. (2003). 2002 state of the business incubation industry. Athens, OH: National Business Incubation Association (NBIA), Publications. Phan, P. H., Siegel, D. S., & Wright, M. (2005). Science parks and incubators: Observations, synthesis and future research. Journal of Business Venturing, 20(2), 165–182. Porter, M. E. (1980). Competitive strategy. Free Press. Shefer, D., & Frenkel, A. (2002). An evaluation of the Israeli technological incubators program and its projects. Final Report. The S. Neaman Institute for advanced studies in Science and Technology, Technion, Haifa.

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Chapter 6

Strategic Management Perspectives of Incubator Startups1 In 1991 a program for technological incubators was established in Israel by the Chief Scientist’s Office. Its goal was defined as the development of a supportive infrastructure for the initial stage of technological entrepreneurship, combined with activities designed for absorbing new immigrants from the former Soviet Union (Harish, M. (1993). The activities of the Ministry of Industry, Trade and Labor, before a discussion in the Knesset of the budget and ministry’s activities in the 1993 fiscal year). Whereas the former chapter addresses the strategy of technological incubators that host technological startup companies, the present study offers a complementary perspective in that it focuses on the strategy of startup companies in the technological incubators, including the support they get from the technological incubator. The study contains two major aspects. The exploratory part describes five different strategic perspectives at the startup level: the product, the employees’ background, the strategic capabilities, the board of directors, and the incubator focus and support. The normative part explores the association among some of the strategic perspectives and startup performance measures in terms of perceived success and survival. Findings show that the best predictors of perceived economic success are the uniqueness of the product and the strategic capability to initiate change and attract strategic partners. On the other hand, the best predictors of perceived survival are the product capability to generate a large profit, and the ability to reduce costs.

6.1. Theoretical Background The literature attribute startup companies success to a wide range of strategic perspectives representing the startup and its associated technological incubator. At the startup level, studies show that time spent in the incubator compels projects to conduct more in-depth planning, and more frequently than an enterprise outside the incubator (Fry 1987). It is reasonable to assume that the level of planning is one of the important factors in the relative success of startups in incubators. Lumpkin & Ireland (1988) defined success factors critical to incubator startups including financial relationships, project managers’ demographic characteristics (age, gender, varied 1 This chapter is based upon the thesis of Elitzur Cohen (1996) as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion—Israel Institute of Technology in 1996.

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skills, character traits, and level of investment in the project), as well as diverse market factors. Findings of an in-depth study of two incubators in the US show that a startup main profit lies in the opportunity given to the entrepreneur to develop a relationship with other entrepreneurs in the incubator. Another important reported source of success is manifested through the building of strategic capabilities such as marketing (mainly sales) and costs reduction. Numerous studies were conducted in the US in the 1980s on technological incubators, which at the time were a new phenomenon that aroused a great deal of interest. These studies focused on the incubators and startup strategic perspectives that contribute to their success. Incubators were set up in the US mainly in response to an acute increase in the failure rate of new businesses, and were regarded as the crucial force in developing and creating new jobs. Incubators in the US provide the entrepreneur business with low rental fees, a variety of administrative services, equipment and consulting services vis-a`-vis marketing and financing. Some of the incubators also provide direct financial assistance, albeit significantly partial and in most cases manifested solely in loans. A preliminary study carried out by NBIA (National Business Incubator Association) shows that incubators’ startups strategic perspectives increased the probability of project survival from 20% to approximately 80%. Feeser in 1988 examined ‘‘graduate’’ projects after they left the incubators and studied factors that explained their performance. He defined performance in terms of growth rate and differentiated between projects whose growth rate was rapid, and those whose growth was slow. The differentiating factors included incubator’s as well as startup factors such as size, technology, product focus, customer focus, and the niche strategy. In sum, this background review indicates that both startups and technological incubators contribute to the success of the startup companies. At the startup level it includes such aspects as the opportunity idea, the product, the manager, and the strategic capabilities. At the incubator level, it includes the added value activities provided by the incubators based on their accumulated experience and resources that can be shared among the startup companies. The first part of the study explores various strategic aspects mainly at the startups but also at the technological incubator levels. The second normative part hypothesizes the association among startups strategic perspectives and performance.

6.2. Method In this section we describe the sample, questionnaires, and the choice of performance measures. It should be noticed that the study was carried out during the 1994–1996 time period just three years after its inception. 6.2.1. Sample The research population comprises startup (projects) managers in technological incubators in Israel. In accordance with the Chief Scientist’s division, the startups

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belong to five main fields of activity: electronics, software, medical equipment, chemistry and substances, and miscellanea. The sample’s distribution according to fields of activity is similar to the distribution of the project population. Questionnaires were administered to all startups in all the technological incubators. Of the 230 questionnaires administered, 55 were returned at a response rate of 24%. The projects participating in the study originated from 22 of the 28 technological incubators operating in Israel. 6.2.2. Questionnaire Information was gleaned from primary sources addressing the activities of the Chief Scientist and the technological incubators. Additionally, interviews with several selected startups managers, incubator managers, and senior officials in the Chief Scientist’s Office were conducted. In accordance with the information collected a questionnaire was formulated for the startups managers in the technological incubators. Self-addressed and numbered questionnaires were distributed to the technological incubator managers, and they in turn distributed the questionnaires to the startups managers in their incubators. To ensure anonymity the questionnaires were returned by mail directly to the researchers, without going through the incubator’s general director another time. A pre-test on a small sample comprising two incubators and two startups was conducted for delineating the questionnaire. It comprised in-depth interviews with the incubator and startups managers in order to understand the unique character of the incubator. A theory-based questionnaire was compiled together with consultation with the responders to the questionnaire. Conclusions, based on the pre-test, called for reformulation of the questionnaire. The questionnaire was composed of several parts: (1) product characteristics; (2) employees background; (3) startups strategic capabilities; (4) startups board of directors; and (5) technological incubator practices and support. In order to better understand the essence of the technological incubators program and boost the questionnaire’s response rate, several meetings were held with Ms. Rina Pridor, director of technological incubators program. An additional meeting was held with the Chief Scientist, Dr. Yehoshua Gleitman. In the meetings the study’s goals and the way that it was carried out were presented. Ms. Pridor and Dr. Gleitman acknowledged the importance of conducting a study on the subject, which had not yet been thoroughly studied in Israel, and agreed to cooperate in arranging the research. As a result, a letter signed by Ms. Pridor was attached to each questionnaire, which explained the importance of the study and accorded it an official imprimatur. A telephone followup of the questionnaires was conducted over several months: in most cases the liaison was the incubator manager or one of his/her assistants. After several telephone rounds the response rate rose to 24%. 6.2.3. Performance Measures The process of choosing performance measures comprised several stages. The first examined the ways of determining the performance measures of a startups, and later

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the alternatives to the questions, which would examine these performance measures. Following are the measures together with the advantages and disadvantages of each. 6.2.3.1. Domestic and international sales These variables were derived from responses to the questions related to the projected market size worldwide and in Israel for the main product, and the projected market share in the first year after production commencement. These measures are correlated with economic performance as indicated in the literature. However, several problems regarding this measure were observed, beyond the question of whether it constitutes an appropriate performance measure. It leans heavily on respondents’ subjective evaluation, and is accordingly biased by their level of optimism and familiarity with the market, contrary to objective financial measures. An initial difficulty exists in defining the market in which a startup company operates, and in most cases it can be expanded into a generic sphere, reduced to a specific sphere, and thus artificially modifies the market space. According to interviewees it appears that it is more difficult to evaluate the expected sales volume, and easier to evaluate the expected market share and size. We decided to include both expected sales and market share. 6.2.3.2. Market capitalization This measure constitutes the main measure for the economic success of technological startups given that it incorporates their future profits and competitive positioning (Hamel & Prahalad 1989). The introduction of an outside investor in fact determines the possibility of the startup’s survival after the conclusion of the incubator period. Only a few projects succeeded in surviving without outside financing after the conclusion of the incubator period because the majority of entrepreneurs had originally come to the incubator without noticeable financial resources. Several questions were formulated in the questionnaire examining directly and indirectly, the presence of an outside investor. 6.2.3.3. Perceived versus objective measures Previous research indicates that top management team’s perception of how well their firm had performed—measured in a subjective and relative sense—was consistent with how the firm actually performed (r ¼ 0.694, po0.001) (Dess & Robinson 1984). The subjective measures should be used as ‘‘alternative to remove the consideration of performance from research design’’ (Dess & Robinson 1984: 271) and may be useful also in attempting to operationalize broader dimensions of performance. In the absence of more reliable and precise objective measures during the operation of the projects, and not post factum, the subjective indices for success were defined as the dependent variables in the study model. Given the early stage of the incubator startups and the difficulty to achieve subjective data, we used performance measures as perceived by the startup’s general managers. We used two measures: success and survival and these variables were measured respectively by position sentences: ‘‘I think my project is successful’’, and ‘‘I am sure that my project can stand on its own feet independently even after the conclusion of the incubator period’’. These sentences were measured, like the other position sentences, on a 10-entry nominal scale.

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6.3. Findings and Discussion 6.3.1. Descriptive Exploration Figure. 6.1 below presents the questionnaire and summarizes the descriptive findings. 6.3.1.1. (1). The product The average startup was accepted into the technological incubator in January 1994, approximately two years after the idea that led to its establishment was conceived (first question). On one hand, it can indicate that the entrepreneurs were thinking about the idea for about two years and entered the incubator after it was well thought. On the other hand, it can indicate a slow process of accepting the projects. Item 2 explores the number of technology applications in terms of product development. It is always an issue of whether focusing the limited resources on one product-application or spreading the limited resources on several products and by that the startup reduces the development risk. On average, we can learn that each company developed two product-applications but we can also learn that respondents reported a wide range varying from one to six applications. Questions 3 and 4 concern with the sales aspects of the products. About a year after production commenced the main product is expected to gain a market share of approximately 20% in Israel (question 3), of a yearly market of approximately US$ 4,000,000 (question 4), and a market share of approximately 7% worldwide, of an average market of US$ 240,000,000. These numbers are very high and might represent either wishful thinking or the limited ability of the startup at the early stage of the industry to understand the nature of product development. Questions 5 and 6 concern with competitive aspects of the products. Question 5 explores the product characteristics according to the criteria developed under resource-base view of the firm (Barney 1991). Four questions have addressed their products VRIN (value, rare, inimitable, non-substitute). The two top ranking were rare (8.57) and value (8.37) and they can explain the high levels of sales and market share that were reported on the former 3rd and 4th questions. On the contrary, the lowest level was reported on the non-substitute (5.96) and inimitable (6.41) criteria. These results can indicate that the entrepreneurs also understand that their technologies and products are not immune from future products’ competition. Question 6 explores the competitive advantages, relative to competitors, of startups products (Porter 1980; Fox & Kotler 1980). The highest values were reported on quality (8.62) and quite below it technological advantage (8.38). The lowest was reported for having a patent that can protect them (5.26). The range distribution indicates that entrepreneurs reported the highest value (10) for all items as well as lowest values of 1 and 3. We can conclude that the startup companies developed their competitive advantages along a wide range of product characteristics. 6.3.1.2. (2). Employees’ background A number of previous research studies established the importance and impact of the scope of management background and experience on organizational performance (Burch 1986; Bantel & Jackson 1989;

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s 1. Product 1. The Idea a. Date of conception of enterprise idea-opportunity (12.1991; ±3.1 years). b. Date of entrance into the incubator: (01.1994; ±7.5 month). 2. Number of new products developed out of the idea: (2.2; ±1.3; 1-->-6) 3. Expected market size for main product (in millions of dollars per year) a. In Israel: (3.8; ±6.4; 0-->28) b. Worldwide: (240; ±360; 0-->999) 4. Expected market share (%) one year after production commencement: a. In Israel: (20; ±26; 0-->99) b. Worldwide: (6.7; ±16; 0-->99). 5. The product characteristics are: a. Value: Can generate high profits (8.37; ±1.52; 3-->10) b. Rare: Very unique (8.55; ±1.63; 4-->10) c. Inimitable: Difficult to imitate (6.41; ±2.86; 1-->10) d. Non substitute: Has no alternative products (5.96; ±2.99; 1-->10) 6. The competitive advantages (positioning) of the product are manifested in: a. Low costs (7.07; ±2.64; 1-->10) b. High quality (8.62; ±1.31, 5-->10) c. Technological superiority (8.38; ±1.88; 3-->10) d. Simplicity (7.43; ±2.29; 2-->10) e. Having a protected patent (5.26; ±3.20; 1-->10) 2. Employees Background 1. Academic: Number of salaried employees with university degree a. BA: (0.52; ±0.77; 0-->4) b. MA: (0.35; ±0.65; 0-->3) c. PhD: (0.25; ±0.48; 0-->2) 2. Experience (years): a. Entrepreneur’s years of managerial experience: (10.5; ±9; 0-->30) b. Project manager: (11.8; ±10; 0-->35) c. Entrepreneur’s years of engineering experience: (16.6; ±11; 0-->40) d. Project manager: (16.1; ±12; 0-->40). 3. Start Up Capabilities 1. I, as general manager a. Feel a strong connection to the incubator (7.51; ±2.51; 1→10) b. I don't need the assistance of the incubator (3.23; ±3.10; 1→10) c. Receive assistance from the incubator (7.74; ±2.86; 1→10) d. Believe my incubator is good (7.79; ±2.51; 1→10) e. Operate according to a detailed business plan (6.38; ±2.45; 1→10) f. Devote a great deal of time to future planning_(7.53; ±2.02; 3→10) g. Adhere to the planned budget (9.47; ±0.89; 7→10) h. Adhere to the planned schedule (8.58; ±1.63; 4→10) 2. Evaluation of start up capabilities (At Entrance -----A year from now) a. Cost reduction (5.83 ---- 6.85) b. Customers' response (5.63 ---- 8.58) c. Marketing (3.93 ---- 7.68) d. Attracting investors (4.02 ---- 7.94) e. Attracting partners (3.79 ---- 8.00) f. Innovation (7.62 ---- 8.47) g. Learning new things (7.67 ---- 8.41) h. Initiating change (7.24 ----8.44)

Figure 6.1: Startups’ descriptive statistics. Note: For three numbers in parentheses, the first and second numbers represent the mean and standard deviation, respectively. The third number represents the range of answers.

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3. Contributors to the start up capabilities and success: a. The Chief Scientist’s Office (7.16; ±2.97; 1→10) b. Incubator manager (6.96; ±2.68; 1→10) c. Entrepreneur (8.53; ±1.94; 2→10) d. Project manager (8.67; ±1.55; 3→10) e. Employees (8.08; ±1.67) f. Investor (6.50; ±2.89) g. Other (8.00; ±2.83; 6→10) 4. Start Up (Project) Board of Directors 1. Does the start up have a board of directors (total number-%) a. Has (43-80%) b. Has not (11-20%) 2. Frequency of board meetings during the year a.1-3: (10) b. 4-8 (19) c. 9-12 d. Over 12 (5) 3. Duration of board meetings a. Less than an hour (7) b. 1-2 hours (22) c. 2-4 hours (11) d. Over 4 hours (0) 4. Areas where board of directors contribute: a. Management: (6.20; ±2.88; 1→10) b. Marketing: (5.73; ±2.88; 1→10) c. R&D:(4.35; ±2.40; 1→8) d. Legal aspects:(5.33; ±2.99; 1→10) e. Attracting investors: (5.28; ±3.09; 1→10) 5. Incubator 1. My incubator's general director focuses attention on: a. The projects’ needs (7.83; ±2.56; 1-->10) b. Work with the Chief Scientist (8.28; ±1.82; 1-->10) c. Work with suppliers (7.36; ±2.36; 1-->10) d. Attracting new projects (8.06; ±2.10; 1-->10) e. Development of the incubator’sunique capabilities(6.78; ±2.95; 1-->10) f. Positioning the incubator vs. other incubators (6.15;±3.16; 1-->10) 2. The kinds of decisions taken at present in the incubator are affected :by a. The incubator’spast experience (7.43;±2.34; 1-->10) b. The incubator’sfuture directions (6.96;±2.88; 1-->10) 3. For future success the incubator should develops: a. R&D capabilities (6.25;±2.89; 1-->10) b. Managerialcapabilities (7.27;±2.40; 1-->10) c. Marketingcapabilities (7.00;±2.56; 1-->10) d. Capabilities forattracting investors(7.35; ±2.58; 1-->10) 4. I am pleased with the contribution of the incubator's general manager to my project (7.88; ±2.50; 1-->10)

Figure 6.1: (Continued)

Scherer & Huh 1992; Wiersema & Bantel 1992). The first question indicates that on average, each startup has less than one employee that holds a BA degree, MA degree, and a PhD. However, the range varies from 0 to 4, 3, and 2, respectively. Given that on average each startup employs about four people, it indicates a relatively high level

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of employees’ academic background. As indicated from the second question, both entrepreneur and project managers have about 11 years of managerial experience, and 16 years of engineering experience.

6.3.1.3. (3). Startups’ capabilities The first question focuses on the attention of the general manager since it directs and affects the type and kind of strategic choices made (Cohen & Levinthal 1990). Items (1–4) concern with the incubator-startup attention. It can be seen that the startups’ general managers assigned a high level to this kind of relationship since they are connected (item a; mean 7.51), and get assistance (item c; mean 7.74) and believe that their incubator is good (item d; mean 7.79). This was also supported by their agreement with the statement that they do not need the assistance of the incubator (item b; mean 3.23). However, all four items receive a wide range of response from 1 to 10 indicating that there are managers that either do not agree or highly agree with this aspect. In regard to planning, the questions have explored four different but complementary perspectives. The highest attention was paid to budget (item g; mean 9.47) and schedule (item h; mean 8.58). In addition, the range went as high as 10 but did not go below 7 and 4, respectively. This can be understood because of the strict requirements of the Chief Scientist’s Office for ongoing operation. On the other hand, developing future planning (item f; mean 7.53) and operating according to business plan (item e; mean 6.38), received less attention. The second question focuses on the attention made on capabilities building at two points of time: a year ago (or the time of entry of the incubator) and a year from the time of the questionnaires. Strategic intent (Hamel & Prahalad 1993) is an important aspect in adapting the nature of the startup to the changing nature of the competitive environment (Porter 1980). The first item indicates that cost reduction is relatively low at the two points of time although the respondents provided a higher level in a year’s time from now (6.85) relative to the period a year ago (5.83). The next two items indicate a big shift in the respondents’ attention in regard to customers and marketing in general. Especially, marketing attention (item c) has shifted from 3.93 to 7.68. The next two items relate to attracting partners to the startups. Both, attracting investors (item d) and partners in general (item e) received high values close to 8 and they reveal almost 3 units of change (on a scale of 1–10) from the previous time period. This indicates that staying in the incubators had shifted their attention toward the particular importance of investors and strategic alliances in general. The last three items focus on organizational issues. All three items received high values at both time periods and all have revealed a positive shift as well. The respondents understood the importance of innovation (item f), learning (item g), and changes (item h). The third question focuses on the contributors toward the startup capabilities building and overall success. Project managers believe that the overall contribution to the startup’s success is mainly their own (item d; 8.67), the entrepreneur’s (item c; 8.53), and the employees’ (item e; 8.08). A lesser contribution is attributed to the

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Chief Scientist’s Office (item a; 7.16), the incubator manager (item b; 6.69), and the investor (item f; if there is one — 6.50).

6.3.1.4. (4). Startups’ board of directors From a legal point of view, boards are responsible for the overall organization’s strategy and its resulting performance. The organizational strategy literature is divided on this issue and reports two polarized theoretical perspectives supported by empirical findings. On the one hand, the literature refers to the board as ‘‘rubber stamps’’ (Herman 1981), which abstain from the company strategy and leaves the leadership to the top management team (Pfeffer 1972). On the other, the board is considered as the leading force of the organization that directs the top management team and affects organizations’ performance (Galen 1989; Johnson et al. 1993). The first three questions explore process issues of the board. Question 1 reveals that only 80% of the companies have board of directors. Most of the companies meet (19 startups) 4–8 times a year (item c of question 2). However, 10 companies reported that they meet only 1–3 times a year. In regard to the board meeting duration time (question 3), 7 companies meet for less than an hour (item a) and most of the companies (22) meet for 1–2 h. These are definitely short meeting. Question 4 reveals that the managers do not think that the board contribution to the company is high. Most of the items reveal values around 5 where the management contribution is the highest (item a; 6.20) and the lowest is R&D (item c; 4.35). However, the range of responses varies from 1 to 10 for all type of contributors.

6.3.1.5. (5). Incubator support Finally, we focus on the technological incubator support for the startup from various perspectives. The first question explores the incubator’s general director attention as seen by the startup general manager. The highest value received the work with the Chief Scientist (item b; mean of 8.28) and attracting new projects (item d; mean of 8.06). The lowest was reported for positioning against other incubators. It should be noticed that responses varied from 1 to 10. The second question explores the time orientation of the decision taken. Both past (item a; mean of 7.43) and future (item b; mean of 6.96) received very similar results and indicate a relatively high level of past and future orientations in their advices to the startups. The third research question addresses the future emphasis that the startup manager recommends the incubators. The highest are the development of the management perspectives of attracting investors (item d; mean of 7.35), managerial capabilities (item b; mean of 7.27), and marketing capabilities (item c; mean of 7.00), while the lowest is R&D capabilities (item a; mean of 6.25). Finally, the startup manager revealed that he is highly satisfied with the work of the incubator’s general manager (mean of 7.88). This is especially important since it indicates that the idea of the incubator as a support mechanism and the role of its general director to manage these mechanisms are highly appreciated by the most important constituent. Namely, the startups’ general managers.

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6.3.2. Normative Exploration 6.3.2.1. The association between product characteristics and performance Table 6.1 presents the results of two regression models that explain performance. The first model explores the factors that are associated with our measure of success, and the overall model is statistically significant and it explains about 30% of the adjusted R2. The product characteristics that positively associated with success are: uniqueness and value (the ability to generate higher profits). Surprisingly, the difficulty in imitating the product was negatively correlated with success. One possible explanation is that this high-risk aspect affected negatively the success level of the startup. The second regression explains survival rates and it explains 24% of the adjusted R2. The product characteristics that were significant are: product value (the ability to generate higher profits), the quality of the product, and the difficulty of imitating the product. This is in line with the arguments made by the resource-based view of the firm (Barney 1991; Amit & Schoemaker 1993). In addition, it was found that the number of products application is positively associated with survival rate. This finding supports the risk management explanation, namely that several applications are better from a survival point of view but not from an economic success. In sum, product characteristics are correlated with success and survival rate of the startup company. 6.3.2.2. The association between startup managers’ attention and performance Table 6.2 presents the results of two regression model that correlate attention and performance. The first model explains success and the overall model is statistically significant and it explains about 48% of the adjusted R2. Potential customers and attracting investors’ variables were found to have a positive and significant association. The second regression explains survival rates and it explains 304% of the adjusted R2. The variables that were significantly associated with survival rate Table 6.1: The association between product characteristics and performance. Performance: Product Characteristics

Success

Survival

Intercept  Number of developed products Uniqueness of the product Difficulty of imitating the product  Value (ability to generate high profits)  High quality of the product R2 R2 adjusted F factor Degrees of freedom

4.04

4.28 0.511

 po0.05.  po0.01.

0.381 0.171 0.288 0.3658 0.3076 7.3 38

0.182 0.776 0.564 0.3316 0.2427 4.5 37

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Table 6.2: The association between general managers’ attention and startup performance. Performance: Manager Attention

Success

Survival

Intercept  Potential customers  Attracting investors  Administrative work R2 R2 adjusted F factor Degrees of freedom

5.32 0.197 0.294

0.55 0.465

0.54 0.48 9.4 16

0.523 0.36 0.30 4.7 17

 po0.1.  po0.01.

Table 6.3: The association between planning and performance. Performance: Planning

Success

Survival

Intercept  A great deal of time devoted to future planning  Adhering to the planned budget  Adhering to the planned schedule R2 R2 adjusted F factor Degrees of freedom

4.04 0.223

8.39

0.15 0.13 8.4 49

0.889 0.846 0.32 0.29 11.4 48

 po0.01.

are potential customers and administrative work. In contrast to success, the survival probability is highly correlated with administrative work and it justifies the findings that we reported earlier about the importance of following the Chief Scientist guidelines.

6.3.2.3. The association between startup planning and performance Results of the regression on perceived success show that planning significantly explains 13% of the variance (Table 6.3). The variable found significant in explaining the variance are devotion of time to future planning. Results of the regression on perceived survival indicate that planning significantly explains 29% of the variance. These variables include the two adhering aspects to planning: adhering to planned schedule but surprisingly, negative correlation with adhering to planned budget. This might indicate that too much focusing on the budget can heart and it is consistent with some writers of management that too much planning can be an impediment for future growth (Hamel & Prahalad 1993).

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6.3.2.4. The association between marketing focus and performance As the marketing and entrepreneurial literature argue, it is important to incorporate marketing focus at an early stage of the startup company. Table 6.4 provides support for this claim. The overall model explains about 19% of the adjusted R2. Significantly affecting performance are two complementary aspects: the manager focus on potential customers and by that, learning about their needs. Then, the second factor represents the general manager ability to respond to the customers; identified needs. No significant results were found on the regression on perceived survival. 6.3.2.5. The association between strategic capability and performance The results of the regression on perceived success show that strategic capabilities significantly explains 49% of the adjusted R2 (Table 6.5). Significantly affecting success are the ability to produce a prototype, the ability to attract strategic partners, and the ability to initiate changes. In regard to survival, different strategic capabilities have a sig-

Table 6.4: The association between awareness to customers’ needs and performance. Performance: Awareness to Customers

Success 3.61 0.204 0.409 0.23 0.19 4.5 36

Intercept  Manager focus on potential customers  Ability to respond to the customers’ needs R2 R2 adjusted F factor Degrees of freedom  po0.05.

Table 6.5: The association between strategic capabilities and performance. Performance: Strategic Capabilities

Success

Intercept  Ability to reduce costs  Ability to respond to the customers’ needs  Ability to attract strategic partners  Ability to innovate  Ability to learn new things R2 R2 adjusted F factor Degrees of freedom

0.78

 po0.05.  po0.01.

0.313 0.435 0.56 0.49 12.5 29

Survival 6.01 0.326 0.204 0.371 0.43 0.36 7.4 29

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nificant impact and they include learning, responding to customers’ needs, and cost reduction explain. Together, they explain 36% of the adjusted R2. The findings indicate that cost reduction was negatively associated with survival indicating that cost reduction at an early stage might reduce survival rate since it deviates attention from product innovation focus. The two models clearly support the theoretical foundations of resource-based view of the firm (Barney 1991; Amit & Schoemaker 1993).

6.4. Limitations and Future Directions Data are based on the subjective reports of the startup managers. There is always the risk that respondents did not correctly evaluate the product characteristics and capabilities or its degree of success and chances of survival. The imprecision of evaluation can derive from two major sources; insufficient awareness of the project’s capabilities, or an attempt to present the project in a positive light as far as possible in order to justify the manager’s role. The study population related only to startup in the technological incubators in Israel; hence, generalizing on other populations should be made with extreme caution. Notwithstanding the relatively high-response rate, the overall research population was too small to make significant inferences. In this vein, the results should be interpreted with caution but may, however, be regarded as suggestive for future studies. Causality; one of the questions raised for discussion was whether the variables examined affect startup success, or in certain cases, whether success affects the variables examined. According to the strategic perspectives including resource-based view, the main direction of the relationship shows that strategic capabilities and other groups of variables affect the degree of success. Situations exist in which the success of a startup affects its ability to recruit resources and develop certain capabilities as proposed in the discussion. Cross-sectional data preclude any substantial inferences for the other way around namely, performance effect on strategic issues. Therefore, we hope that future studies will be able to get time series data and build dynamic model which simulates impact of strategy on performance and performance on strategy. It would also be advantageous to compare startup at the same developmental stage — upon entrance into the incubator, in the middle of the period, and at its conclusion. It would also be possible to examine the strategic behavior of a single startup over time. Sampling the startup over a longer period could provide more objective success indices, such as finding an investor, sales or profit, which could be projected on the data of this study, and validate or refute its conclusions more significantly. In sum, in spite of its limitations and future possible directions, we hope that the reported findings that were collected and analyzed during the 1994–1996 time period, three years after the take-off, are unique. They can serve future studies to develop historical perspectives of the evolution of the incubators and startup companies in Israel.

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References Amit, R., & Schoemaker, P. J. H. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14, 33–46. Bantel, K. A., & Jackson, S. E. (1989). Top management and innovations in banking: Does the composition of the top team make a difference?. Strategic Management Journal, 10, 107–124. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Burch, J. G. (1986). Profiling the entrepreneur. Business Horizons, 29(5), 13–16. Cohen, E. (1996). The impact of strategic reference points and strategic capabilities on the subjective success of projects in the technological incubators of the chief scientist of Israel. MSc thesis. Technion — Israeli Institute of Technology (in Hebrew). Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(March), 128–152. Dess, G. G., & Robinson, R. B. (1984). Measuring organizational performance in the absence of objective measures: The case of the privately-held firm and conglomerate business unit. Strategic Management Journal, 5(3), 265–273. Fox, K. F. A., & Kotler, P. (1980). The marketing of social causes: The first 10 years. Journal of Marketing, Chicago, 44(4), 24. Fry, L. F. (1987). The role of incubators in small business planning. American Journal of Small Business, 12, 51–61. Galen, M. (1989). A seat on the board is getting hotter. Business Week, 3(July), 72–73. Hamel, G., & Prahalad, C. K. (1989). Strategic intent. Harvard Business Review, 67, 63–76. Hamel, G., & Prahalad, C. K. (1993). Strategy as stretch and leverage. Harvard Business Review, Boston, 71(2), 75. Harish, M. (1993). The Activities of the Ministry of Industry, Trade and Labor, before a discussion in the Knesset of the budget and Ministry’s activities in the 1993 fiscal year. Herman, E. S. (1981). Corporate control, cooperate power. Cambridge: Cambridge University Press. Johnson, R. A., Hoskisson, R. E., & Hitt, M. A. (1993). Board of director involvement in restructuring: The effects of boards versus managerial controls and characteristics. Strategic Management Journal, 14(Special Summer Issue), 33–50. Lumpkin, J. R., & Ireland, R. D. (1988). Screening practices of new business incubators: The evaluat. American Journal of Small Business, 12(4), 59–82. Pfeffer, J. (1972). Interorganizational influence and managerial attitudes. Academy of Management Journal (pre-1986), Briarcliff Manor, 15(3), 317–330. Porter, M. E. (1980). Industry structure and competitive strategy: Keys to profitability. Financial Analysts Journal, Charlottesville, 36(4), 30–41. Scherer, F. M., & Huh, K. (1992). Top managers’ education and R&D investment. Research Policy, Amsterdam, 21(6), 507–511. Wiersema, M. F., & Bantel, K. A. (1992). Top management team demography and corporate strategic change. Academy of Management Journal, Briarcliff Manor, 35(1), 91–122.

Part III New Origins for Startups Part III discusses the origins of new startup sources of Israeli high-tech take-off. Chapter 7 considers the theoretical aspects and empirical examination of women and Chapter 8 discusses the new startup companies that came out of elite units in the IDF. This part’s central claim is that women and IDF were important factors influencing the Israeli high-tech momentum in the nineties.

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Chapter 7

Women as Technology Entrepreneurs1 7.1. Research Motivation Why do some companies succeed and others fail? What do the following companies — and others — have in common: Ornet Datacom, sold to electronics giant Siemens for $30 million; Panorama Software, sold to Microsoft for an undisclosed sum; NetVision — a top-level Internet service provider; Hashavshevet — a successful software house; Pnina Rosenblum — cosmetics manufacture and marketing? All are successful private corporations in high-tech and light industry, fields that are traditionally considered male provinces, but each of the above companies is headed by a woman (Ornet — Dr. Orna Berry; Panorama — Rony Ross; NetVision — Ruth Alon). What characterizes and motivates women to set up private technology firms? Business entrepreneurship in general — and among women in particular — has developed steadily over the past few years, as reflected in research literature (e.g., Buttner & Moore 1997; Moore 1999; Chandler et al. 2000; Bliss & Garratt 2001; Weiler & Bernasek 2001; Gatewood et al. 2003). Nevertheless, little is known about women who set up private companies in traditionally ‘‘masculine’’ fields such as advanced technology. The current study provides two angles about Israeli woman as technology entrepreneur. First, we provide an exploratory aspect, which describes some characteristics of the entrepreneur and their companies. Second, we provide a normative part, which explores the association between firm strategy in terms of SRPs and firm success along four different measures: cost, quality, profit, and risk.

7.2. Literature Review Participation of women in the workforce rose steadily throughout the 1990’s, with an increasing percentage of married women and/or mothers working outside their homes. A decisive majority favors working in fields such as education and the social sciences, while very few opt for heavy industry or advanced technology. The literature delineates ‘‘masculine’’ and ‘‘feminine’’ occupations according to the gender of the majority of their practitioners. As private enterprise continues to develop, in Israel and elsewhere, an increasing percentage of the overall workforce — and of women in particular — tends to favor entrepreneurship as a career choice. Private 1

This chapter is based upon the thesis of Nira Boneh (1999) as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion — Israel Institute of Technology in 1999.

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business entrepreneurship may have been perceived as a ‘‘masculine’’ occupation, but the number of self-employed women is on the rise. While self-employment may demand considerable time and serious commitment, it also allows for flexible worktime scheduling. Most female entrepreneurs work in ‘‘feminine’’ fields. Some experts perceive this development as a kind of ‘‘expansion’’ of traditionally feminine home functions (such as cooking, childcare) or hobbies (e.g., art, design). Mirroring these developments, the literature includes numerous studies concerning general, technological, and women’s entrepreneurship, but little has been written about women’s business inroads into ‘‘masculine’’ fields, including high-tech. Most studies examine entrepreneurs’ profiles and motives for selecting their respective fields, assessing differences between men and women in this respect. Less attention has been devoted to factors affecting business performance in private enterprise. There are several perspectives of entrepreneurship. Schwartz & Felsenstein (1990) differentiate between two levels of entrepreneurship: The lower level, at which the entrepreneurs are owners/managers who take risks and maintain or acquire and manage economic units. The higher level, at which entrepreneurs also carry out innovative entrepreneurial activity, as reflected in producing a new product or service, identifying new markets, corporate restructuring, or discovering new sources of investment. According to this stringent definition, the status of ‘‘entrepreneur’’ does not continue after the initial stages. A broader definition speaks of individuals who maintain a new business that they own and control (Cromie & Hayes 1988). On the contrary, one may function as an ‘‘entrepreneur’’ even within a major corporation. Hisrich & Brush (1985: 15) define entrepreneurship as ‘‘a process of creating something different with value by devoting the necessary time and effort, assuming the accompanying financial, psychological, and social risks, and receiving the resulting rewards of monetary and personal satisfaction’’. Over the past few decades, especially during the 1980s, certain environmental changes have encouraged development of private entrepreneurship in general and women’s entrepreneurship in particular, leading business organizations and private entrepreneurs to adopt economic initiatives that increase the likelihood of commercial success. Gilbert (1991), for example, perceived a marked tendency toward establishment of small enterprises up to five employees. As private enterprise initiatives flourished, the female entrepreneur sector began to increase steadily, with an estimated annual growth rate equal to twice that of its male counterpart (Bowen & Hisrich 1986; Loscocco & Robinson 1991; Smith et al. 1992). In the US, for example, although female business owners began penetrating high growth fields such as industry and construction (Loscocco & Robinson 1991), the most outstanding growth rates among businesses owned by women were observed in services and retail commerce, as women tend to open ‘‘traditional’’ or ‘‘stereotypical’’ businesses (Watkins & Watkins 1983; Hisrich & Brush 1985; Bowen & Hisrich 1986; Loscocco & Robinson 1991). One key assertion derived from the literature maintains that ownership of a private business represents a potential escape route for employees disgruntled with the salaried job market and is especially attractive to disadvantaged groups, such as

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immigrants and minorities, whose market opportunities are limited (Cromie & Hayes 1988; Carter 1992c). In a business world perceived as ‘‘masculine,’’ women may also be considered a minority group without a secure position. Many women open private businesses after having encountered some kind of obstacle in the salaried job environment (Cromie & Hayes 1988; Loscocco & Robinson 1991; Carter 1992c), in which the male gender generally prevails (Smith et al. 1992). There are drawbacks to entrepreneurship as well. The literature indicates that small business owners are in economically low and vulnerable positions and suffer a high failure rate. For women, moreover, the small business sector constitutes a ‘‘peripheral economic niche’’ and not an escape route from inequality (Aldrich et al. 1983; Cuba et al. 1983; Loscocco & Robinson 1991). The literature pays considerable attention to women’s empowerment. Much emphasis has been placed on the long-term rise in women’s participation in the workforce, in Israel and elsewhere (Shifrin 1979; Gerson 1985; Bowen & Hisrich 1986; Izraeli 1989). Several outstanding social developments are relevant to this observation. Working women have become the norm. The percentage of young married women working increased steadily; women exhibit an overt tendency to work outside their homes throughout their lives; women are investing more and more resources in acquisition of higher education and it has become increasingly evident that women’s achievements in studies and in the professional sphere enhance family prestige (Wolkinson et al. 1981/1982). Nevertheless, the impressive influx of women into the workforce has not been accompanied by a parallel change in family gender roles, i.e., division of functions between men and women. The social atmosphere regarding such division of labor has improved somewhat, but the situation is still far from egalitarian, as married women bear responsibility for the lion’s share of household and family chores. At the same time, women are employed for fewer hours than men, working at occupations with low status and salaries; they are discriminated at work and receive less pay and fewer benefits than men for performance of the same job (Wolkinson et al. 1981/1982; Cuba et al. 1983; Malakh-Pines 1989). Gerson (1985) claims that women make a ‘‘hard choice’’ between family life and working life. As an example, she notes the negative correlation between women’s participation in the workforce and the birthrate in the United States: An increase in the percentage of working women versus a drastic decline in births. These observations underscore the significance of special studies of working women, inquiring whether there are any work performance differences between men and women and whether such differences, if any, are affected by the functional conflict noted above. Female entrepreneurs’ economic success and the performance of their businesses have hardly been evaluated in research literature. Most studies on the topic are based on small samples and very few compare such businesses with those owned by men (Loscocco & Robinson 1991; Lerner et al. 1997). One noteworthy major, long-term comparative study was conducted by Kalleberg & Leicht (1991), assessing the performance of companies according to survival and success parameters and finding differences between men and women in terms of tendency to succeed or fail. In contrast to previous claims that women occupy an inferior position, these scholars

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maintained that both men and women have similar survival and success rates, noting that the processes underlying small business performance are not affected by the entrepreneur’s gender. Birley, Moss, & Saunders (1987) identified a few differences between women but directed their focus primarily toward characteristics of the respective entrepreneurs and companies. Various indicators of company performance have been proposed. Several studies use ‘‘hard’’ objective indicators: Lerner et al. (1997) examined a number of employees, sales, income, and profitability. Loscocco & Robinson (1991) chose indicators of profitability and total company sales, claiming that they serve as the best barometer of sexual inequality. Their data show that in the United States, the percentage of overall profits generated by companies owned by women is lower than their proportional representation in the business population. Cuba et al. (1983) used profit and sales indicators as well, adding company age as an additional measure of survivability. Performance analysis may also use subjective indicators, especially when samples consist of private companies whose financial data is inaccessible. Shoham (1998) shows that subjective indicators provide results similar to and as reliable as objective ones. We attempted to collect objective data on profitability and sales for this study, but only a small minority of companies in the sample agreed to share this information, rendering it necessary to use subjective indicators instead.

7.3. Research Questions and Hypotheses The study focuses on two aspects. First, we provide exploratory data on the woman technology entrepreneur in terms of both her personal and company profile. We explore perspectives that have been covered in the literature such as age, experience, and marital status. In regard to the company, we explore the type of ownership and size of the company. The second part is a normative part and relates women technology company’s strategy with performance. The strategy is operationalized along the three competitive dimensions of SRPs (Fiegenbaum et al. 1996), which has been explained in the introductory chapter. The formal hypothesis states that woman technology entrepreneurs business performance is positively associated with their strategy. It is defined as developing the internal dimension of vision and strategic capabilities, considering both past experience and future trends, in such a way that will satisfy future needs of the customers and stakeholders in a better manner than their competitors.

7.4. Methodology 7.4.1. Research Population The research population definition and criterion for participation was: women who initiated or established a high-tech business alone or together with female partners. To reach this population, we conducted a comprehensive examination of information

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available in 1996–1997. These include such various sources as: technological incubators, advanced industrial zones, women’s organizations, women’s chambers of commerce, and through articles in the press and personal contacts. The results yielded 43 women who responded to our criteria. We succeeded in locating 38 of them, contacting them first by telephone. After 31 responded, we arranged interviews or sent out questionnaires. Sixteen interviews were conducted by the author and four questionnaires were filled out and returned. One incomplete questionnaire and one incomplete interview were rejected. Twenty-one companies were included in the sample, constituting about 48% of the original population and 67% of those that received questionnaires. During the process management, we realized that the topic was important to female entrepreneurs: combined emphasis on women, entrepreneurship and technology, coupled with a personal appeal (telephone call plus interview or questionnaire at participants’ discretion), yielded response. Some women were hesitant about the exposure entailed by the study and appeared reluctant to participate. 7.4.2. Questionnaire The questionnaire, formulated especially for this study, comprised several sections focusing on evaluation of each company’s strategic profile, the entrepreneur profile, and company performance. A pre-test with one of the women was conducted for delineating the questionnaire. It comprised in-depth interviews in order to understand the unique character of the entrepreneur and the company. A theory-based questionnaire was compiled together with consultation with the responses to the questionnaire. Conclusions, based on the pre-test, called for reformulation of the questionnaire. The independent explanatory variables included competitive strategic management, examining the three SRP dimensions: internal, external, and time. Addressing the internal dimension, to strategic capabilities and strategic vision according to five functional aspects of management: Human resources, information systems, logistics, marketing, and R&D. Several scale groups were formed according to the theory and results, all with a Chronbach’s a greater than 0.7. For the dependent variable, we apply the following procedure. As quantitative and objective data provided by entrepreneurs were impossible for most companies, our analysis focused on four subjective measures: cost of product relative to that of competing products, quality of product, company profitability, and company risk level. All scales were found to have a high a coefficient (0.78–0.85).

7.5. Findings 7.5.1. Descriptive Exploration The descriptive exploration contains two parts; aspects related to the profile of the woman entrepreneur and the company. In regard to the entrepreneur, we have five

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different perspectives. First, in regard to age, the majority of the women fall within the 41–50 age bracket (Figure 7.1). This indicates that the woman technology entrepreneurs have accumulated business experience before they entered the entrepreneurship field. Interestingly, none of them was in the young age range of 21–30 or in the oldest 61–70. In regard to the second question, the marital status, the figures relate to four different types (Figure 7.2). First, most (62%) of the respondents are married. In addition, 14% have not married and some of them were divorced (19%) or separated (5%). Second, in regard to the number of children (Figure 7.3), the majority have two children (48%), three children (24%), or one child (14%). The fourth question explores their education background (Figure 7.4). Only 25% do not have a university degree. The ones that pursued an academic degree hold a bachelors degree (40) and also an advanced degree. Interestingly, 25% have a PhD and 10% have a masters degree. The fifth question explores the academic background of the woman entrepreneur (Figure 7.5). The majority hold a degree in hard sciences such as computer engineering (42%), mathematics (14%), physics (5%), and chemistry (5%). It should also be noticed that only 19% hold a business degree. These numbers definitely support the high-tech orientation of the woman entrepreneurship. In regard to the companies of the entrepreneurs, we have explored four different aspects. First, we have explored the industry sectors of the entrepreneurial activity. As can be seen from Figure 7.6, most of them are in the high-tech sectors such as electronics (29%), software (37%), and biochemistry (5%). The second question

14 12

# of Initiatives

10 8 6 4 2 0

21-30

31-40

41-50 Age group

51-60

60

Figure 7.1: Firm distribution by entrepreneur’s age.

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62% 14 12 10 8 6

19% 14%

4 5% 2 0 Single

Married

Divorced

Separated

Figure 7.2: Firm distribution by entrepreneur’s marital status.

10 9 8 7 6 5 4 3 2 1 0 1

2

3

4

Figure 7.3: Firm distribution by entrepreneur’s number of children. explores the firm ages. Figure 7.7 indicates that most of the companies are young and about 5% of them are less that five years old. The third finding reveals the number of employees. Not surprisingly, the young age is also correlated with relatively small number of employees. About 50% of the companies have less than 10 employees and only 15% employs more that 80 employees. Finally, the location of these companies (Figure 7.8) is in a city area, which is close to the entrepreneurs houses.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s Other 10%

Certificate 10% Pratical Engineer 5%

Doctorate 25%

Masters Degree 40%

Bachelors Degree 40%

Figure 7.4: Firm distribution by entrepreneur’s educational level.

Data Unavailable Physics 5%

Did Not Study 5%

5%

Computers and Programming 42%

Chemistry 5%

Mathematics 14% Economics and Business Administration 19%

Figure 7.5: Firm distribution by entrepreneur’s academic background.

7.5.2. Normative Exploration Table 7.1 describes the regression results relating to the impact of strategy on performance. The strategy construct was operationalized via the impact of the three strategic dimensions: internal, external, and time. Given the various aspects of performance at an early stage of a company, and the difficulty to get market capitalization data, we have estimated the strategy impact on several performance measures separately. They include cost, quality relative to competitors and profitability, and risk. All of them were measured on a scale of 1–10. It should be noticed that all four models explain a fair amount of adjusted R2 ranges between 0.53 and 0.69. In regard to the internal dimension, the first item, human resource capability, has a significant and positive association with the fist performance measure namely cost.

Women as Technology Entrepreneurs

Consulting and Services 19%

Industry 10%

Biochemistry 5%

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Software 37%

Electronics 29%

Figure 7.6: Firm distribution by industrial sector.

Figure 7.7: Firm distribution by firm age.

Given the very competitive high-tech market in Israel, human resource management has to deal with attracting qualified people and keeping their salaries and bonuses as low as possible. The research and development capability was associated positively and significantly only with the quality of the products. This finding is not surprising because R&D is considered to be an investment that hurts the short-term performance of the company but hopefully affects the long-term survival and success. In regard to the external dimension, attention to various stakeholders has an impact on all four types of performance but in a different way. Attention and learning from

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Figure 7.8: Firm distribution by firm location.

Table 7.1: Association between strategic dimensions and performance. Performance Competitive Dimension Constant A. Internal Human resources R&D B. External Competitors Stakeholders Suppliers C. Time Using past experience Reference to future trends Adjusted R2  po0.1.  po0.05.  po0.01.

P1

P2

P3

P4

Cost

Quality

Profitability

Risk

1.141

5.813

24.001

0.556

0.480

0.096

0.637

0.593

0.469

0.908

0.593

0.532

0.559

0.316 0.277

0.438

0.994

0.715 0.697

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competitors indeed is correlated with cost reduction. Learning from stakeholders in general is positively correlated with profit and attention to suppliers is correlated with risk reduction. In regard to the time dimension, learning from the past has a positive impact on three performance measures. It is correlated with cost reduction, enhanced quality, and profit. Future attention is positively correlated with risk reduction.

7.6. Summary This study has explored important aspects of the new phenomena in Israel, namely, women as technological entrepreneurs. This is especially important from a social point of view in terms of an equity society and equal opportunities. The exploratory findings reveal the ‘‘inequity’’ of women as technological entrepreneurs. We could not find documents at the time of the research that provide a list of companies with women as entrepreneurs. Following our own method of data collection, we were able to identify only 53 companies (in which only 21 responded to our questionnaire). The sampled firms reveal aspects related to the entrepreneurs as well as their companies. In regard to the personal profile, most of the respondents are married (62%) and have one to three children (86%). Only 25% do not have a university degree and 25% have a PhD and the majority have an academic degree in hard sciences (66%). Only 19% hold a business degree. Most of the entrepreneurs’ companies are in the high-tech sector (71%). They are young and have a very small number of employees. In regard to the competitive strategy and performance hypotheses, our data reveal that all three competitive dimensions are correlated with performance measures (cost, quality, profit, and risk) although different ones. By applying SRP theory, this analysis may assist organizations in understanding the variables that correlate with different measures of organizations’ performance. We hope that these findings may help female entrepreneurs determine investment priorities for their companies according to the various dimensions of competition and functional spheres of management.

References Aldrich, H., Carter, J., Jones, T., & McEvoy, D. (1983). From periphery to peripheral: The South Asian petite bourgeoisie in England. Research of the Sociology of Work: Peripheral Workers, 2, 1–32. Birley, S., Moss, C., & Saunders, P. (1987). Do women entrepreneurs require different training?. American Journal of Small Business, 12, 27–36. Bliss, R. T., & Garratt, N. L. (2001). Supporting women entrepreneurs in transitioning economies. Journal of Small Business Management, 39, 336–356. Boneh, N. (1999). The association between woman entrepreneurs and performance in Israeli hightech firms: Examining strategic reference point theory. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). Bowen, D. B., & Hisrich, R. D. (1986). The female entrepreneur: A career development perspective. Academy of Management Review, 11(2), 393–407.

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Buttner, E. H., & Moore, D. P. (1997). Women’s organizational exodus to entrepreneurship: Self-reported motivations and correlates with success. Journal of Small Business Management, 35(1), 7–18, 34. Carter, S. (1992c). Women as entrepreneurs: A study of female business owners, their motivations, experiences and strategies for success. In: S. Carter & T. Canon (Eds). London, San Diego: Academic Press. Chandler, G. N., Jansen, E., & Mero, N. P. (2000). Women business owners in traditional and non-traditional industries — Differences in working with people and things. Journal of Business Venturing, 15(3), 279–303. Cromie, S., & Hayes, J. (1988). Towards a typology of female entrepreneurs. Sociological Review, 36(1), 87–113. Cuba, R., Decenzo, D., & Anish, A. (1983). Management practice of successful female business owners. American Journal of Small Business, 8(2), 40–46. Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17, 219–235. Gatewood, E., Nancy, M. C., Candida, G. B., Patricia, G. G., & Myra, M. H. (2003). Women entrepreneurs, their ventures, and the venture capital industry: An annotated bibliography. Stockholm: ESBRI. Gerson, K. (1985). Hard choice: Women work and family decision. Berkeley University of California Press. Gilbert, N. (1991). Strategic alliances spur small business R&D. Financier, 15(6), 18–21. Hisrich, R. D., & Brush, C. G. (1985). Women and minority entrepreneurs: A comparative analysis. In: J. A. Hornaday, E. B. Shils, J. A. Timmons & K. H. Vesper (Eds), Frontiers of entrepreneurial research (pp. 566–587). Boston, MA: Babson College. Kalleberg, A. L., & Leicht, K. T. (1991). Gender and organizational performance: Determinants of small business survival and success. Academy of Management Journal, 34(1), 136–161. Lerner, M., Brush, C., & Hisrich, R. (1997). Israeli woman entrepreneur: An examination of factors affecting performance. Journal of Business Venturing, 12(4), 315–339. Loscocco, K. A., & Robinson, J. (1991). Barriers to women’s small-business success in the United States. Gender & Society, 5, 511–532. Malakh-Pines, A. (1989). Career burnout: Causes and cures. New York: Free Press. Moore, D. P. (1999). Women entrepreneurs: Approaching a new millennium. In: G. Powell (Ed.), Handbook of gender in organizations. Thousand Oaks, London & New Delhi: Sage. Schwartz, D., & Felsenstein, D. (1990). Promoting entrepreneurship in peripheral areas. Rehovot: Development Study Center (in Hebrew). Shifrin, M. (1979). Work centrality, rewards and job strains of women in academic professions. Master thesis. Technion (in Hebrew). Shoham, A. (1998). Export performers: A conceptualization and empirical assessment. Journal of International Marketing, 6(3), 59–81. Smith, P. L., Smith, S. J., & Hoy, F. (1992). Female business owners in industries traditionally dominated by males. Sex Roles, 26, 11–12. Watkins, J., & Watkins, D. (1983). The female entrepreneur background and determinants of business choice — some British data. International Small Business Journal, 2, 21–31. Weiler, S., & Bernasek, A. (2001). Dodging the glass ceiling? Networks and the new wave of women entrepreneurs. Social Science Journal, 38(1), 85–103. Wolkinson, B. W., Harel, G. H., & Izraeli, D. N. (1981/1982). Employment discrimination against women: The Israeli experience. Employee Relations Law Journal, New York, 7(3), 466–489.

Chapter 8

Elite Units of the Israeli Defense Forces – The Story of Unit 82001 Veterans of technology units in the IDF have attracted much attention in Israel’s high-tech community. In an interview in the high-Tech supplement of the Israeli financial daily Globes (Natan, N. (2000). From the IDF to the desktop. Globes, High-Tech Section (June 21), 30–34.), Tal Keret, a veteran of the IDF Computer Unit and a founder of Rich FX, was asked what persuaded so many leading venture capital funds to invest $12 million in the company. He responded: ‘‘They had successful experience with young founders who have backgrounds similar to ours. The founders of Check Point were our age and served in the same computer units. I think that helped calm investors’ nerves.’’ This study assesses differences in business performance among high-tech companies set up by veterans of IDF technology units focusing on the interrelationships among organization’s competitive environment, strategy, and social network and their effect on company performance. The main research hypothesis stipulates that the performance of high-tech firms set up by veterans of IDF technology units is influenced by the extent to which social network structure is compatible with the company environment and strategy. The principal finding reflects compatibility between the social network structure of high-tech companies set up by veterans of IDF technology units and the competitive task environment in which the companies operate. It was found that the smaller the social networks and the stronger the ties therein, the poorer the performance of companies in competitive environments (mechanistic structure). By contrast, companies that operate in a highly turbulent environment achieve better results with larger, weaker, and more varied social network (organic structure). Similarly, companies characterized by an organic social structure achieve better results when they focus on the external dimension of SRPs,; satisfying customers’ needs in a better manner than their competitors do.

8.1. Research Motivation – An Interview with an IDF Unit 8200 Veteran The venture was launched the day Mr. __ was discharged from military service in an IDF technology unit. Mr. __ is a practical electrical engineer (14 years of schooling) 1

This chapter is based upon the thesis of Eran Baram (2000) as part of the requirements for the MSc degree. The thesis supervisors were Prof. Fiegenbaum, Gabbay, and Lenders and it was submitted for approval to the Senate of the Technion — Israel Institute of Technology in 2000.

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who spent most of his military service (nearly six years) developing, installing, and maintaining communication network management systems. Mr. __’s father, himself a practical electrical engineer, served in the IDF for over 20 years in systems maintenance, development, and management positions. He retired from military service and started his own electronics business at the time his son was on active duty, introducing an entrepreneurial spirit at home and encouraging Mr. __ to start his own business. Mr. __ teamed up with two college friends who were serving in other IDF technology units. During their last year of service, the team met with CEOs of several large communication network firms in Israel and examined the opportunities and challenges they would be confronting in a network management solutions venture. The meetings were arranged through Mr. __’s father’s connections, as well as contacts the three partners had met during their IDF service (parts suppliers, project subcontractors, etc.). The venture was started as a project subcontractor with an owners’ equity of approximately $25,000 and no projects to work on. The first thing the three partners did on day one was to assemble a list of their contacts and acquaintances, including veterans of their respective units who were well positioned in relevant communications firms, so they could start scheduling business meetings. The first project was obtained three days later, followed by several more. A year into operation, the venture established itself as a network management solutions subcontractor. At the same time, the founding partners are progressing well toward development of a generic network management product. One employee (working on subcontracted projects) was recruited, and Mr. __ is looking forward to attracting young veterans of his IDF unit to join his promising business.

8.2. Theoretical Development The explanation of what makes an organization more successful than another is the core of competitive strategy. The current study focuses on organizational corporate social capital in terms of its network and relates it to performance. As Gulati et al. (2000) suggested, in a world in which firms are embedded in networks of social, professional, and exchange relationships with other organizational actors, the conduct and performance of firms can be more fully understood by examining the network of relationships in which they are embedded. Many of the company’s competitive advantages depend on the flow of information among network firms (Burt 1992; Moran & Ghoshal 1999). The central interest in this article is to explain how network properties enable firms to achieve high performance. We argue that a focal firm’s network interaction and fit with the organization’s environment and strategy, affect performance. The network ties of organizations act as the vehicle that allows firms to align environment and strategy in order to enhance performance. But it can also impede firms from creating this alignment. A major part of a firm’s network environment is uncertainty (Duncan 1972). It has been characterized along a number of dimensions such as unpredictability and complexity (Lawrence & Lorsch 1967; Mintzberg 1979; Covin & Slevin 1989). Higher levels of environmental uncertainty demands more information on the firm’s

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environment. When firms are confronted with high levels of unpredictability, they need to create and maintain structures that can quickly extract and filter required information. In a highly uncertain environment the firm’s network should be large and heterogeneous. Relationships may be short-lived as changes in the environment may render them unproductive. In such environments, organic networks are much more effective than mechanistic ego-networks (Podolny 1994; Stuart 1999). Therefore, we propose that the better the fit between firm’s network and its environment the higher is its performance. The second aspect of the study is the fit between firm’s network and its strategy. Various business strategies have been identified in the literature such as Porter’s (1980) generic strategies and resource-based view of the firm (Barney 1991). The strategy literature emphasizes efficiency in terms of cost leadership as well as differentiation. In regard to cost leadership, strategy research prefers a low number of large volume suppliers. Moreover, the costs associated with controlling and handling many small sized suppliers are high. For a differentiation strategy an organic network is more fitting. When following a differentiation strategy, firms require a wider variety of scarce resources, especially information, than do organizations pursuing the strategy of cost leadership. Therefore, we propose that the better the fit between firm’s network and its strategy, higher is its performance.

8.3. Methodology The research sample comprises of 68 technology firms (Table 8.1) established by veterans of IDF technology units, primarily during the 1990’s. As no single source identifies companies according to their founders’ backgrounds, we assembled the sample using snowballing methodology, ensuring that it included companies representing a wide variety of fields, technology units, and performance levels. Research data were gathered in personal interviews with the entrepreneurs of the designated companies. During each interview, the entrepreneur was asked to fill out a structured questionnaire based on previously validated studies. Despite the extensive scope of the questionnaire and the duration of the interviews (about an hour and a half, on the average), participants were highly cooperative, contributing time and information very generously.

8.3.1. Industry Characteristics Constructs were developed and they are summarized in Table 8.2. Two scales were constructed for industry structure that display various aspects of the industry, of which the first (IND_A) is based on Porter’s (1980) five-force model. This model claims that industry characteristics contain the bargaining power of its customers and its suppliers, the threat of alternative products and newcomers to the market and competition among existing companies. One question was phrased for each of these five forces and a factor analysis of all five forces was conducted, the results of which

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Table 8.1: Companies in the sample. Company Name

Major Field of Activity

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

Broadband communication Medical imaging Information security Advanced recognition technologies Information security Packet voice communication Internet systems development Short-distance wireless communication E-commerce Information security Fiberoptic relay networks Internet communication Fast Internet access Network management Internet software Internet software Internet software Wireless communication Technology and business consulting Generic PCBs Wireless communication Satellite communication Satellite communication Optical motion measurement Software consulting Internet systems development Internet communication Internet software Software development tools Internet systems development Broadband communication Network management Business intelligence Information security Internet systems Embedded software System engineering E-Commerce Operating system utilities Wireless communication Digital data solutions Unified messaging XDSL communication Information security Communication hardware components

Actelis Algotech Aliroo ART ARX AudioCodes Box G-Sites Butterfly Buywiz CheckPoint Chromatis Class Data Combox Conduct Contact.com ContactNow EBSure Floware Forsight Frameworx Giganet Gilat Comm. Gilat Networks Goulite Interbit Internative Isp-Focus Iweb Jacada Kinetika Libit Magicom Maximal Memco Merlynet Modules MTI Nectaris New Dimension Nexus Nice Onset Orckit Perfecto Powerdesign

Year Founded 1998 1993 1994 1990 1986 1993 1996 1992 1999 1993 1997 1996 1997 1996 1997 1999 1999 1996 1993 1998 1996 1990 1990 1998 1995 1997 1998 1998 1990 1996 1993 1998 1997 1990 1999 2000 1993 1998 1983 1992 1984 1991 1990 1997 1995

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Table 8.1: (Continued ) Company Name

Major Field of Activity

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

Data communication IBM gateways Wireless communication Telphony communication Wireless communication Wireless communication Embedded software Medical information systems Information security Advanced communication protocols Software development tools 3D simulation Billing software Unified messaging Advanced search engines Software systems E-commerce Broadband Internet Small office communications Business intelligence Voice over IP Wireless Internet access Advanced video communication

RAD RadLinks RadWin RadWiz Rosh Kesher Roveh Keshet RTView Softov Spearhead Surf Synopsis Techomatix Teleknowledge Telemessage Textray Tici Trivnet Veon Vianet Vigil Vocaltech WaveAccess WebGlide

Year Founded 1981 1990 1997 1997 1997 1988 1996 1997 1998 1996 1992 1983 1997 1999 1997 1982 1997 1994 1998 1997 1989 1993 1997

point to a reasonable coefficient of consistency (Cronbach’s a ¼ 0.61). The average score is 4.1 on a 1 (no competition) to 7 (high competition) indicating that most respondents attest to moderate competitiveness in their industries. The second scale is based on several industrial performance parameters, measured according to questions inquiring about size (total sales), growth rates, and return rates. There were 58 respondents and the coefficient of consistency was high (Cronbach’s a ¼ 0.73).

8.3.2. Social Network Respondents were asked to answer two questions regarding their company’s social network: one concerning the number of social ties their company’s founders maintain with entrepreneurs who are veterans of IDF elite units and the other relating to the intensity of these ties. To focus responses to the second question, a matrix of the various ties and their respective intensities were constructed for each entrepreneur, from which data on overall intensity was calculated. The number of respondents answering the two key research questions was high (68 and 60, respectively). For the first question, the average network size was 8.5 persons and the average intensity of ties was 3.5 on a scale of 0–5.

116

Table 8.2: Definition of research variables and statistical characteristics. Scales Max

Avg

Stdv

a

Content

1

7

4.3

1.1

0.61

58

0

7

4.8

1.6

0.73

CSC_Size

68

0

19

8.5

4.2

Five items: threat of alternative products and new competitors, bargaining power of suppliers and buyers, and rivalry among firms currently Three items: industry sales, sales growth rate, and return on sales Size of social network

CSC_Strength

60

1

5

3.5

1.0

Internal

59

1

7

5.4

1.0

External

54

1

7

4.1

1.8

P_Sales

45

0

340

30.4

65.6

P_Employees P_MV

43 51

0.48 1

Name Industry

Corporate social capital (CSC) Strategy

Performance

N

Min

IND_A

68

IND_B

3.2 7

1.81 6.1

0.62 1.6

0.65

Average strength of ties in social network Four capabilities (technology, marketing, fund raising, and human resources) and one overall vision (clear visionfuture positioning). Degree competitors are considered by firm Total annual firm sales for 1999 in $M Log of number of employees Extent at which firm value rose in the last year in $M

The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Construct

Elite Units of the Israeli Defense Forces — The Story of Unit 8200

117

8.3.3. Company Strategy Questions addressing the strategy along the two competitive strategy dimensions of internal and external were presented to the IDF veterans. On the internal dimension, we examined development of strategic capabilities enabling companies to realize their respective strategic capabilities. The first four questions address the intensity with which companies develop technology, marketing, capital raising, and human resource capabilities, while the fifth inquires whether the company has a vision regarding future development intentions. The coefficient of consistency was reasonable (a ¼ 0.65), with an average score of 5.4 (on a scale of 1–7), attesting to a relatively high emphasis on the internal dimension. For assessment of the external dimension, we asked respondents to indicate the extent of their attention to competitors when planning and developing their internal strategic capabilities. The average score, 4.1, was lower than the average for the external dimension (5.4), indicating that most companies pay more attention to internal capabilities development relative to their external positioning.

8.3.4. Performance Three distinct company performance variables were examined — sales, number of employees, and company market value — with 45, 43, and 51 respondents answering the respective questions. The number of respondents is clearly lower for this question category than for others, possibly because of the sensitivity and confidentiality it entails. Average sales of companies in the sample come to $30.4 million, with the highest and lowest values $340 million and $65.6 million, respectively. The second measure was the number of employees and we performed a logarithmic transformation. The third measure related to the market value change that took place in company value over the preceding year. The average was $6.1 million, with the lowest value $1.6 million and the highest $7 million.

8.4. Results The first part represents three demographical aspects of the sample. In terms of company age, the companies in the sample range from 1 to 20 years old. The average age at the time of writing was 5.9 and it can be seen that most of the companies fall in the range of 2–5 years (see Figure 8.1). In terms of age, Figure 8.2 presents the breakdown of age of entrepreneur, most of the entrepreneurs fall into the second category of 25–30 years and the average age is 63. Finally, Figure 8.3 presents the number of IDF veterans that were involved in founding a company. There were 177 entrepreneurs involved in the establishment of the 68 companies, of whom 134 were veterans of IDF technology units. An average of 2.6 entrepreneurs was involved in the establishment of each company and 2.1 involved in establishment of companies set up by IDF technology unit veterans. In sum, the average age of the IDF veteran founders and their associated companies are very young. On average about two

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Proportion of Sample

25% 20% 15% 10% 5% 0% 1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 Age

Figure 8.1: Sample company age distribution.

Proportion of Entrepreneurs

40% 35% 30% 25% 20% 15% 10% 5% 0% 20-25

25-30

30-35

35-40 Age

40-45

45-50

>50

Figure 8.2: Distribution of age of IDF technology unit veteran involved in setting up companies.

Proportion of Sample Firms

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1

2

3 4 5 6 Total Number of Entrepreneurs

7

8

Figure 8.3: Distribution of number of IDF technology unit veterans involved in setting up companies.

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veterans founded a company. It should be noticed that only one of the entrepreneurs in the sample is a woman. The absence of women in Israeli high-tech industries has already been reported by Kagan (2000) and discussed extensively in the chapter: woman as technology entrepreneurs. 8.4.1. Social Network, Industry Structure, and Performance Table 8.3 presents two models that represent the effect of the corporate social network structure with industry structure on performance in terms of the number of employees of a given company. Model (1) shows that corporate social capital has a positive and significant impact on performance in terms of total number of employees, with the model explaining about 10% of the variance in this performance variable. Model (2) considers the additional impact of industry structure and the interaction effect with social network on performance. The findings are interesting since there is no main effect of either social capital size or industry structure. On the other hand, the interaction between the social network and the industry’s attractiveness displays a significant negative correlation, meaning that the more attractive an industry is and the larger the companies’ social networks, the poorer their achievements. We conclude that an attractive industry encourages companies to focus on smaller and more manageable social networks. Because of the industry’s attractiveness, a smaller network, that can yield more rapid results, is preferable to a larger one that embodies more opportunities but demands greater investment over a longer period of time. The model explains about 27.6% of the variance in this performance variable. 8.4.2. Social Network, Internal Strategy, and Performance Table 8.4 presents two models that examine the effect of social network and the internal dimension of strategy on performance in terms of market value change. Model (3) shows the main impact of social capital size of performance and it is positively correlated, but not significantly, with the model explaining about 1.5% of the variance. However, when the internal strategy was added as represented by Model (4), it indicates strategy does not affect performance but it is the interaction term between strategy and network size. The interaction term has a negative and Table 8.3: Impact of social network and industry structure on number of company employees. Model No. Independent Construct

Independent Scales

1 2

CSC_Size P_Employees CSC_Size P_Employees IND_B CSC_Size  IND_B

CSC CSC IND CSC  IND

 po0.01.

Dependent Scale

Coefficient

R2 Adj.

R2

N

0.05 0.32 n.s. 0.03 n.s. 0.18

0.103 0.276

0.128 0.321

41 37

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 8.4: Impact of social network and internal strategy on change in company market value. Model No.

Independent Construct

Independent Scales

Dependent Scale

Coefficient

R2 Adj.

R2

N

3 4

CSC CSC Strategy CSC  Strategy

CSC_Size CSC_Size STR_Internal CSC_Size  STR_Internal

P_MV P_MV

0.06 n.s. 0.09 n.s. 0.18 n.s. 0.25

0.015 0.101

0.022 0.132

40 35

 po0.1.  po0.05.  po0.01.

significant impact on performance, meaning that the more a company invests in development of internal strategic capabilities and the larger social network, the poorer its performance will be. We may conclude that development of internal strategic capabilities encourages companies to focus on a smaller and more manageable social network. As companies display high internal capabilities and a unique vision, a smaller network, that can yield more rapid results, is preferable to a larger one that embodies more opportunities but demands greater investment over a longer period of time. The model explains about 10% of the variance. 8.4.3. Social Network, External Strategy, and Performance Table 8.5 presents the effect of the regression equation that correlates social network strengths, company external strategy, and performance in terms of sales. Model (5) reveals that social network strength has a significant negative impact on performance and it explains about 6% of the adjusted R2. Model (6) shows two additional new findings. Although social network strength correlates negatively with company sales, focusing external company strategy on monitoring competitors has a positive effect on sales. In such cases, companies learn from their competitive experience (Cyert & March 1963). Furthermore, the interaction between social network strength and external strategy is negatively and significantly correlated with company sales. The more the company invests in studying its competitors and the stronger the ties in its social network, the poorer its performance will be. Concentration on competitors requires interaction with new social loci and a certain detachment from the veterans’ network. The model explains about 36% of the adjusted R2. 8.4.4. Social Network, External Strategy, Industry Structure, and Performance Table 8.6 sums up the regression equation showing the correlation between social network, company strategy, and industry structure with company performance in terms of sales. The social network is expressed in terms of intensity of ties, strategy in terms of the external dimension, and industry structure in terms of Porter’s five-force model. Model (7) shows that the effects of the social network and company strategy

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Table 8.5: Impact of social network and external strategy on company sales. Model No.

Independent Construct

Independent Scales

Dependent Scale

Coefficient

R2 Adj.

R2

N

5 6

CSC CSC Strategy CSC  Strategy

CSC_Strength CSC_Strength STR_External CSC_Strength  STR_External

P_Sales P_Sales

18.51 50.7 22.3 15.1

0.059 0.366

0.082 0.441

40 35

 po0.1.  po0.05.  po0.01.

Table 8.6: Impact of social network, external strategy and industry structure on company sales. Model No.

Independent Construct

Independent Scales

Dependent Scale

Coefficient

R2 Adj.

R2

N

7

CSC Strategy Industry CSC  Strategy CSC  Industry

CSC_Strength STR_Exernal IND_A CSC_Strength  STR_External CSC_Strength  IND_A

P_Sales

41.9 33.6 36.6 34.9 41.2

0.581

0.643

35

 po0.05.  po0.01.

resemble those reflected in the findings displayed in Table 8.5. Namely, a social network with stronger ties correlates negatively and significantly with company sales, while strategy has a positive impact. Industry competitive structure correlates with sales positively and significantly. We identified two significant interaction components in the model. As reported in the previous table, there was a significant negative correlation between intensity of social network ties and external company strategy. By contrast, a significant positive correlation was found between intensity of ties and industry competitiveness. This means that the more competitive the industry (according to Porter’s five-force model), the more adverse the effect of strong social ties on company sales. The explanation may be that a competitive industry requires contacts with external social networks and not those of IDF technology unit veterans. The model explains about 58% of the adjusted R2.

8.5. Discussion Table 8.7 sums up the research findings according to models developed and presented in the previous section. Columns 1–3 describe the effects of the research model constructs representing social network, strategy, and industry structure, respectively, on company performance. Columns 4–5 show the interaction between the social

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Table 8.7: Summary: impact of strategic components and correlation with social network on company performance. Model No.

Independent Variables

1. CSC

Dependent Variables 2. STR

1, 2

Size (Not Sig.)

3, 4

Size (Not Sig.)

Internal (Not Sig.)

5, 6 7

Strength (Sig.) Strength (Sig.)

External (+Sig.) External (+Sig.)

3. IND

4. CSC  IND

Growth (Not Sig.)

Sig.

5. CSC  STR

#Employees Sig.

Rivalry (+Sig.)

+Sig.

6. PER

Sig. Sig.

Market Value Sales Sales

network and industry structure and company strategy constructs, respectively. Column 6 represents the performance indicator selected. The major finding indicates that the coefficient among the various scales of each of the construct has a differential effect on different performance measures. The table shows the importance of the interaction between the social network variable and the other strategic variables: Industry structure (Models 1 and 2), internal strategy (Models 3 and 4), external strategy (Models 5 and 6), and the interaction of industry structure and strategy (Model 7). The most interesting finding is that in all models but one, the interaction coefficient of social network and strategy is negative, meaning that the larger the social network, the poorer a company’s performance, provided the industry has a high growth rate (Models 1 and 2) and the company has developed internal strategic capabilities (Models 3 and 4). Similar findings were reported when the social network ties were of high intensity and companies developed external strategic capabilities (Models 5 and 6). This finding reinforces the theoretical assertion that a social network may also constitute a liability. On the other hand, Model 7 indicates that high intensity social ties do increase company sales in highly competitive industries.

8.6. Summary The principal message derived from the present study is of particular importance to executives and practitioners, indicating that the structure of a company’s social network constitutes a strategic component that affects performance significantly. Compatibility between social network structure and industry and company strategy is a precondition for achievement of a competitive edge but not a sufficient one. On the other hand, incompatibility between the social network and various other components often prevents high-tech firms from tapping on the advantages inherent in its task environment and the strategic measures it institutes. The study findings confirm that a social network may serve as an asset to the company and as a liability that affects performance adversely.

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References Baram, E. (2000). Competitive strategy, cooperate social capital and performance of high technology Israel Defense Forces spin-offs. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Burt, R. S. (1992). Structural holes: The social structure of competition. New York: Academic Press. Covin, J. G., & Slevin, D. P. (1989). Strategic management of small firms in hostile and benign environments. Strategic Management Journal, 10(1), 75–87. Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall (second edition in 1992). Duncan, R. (1972). Characteristics of organizational environments and perceived environmental uncertainty. Administrative Science Quarterly, 17, 313–327. Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal, 21, 203–215. Kagan, E. (2000). Leading features of startup entrepreneur. Ma’ariv, Business Section (April 25), 4–9 (in Hebrew). Lawrence, P. R., & Lorsch, J. W. (1967). Organization and environment. Homewood, IL: Irwin. Mintzberg, H. (1979). The structuring of organizations. Englewood Cliffs: Prentice-Hall. Moran, P., & Ghoshal, S. (1999). Markets, firms, and the process of economic development. Academy of Management Review, 24, 390–404. Natan, N. (2000). From the IDF to the desktop. Globes, Hi-Tech Section (June 21), 30–34 (in Hebrew). Podolny, J. M. (1994). Market uncertainty and the social character of economic exchange. Administrative Science Quarterly, 39, 458–483. Porter, M. (1980). Competitive strategy. New York: Free Press. Stuart, T. E. (1999). Technological prestige and the accumulation of alliance capital. In: R. Th. A. J. Leenders & S. M. Gabbay (Eds), Corporate social capital and liability (pp. 376–389). Boston: Kluwer Academic Press.

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Part IV Competitive Strategic Leadership Part IV discusses organization-level strategy of Israeli high-tech startup companies. Chapter 9 considers theoretical aspects and empirical examination of board of directors and Chapter 10 discusses the role of competitive intelligence. This part’s central claim is that both board of directors and competitive intelligence were important factors influencing the Israeli high-tech momentum in the 1990’s.

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Chapter 9

Board of Directors and Companies’ Performance1 Do boards of directors of technology-intensive industrial companies, such as Teva, Adacom, Indigo, Scitex, Geotek, and Tower Semi Conductors, contribute to their performance? The board of directors is the top echelon of a company’s senior management and it is responsible for its corporate governance. The current study explores four different but complementary perspectives of board of directors and their impact on corporate performance: boards’ demographics, working processes, strategic approach, and strategic resources profile. The data for the empirical examinations are based on financial statements (objective evaluation) and questionnaires (subjective evaluation), which were collected from 51 chairs and board members of Israeli industrial companies traded on the TASE (Tel Aviv Stock Exchange Traded Companies Financial Data 1994). The findings mainly support our hypothesis that the four boards’ perspectives contribute to companies’ performance. The research findings reinforce government and legal decisions concerning directors made in the past and also add some new perspectives for future considerations for having a more efficient and competitive board of directors.

9.1. Background There are two polarized view points about the role of the board of directors. On the one hand, the board is a ‘‘rubber stamp’’ for companies’ management decisions and that it has no part in affecting the strategy and performance of the company. On the other, that directors do have an impact on organizational behavior and performance. In the last few years we have witnessed a new phenomenon among public Israeli companies, where shareholders sue (or threaten to sue) members of the board of directors for considerable amounts of money subsequent to a decline in the company’s market value. In their opinion, the members of the board that are supposed to represent the interests of various interested parties did not do enough to represent their interests. The Government Companies Law was amended in 1993 states that a ‘‘qualified’’ director is someone with an academic degree in economics, business administration, 1

This chapter is based upon the thesis of Dalit Lesitzky (1995) as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum and it was submitted for approval to the Senate of the Technion — Israel Institute of Technology in 1995. We wish to thank Mr. Eli Hurvitz (Teva’s President) and Mr. Dov Shaphir (director and chairman of the operating committee of Teva) and all of the directors who cooperated with us.

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law, accounting, public administration, engineering, labor studies, or in the area that the company is engaged in. In a precedent setting ruling in 1993, the directors of the North American Bank were fined heavily, 100 million dollars US, for negligence in fulfilling their tasks as directors. The judge saw the directors responsible for the collapse of the bank and claimed that their lack of involvement in management and control of the management were the main causes for the bank’s failure. Legislation was proposed to the ‘‘Knesset’’ (Israel Cabinet) in 1994 to prevent Knesset members from serving as board members claiming conflict of interests and exploitation of their status and connections as members of parliament by the companies. These facts prove that there has been a change in the perception of the role of directors, from passive personas enjoying the prestige of the position, to active internal stakeholders, who ought to be professional and skilled, because they bear responsibility for the company’s well being, functioning, and performance. The current study intends to explore various aspects of board of directors and their impact on corporate performance. The importance of the subject, its relevance, and its potential contribution to Israeli companies confronting the reality of global competition, encouraged us to carry out this research. We explore the impact of boards’ four different theoretical perspectives on their performance: Boards’ demographics, processes, strategic approach, and strategic profile (resources). 9.1.1. Board Demographics Companies must have a clear strategy and qualified managers capable of effectively managing the company and leading to achieve its objectives. Therefore, it is important that the executives would have knowledge and experience (Murray 1989). Gross (1989) lists the advantages of appointing outside directors. Outside directors bring in know-how, experience, and judgment and are likely to balance differing opinions. Outside directors examine the subjects under discussion more objectively, are distant from the everyday work, which hinders a comprehensive and unbiased examination of the subjects at stake. Outside directors can express objective positions whenever differences of opinion between diverse groups in the company exist. Knowledgeable, well-connected outside directors who bring in their expertise are likely to add an important professional dimension to the board (Bantel & Jackson 1989; Baysinger et al. 1991; Boeker & Goodstein 1991) 9.1.2. Boards Process It is essential that boards ensure checks and balances. It should be an independent body, constituting a thoughtful and judicial body that will scrutinize management while keeping the whole picture in mind (Judge & Zeithaml 1992). Likewise, boards must have the prerogative to take harsh and uncompromising measures when need be, including replacement of CEOs. The role of the board includes, inter alia, seeing to the continuity of management in the company, and the appointment of senior officers (Zajac 1990). It is important that the directors dedicate time to the company’s

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activities and not just in participating in meetings affecting the overall risk-taking of the company (Singh & Harianto 1989). 9.1.3. Board Strategic Approach Directors should be available to the management for advice, guidance, and assistance. Legally, the board of directors is the uppermost corporate echelon directing the company’s activities and accountable to owners and most other stakeholders. The board of directors carry out their task by appointing the company’s senior management, delineating the company’s strategy, instructing and approving long- and short-term policies and operational programs, and reviewing the company’s activities. A board should have this competitive approach in order to affect performance (Lang & Lockhart 1990; Kesner & Johnson 1990). 9.1.4. Board Resources The board has an obligation of fidelity to the company and bears the final responsibility for its operations and financial results (Norburn & Birley 1988). The board must be faithful not only to the shareholders, but to all stakeholders, internal and external alike. The board is a source of strategic resource that can affect the strategy and performance of companies (Boyd 1990; Pearce & Zahra, 1991). Because of the importance that Parliament attributed to the appointment of directors of state-owned enterprises, various options for defining a ‘‘qualified’’ director have been on the agenda. The 1993 amendment to the Government Companies Law in the matter of qualification to hold the position of director (paragraph 16a) elaborates the following conditions: ‘‘1. He/she has an academic degree in one of the following subjects: economics, business administration, law, accounting, public administration, engineering, labor studies or another academic degree or completed other advanced education studies in the area that the company is engaged in. 2. He/she has at least five years of experience in one of the following, or has at least five years cumulative experience in two or more of the following: a. A senior business management position in a corporation having significant enterprise scope. b. Serving in a senior public position in the public services dealing with economic, commercial, management or legal matters. c. A senior position in the company’s primary areas of business’’ (Reshumot [Official Knesset Gazette], Code of Laws 1993).’’ As early as the amendment to the Government Companies Law 1993, it can be seen that emphasis was placed on the individual qualifications of board members from the perspective of academic education, managerial experience, or in the

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company’s area of operations, under the assumption that these capabilities can contribute to the company’s success. Therefore, based on the former review, we hypothesize that board of directors’ perspectives in terms of demographics, process, approach, and resources will be correlated with companies’ performance.

9.2. Methodology 9.2.1. Sample The research population includes the board chairmen and directors of industrial companies traded on the TASE. Because of confidentiality the participated companies are not listed. The industrial companies traded on the TASE are divided into eight sectors: food and tobacco, textiles and clothing, metal, electricity and electronics, building materials, chemicals, wood and paper, industrial investment and miscellaneous. All the companies chosen for the study were from the aforementioned industrial sectors excluding companies belonging to the industrial investment and miscellaneous sectors, 177 companies in total (out of 185). Another eight companies were not included in the sample owing to lack of pertinent data. Of the 177 companies comprising the entire population, 51 answered the questionnaires or a response rate of 29%; 62.7% were answered by the chairmen of the board and approximately 37.3% by directors. Collection of the data was based on three sources. Demographic information about the directors was gleaned from the companies’ periodic reports (TASE library). Data on the companies’ financial performance was based on the ‘‘Tel Aviv Stock Exchange Companies Financial Data’’ booklet, published by the TASE. The data include financial statement for the years 1989–1993 and are published annually. The questionnaire was mailed to all chairmen of the companies included in the study. Where the chairman served as chairman of more than one company, a questionnaire was sent to a member of the board. 9.2.2. Questionnaire The first part includes demographic details. Items included the following aspects: position on the board, time serving on the board, is he/her the CEO of the company, number of other board of directors he/she serves on. The second part included questions relating to the directors’ resources and intangible capabilities2 (subjective evaluation not attainable from financial reports). For uniformity, a profile of the 2

The research methodology in the strategy area recommends and encourages the use of various approaches to gathering information (‘‘triangulation’’). The big advantage of financial statements is their ability to present objective data about the organization. On the other hand, important information not able to be presented objectively is missing from the statements. That is the reason that we constructed a questionnaire to attain important and relevant information connected with the organization’s and board of directors’ functioning.

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131

resources and capabilities was attached to each questionnaire. The questions included the following types of board resources: the directors’ reputation, connections with stakeholders (suppliers, customers, politicians) and resources (foreign markets), the capacity to bring about changes, the capacity to innovate and to initiate, form the company’s strategy, the capacity to critique the management, communication with the management, and group cooperation. Likewise, questions were asked about the experience and knowledge (education) in the following areas: marketing, research and development and engineering, finance, law, personnel, manufacturing, general management, and the activity of the board of directors. The third section included general questions concerning the company (company age, size-employees, and number of board members). The fourth section included questions relating to the board processes (frequency of annual meetings, meeting duration, and board committees). The fifth section focused on the chairman’s/board member’s perceived level of competition in the sector and strategic approach. In regard to companies’ performance, we used six measures of organizational performance reflecting a wide spectrum of activities. First, the total amount of equity as registered in the book. Second, market value divided by equity known as Tobin Q ratio. It actually represents the extent to which the market values the future capacity of the company, and the greater the better. Third, total sales indicates business effectiveness or monopoly power. Fourth and fifth measures consider the profitability aspects of the company and we consider both operating profit and net profit. Finally, we consider a risk perspective known as the financial leverage and it is calculated as the ratio of equity-to-total assets. The larger the ratio and the more closely it approaches 1, the less external debt the company has and hence less risky (Norburn & Birley 1988; Finkelstein & Hambrick 1990).

9.3. Results 9.3.1. The Association between Company Board of Directors and Performance Multiple regressions were run to examine the impact of each of the four models separately as well as a combined model. The first model, the impact of the board demographic variables, explains 27% of the adjusted R2. The two most significant variables are the average age and the number of board members. The second model, the impact of the board working practices, explains 18.5% of the adjusted R2. The most significant variable is the number of committees. The third model, the impact of the board strategic orientation, explains 12.7% of the adjusted R2. The most significant variable is relating to companies’ competitors. The last single set of explanatory variables, the impact of the board strategic profile, explains 16.5% of the adjusted R2. Know-how and experience in finance had a significant and positive impact on performance. However, connections with customers indicate a surprising negative impact. The fifth model incorporates all significant variables that were reported in the previous four models. This model explains the highest adjusted R2 of the value of 49%. Except two variables, all other five variables entered the model and their

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

Table 9.1: The impact of board of directors on performance. Theoretical Aspect

Demographic variables Working practices Strategic orientation Strategic profile

R2 Adj. R2

Independent Variable

Model 1

Average age Number of board members Number of committees Relating to competitors Know-how and experience in finance Connections with customers Global market connections

0.36 0.40

Model 2

Model 3

Model 4

Model 5 (Combined) 0.34 0.38

0.44 0.38

0.32 0.33 0.32

0.295 0.265

0.202 0.185

0.148 0.127

0.38

0.31

0.43

0.217 0.165

0.551 0.492

 po0.1.  po0.05.  po0.01.

impact is similar to the separated model. This indicates that very low multicolinearity exists among the variables. However, number of committee and know-how and experience in finance did not enter the model (Table 9.1). 9.3.2. Comparing Boards of Directors: High versus Low performing Companies For each company, we calculated an average performance measure based on each one of the six performance measures after it was normalized. Companies with an average score above the mean were defined as high performers relative to low performers whose average score was below the mean. The objective was to test if there are differences between the high and low performers with respect to the four perspectives of the board of directors’ variables: demographic, work practices, strategic orientation, and strategic profile (resources and capabilities profile). A one-way ANOVA test was performed after the companies were divided into the ‘‘high’’ and ‘‘low’’ performers. 9.3.2.1. Demographic differences The demographic make-up of the boards of directors included in this study shows on average: eight members, 52.74 years of age, serving on the board approximately 5.01 years, 78.65% having a college education, 74.91% having managerial experience — and 44.55% inside directors. The Anova shows statistically significant differences between the two groups with respect to a number of variables (see Figure 9.1). As to the number of board members, the average number of high performers was nine and it is statistically greater (po0.05) than the five members of the low performing companies. The proportion of directors with

Board of Directors and Companies’ Performance

133

90 High Performers 80

Low Performers

70 60 50 40 30 20 10 0 # of Members

Age

Educational Level Inside Directors

Management Experience

Years on Board

Figure 9.1: Board of directors demographics: high versus low performers. Note: The variables education level, inside directors, and management experience are presented in percentage points. Statistically significant differences (po0.05) between the groups are identified only relative to the number of members and educational level. college education among the high performers companies is 88.5% and it is statistically greater than less performers firms; 74.4% (po0.05). For the rest of the variables the values of the high performers were greater than the low performers. However, no statistical significant differences were found (age, proportion of internal directors, proportion with managerial experience, and average number of years on the board). 9.3.2.2. Work practices The variance analysis shows statistically significant differences high and low performers (po0.001) with respect to the number of board level committees. High performers companies’ boards had about three committees on average and the low performer ones had on average two committees. No statistically significant differences exist between the two groups with respect to the remaining work-practice variables. 9.3.2.3. Strategic orientation No statistically significant differences between the two groups were identified with respect to the strategy variables: relating to competitors’ boards providing future direction and contribution to management and performance. 9.3.2.4. Strategic profile The variance analysis shows statistically significant differences between the two groups (po0.05) with respect to a number of variables (Figure 9.2). The reputation resource was higher (X ¼ 4.25) among the high

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

4.5

Not Successful

4

Successful

3.5 3 2.5 2 1.5 1 0.5 0 Reputation

Political Connections

International Connections

Strategy Design

General Management

Figure 9.2: Board of directors’ strategic profile: high versus low performers. performers companies as opposed to low performers ones (X ¼ 3.57). Political connections were higher among the high performers (X ¼ 3.42) as opposed to low performer companies (X ¼ 2.75). The other variables also have indicated higher level for the high performer groups although the statistical significance was a bit lower. Specifically, with respect to connections with international markets, strategy design, general management experience, and know-how (po0.01). No statistically significant differences are observed between the two groups with respect to the remaining strategic profile variables. A discriminant analysis was used to build a function predicting whether or not a firm is high performer based on the board’s make-up, where the independent variables were the four perspectives of the boards of directors. The discriminant function evaluated in this study ‘‘correctly’’ classified firms as successful or unsuccessful in 77.87% of the cases. ‘‘Correct’’ classification is where the function based on the board’s components is identical to their categorization according to the financial performance measures. The results of the classification show that 10 companies were incorrectly classified by the function. The function succeeded to predict 22 out of the 28 high performer firms and 12 out of the 16 less performer firms (Table 9.2). It should be noticed that seven observations removed from the discriminant analysis because at least one value was missing.

9.4. Summary The purpose of this study is to examine empirically the relationship between boards of directors and corporate financial performance where four aspects of the board

Board of Directors and Companies’ Performance

135

Table 9.2: Discriminant function classification results. Group

Number of Companies

Low Performer Companies

High Performer Companies

28

22 78.9% 4 24.0%

6 21.1% 12 76.0%

Low performer companies High performer companies

16

have been examined: (a) demographic variables, (b) work practices, (c) strategic orientation, and (d) strategic profile (resources and capabilities profile).

9.4.1. Board Demographics It seems that the higher the number of members on the board, the average age, the proportion of academic-educated board members, and the average time board members have served, the higher the financial performance. In light of the positive statistical association found between directors’ average age and financial performance, one can ask what the average age of directors should be for the company’s financial performance to be high. It is not possible to respond to this question and determine a specific age from the results of our study, notably since the difference between the successful and the less successful companies in terms of directors’ age is relatively small (55 in successful and 52 in unsuccessful companies). Nevertheless, it can be observed that in both high and low performer companies’ directors’ age is within the 50 years range. That is to say, boards manned by seasoned directors ensures more experience and, according to the results of the study, higher reputation. Among the high performer companies, the proportion of directors having academic education was 88.5% and among the low performer ones was 74.4%. This result corroborates decisions taken by the Government of Israel in the past few years. It is specified in the 1993 Amendment to the Government Companies Law pertaining to qualifications for serving on boards (paragraph 16a). Indeed, the government of Israel viewed academic education as a matter of utmost importance in order for a director to be able to function professionally and advance the company they lead and this research reinforces the decision. Finkelstein & Hambrick (1990) identified a relationship between market tenure and corporate performance near the sector average. We found a positive relationship between average number of years on the board and the performance measures. This finding can be explained in that an organizational group active for a considerable duration of time is acquainted with the history of the organization, structure, problems, successes, and failures and so is capable of contributing to the organization in more so than others devoid of this varied experience. A group active in an organization for a long time knows which strategies were effective, which new directions

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developed truly advanced the company and which did not. The substance of the knowledge existing in the group can contribute much to formulating an appropriate strategy and high performance thereof. However, one must be wary of the negative aspects of long terms on the board such as dullness of senses and inertia in the wrong directions. A statistically significant relationship between the proportion of inside directors and proportion of directors having managerial experience was however not supported by the data. Norburn (1986) alleges that the average age of the company board members in growth companies is lower and, on the other hand, declining companies have older board members. On the one hand, younger age may be associated with innovation; ‘‘new blood’’ flowing in the group, new knowledge brought in from the academia and transferred to the board with the assistance of students who have completed their studies in the last few years. On the other hand, older directors are often more experienced, and with seniority comes reputation. A positive correlation between reputation and the average age of board members was identified in our study (r ¼ 0.33, po0.01). It is possible to summarize and state that companies going to put together their board of directors should consider several demographic variables, which contribute to financial performance. We observed that the number of board members, their average age, their tenure on the board, and the proportion having academic education — all are positively correlated with financial performance. The demographic variables explained approximately 29% of the variance in the companies’ financial performance.

9.4.2. Board Work Practices The following variables illustrate work practices; frequency of board meetings during the year, average meeting duration, and the number and type of board level committees. No relationship with performance was identified between the meeting frequency and duration. In fact, it can be said that on the basis of the findings there is no importance to the number of board plenum meetings and the duration of the meeting. These findings contradict our expectations, since we assumed that a board that dedicates more time to the company, which it heads by frequent and longer meetings will be more involved in the ongoing management of the company and thus its contribution to performance will be more conspicuous. It is possible to learn about the importance of the board’s involvement in the ongoing management of the company that it heads from a 1993 verdict for the board of directors of the North American Bank following the collapse of the bank. The ruling is described in a newspaper article: Unprecedented ruling decided by Judge Bazak in the matter of the board of directors of the North American Bank on 27.12.93. The judge found that the directors are responsible for the collapse of the bank in 1985. In the ruling, Judge Bazak determined that the bank’s directors were negligent in fulfilling

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their duty and brought about the collapse of the bank. It became clear, that most of them did not participate in meetings of the board of directors, were not acquainted with one another, did not take an interest in what was taking place at the bank from the management, investment, or loan collateral perspectives. The directors assumed that their membership on the board was an honour or for the purpose of granting prestige to the bank, and did not understand that the subject of discussion was a real job, imposing responsibility for managing the bank’s affairs on them. Consequent to the deficiency in the involvement of the directors, there was no control over the members of the executive management team which was responsible for the ongoing, day-to-day management of the bank, and it was managed without strictness to elementary banking procedures, in disorder and total irresponsibility. The directors’ complete neglect led to the executive’s behaving as they saw fit, irresponsibly and negligently. They committed criminal acts and caused enormous damage to the bank. The judge ruled that a board of directors of a bank which performs its duties diligently and responsibly, and oversees what is done in the bank, thus sends a message to the members of the executive that they are not entitled to do as they please, but that they are being watched and listened to. (‘‘Yedioth Ahronoth’’, 28.12.94). Although no relationship between frequency of meetings or duration of meetings and the company’s financial performance was corroborated by this study, indeed another finding explains the inconsistency. We identified a positive correlation between the number of board level committees and the company’s financial performance. The board level committees are important in that they provide support to the CEO who can always consult with the directors serving on them. The committees meet separate from the full board meetings and all committee decisions are brought before the entire board for approval. In practice, the board level committees are each responsible for its area and tracks matters in those same areas on an ongoing basis. The essence of their ongoing activity discharges the need to convene the whole board frequently, and so the low frequency of board meetings does not necessarily indicate their lack of involvement in the company’s management. In light of the widespread claim that directors are busy people who find it difficult to find free time, the task of assembling a group of such people at a specific hour on a specific date, which will be convenient for all is not an easy task and opens up the possibility that directors will be absent from the meetings. It is worthwhile to split all the directors into deputy committees, with each responsible for a specific area in which it specializes and is responsible for supervising that area on an ongoing basis. The committee includes relatively fewer members than the full board and thus the members’ capacity to maneuver with respect to coordinating the time and frequency of meetings. Indeed, the number of board level committees was found to explain the variance in the financial performance significantly and was also found to discriminate between high and low performer companies in a significant manner. Thus, it is possible to recommend to directors that they adopt the practice of working by means of deputy committees.

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9.4.3. Board Strategic Approach The strategic approach was defined by three measures: relating to competitors’ boards, provision of future direction to the company, and their contribution to management and performance. A relationship was identified only between the competitors’ boards of directors variable and the company’s financial performance (regarding a portion of the performance measures). Despite the importance of this variable, it was found that only 13.3% of the boards in the study relate to counterparts’ boards. We received additional reinforcement, pertaining to the fact that no connection was found between the other two variables: delineating the company’s future direction and contribution to management, and the company’s financial performance, from other questions relating to the resources and capacities profile of the board. In preparing the profile, the respondents were asked, inter alia, to address three questions pertaining to strategy: the board of directors’ ability to innovate and initiate the capacity to bring about change and the capacity to strategically design the firm. These three questions were highly positively correlated with the questions pertaining to the board’s strategy and a connection between them and the company’s financial performance was also not identified. In summary, according to the findings of the study — the board of directors’ capacity to provide future direction for the company, to contribute to management and performance, its capacity to innovate and initiate, to bring about change and delineate corporate strategy — all of these variables are not associated with the company’s financial performance. Notwithstanding, we would not rush to conclude that there is no importance to the boards’ capacity to bring about change and to provide future direction for the company. Since a key task of the board is to plan, delineate, and monitor the corporate strategy, it is recommended that the subject be continued to be studied in depth and the connection between the board’s strategic approach and organizational performance be investigated from different and complementary organizational and strategic aspects. In order to advance the research in the aforementioned direction, we would recommend that studies of the board of directors strengthen the association with the strategic theory that addresses strategic groups (Fiegenbaum & Thomas 1995). The theory claims that each firm belongs to a strategic group defined as a cohort of companies within same industry having comparable strategy. These groups in fact constitute the SRP for the companies making up the same group and the organization can decide if it is interested in and has the ability to move to a better group (characterized by a higher performance potential). For this purpose, the board must be acquainted with competitors’ boards of organizations in the same strategic group and other groups in the industry, thus it is desirable that boards have a more comprehensive knowledge of competing boards, and become acquainted with personas officiating in the board, be familiar with their demographic background, head to the board’s activities, and formulate their company’s strategy accordingly and advantageously. The findings of this study support the hypothesis that the more the board relates to competitors’ boards within the same industry, the higher the financial performance.

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9.4.4. Board Strategic Profile The strategic profile is based on the resource-based view of the firm (RBV). When a company realizes an asset that has value, rare, inimitable, and non-substitute (VRIN), it provides a source for a sustainable competitive advantage (Hitt & Ireland 1985; Aaker 1988/1989; Barney 1991; Hall 1992; Amit & Schoemaker 1993). In this study, we attempted to apply the RBV with respect to the company’s board and examine if there is a relationship between the board’s strategic profile (resources and capabilities) and financial performance. Rotem (1994) investigated the relationship between the company, characteristics of its environment, and success and found that the company’s strategic resources explain 40.5% of the variance in the companies’ financial performance. In our study we found that the strategic profile, including the board’s resources and capabilities explain 21.7% of the variance in the companies’ financial performance. Of the 19 strategic profile variables, a positive relationship with the financial performance variables was identified only for reputation, political networking, links with foreign markets, experience and know-how in finance, experience and managerial know-how. The political networking and reputation variables were found to discriminate in a significant way between high and low performance firms. Israeli companies tend to appoint reputed and politically networked personas, such as ex-members of parliament as directors with the view of cashing on political connections and advancing companies’ interests. Likewise, linkages with overseas markets was also found to explain the variance in the companies’ financial performance. This finding reinforces future strategic directions. Companies aspiring to expand business and increase their financial performance will need to break out of the domestic and enter foreign markets, either by exporting products or by establishing multinational companies (Hamel et al. 1989) To sum, in this study we found that the four perspectives of boards explain about 55% of the variance in the firms’ financial performance. Average age and number of members among the demographic variables should be focused on, with average age having greater contribution. Relating to competitors’ boards should be focused on with respect to strategic orientation. Connections with customers, overseas markets, and experience and know-how in finance should be focused on with respect to the resources and capabilities profile. The number of board level committees, which was found to discriminate in a significant way between high and low performer companies should be focused on with respect to working practices, although this factor was not found to explain the financial performance variance at a statistically significant level in the combined model.

9.5. Limitation and Future Directions We are cognizant of the several limitations in drawing conclusions regarding the findings of this study. Limitations regarding internal validity pertain to the extent to which the conclusions drawn in the study are correct relative to the sample

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population. The limitation in the study may reside in the bias emanating from the source of the information. Collection of some of the data was based on subjective reporting of the directors. It is likely that the chairman/director did not correctly assess the boards’ resources and its contribution to management and performance. Inaccuracy in this essential evaluation could emanate from two sources; insufficient awareness as to the resources of the board and the extent of its contribution, or an attempt to present the board in a positive light in order to justify its role. To overcome biased responses, future research will be well advised to send questionnaires to all directors, and not a single member of the board and then cross-check the information. Nonetheless, the fact that the source of the information in each company was identical (in most cases the chairperson and in a few cases a director) and relying only on a single source, will cause bias, if any exists, to be consistent in all companies. Another limitation pertains to external validity. The sample was relatively small (N ¼ 51), but representative (a population of 177 companies), the research population included solely industrial companies traded on the stock exchange. Thus the generalization to another population, other than industrial-traded companies is not necessarily correct. Nevertheless, it is possible to use the results of this study as a basis for future research on other populations. Another limitation is associated with the inability to accurately evaluate if the current board under study actually contributes to the companies’ financial performance in 1993. Notwithstanding, the financial performance that the study was based on relates to 1993, and the directors’ average seniority was five years, it is possible that there exist firms whose financial performance was brought about by the successes of boards that preceded the present one.3 If we rely on the average score of seniority of the board of directors, five years as previously stated, this is a reasonable time between the outset of the boards’ activity until the measurement of the companies’ performance. Since we did, for lack of access, track replacement of directors and the percentage replaced each year, we do not rule out a situation in which new directors have replaced others and have yet to contribute to corporate performance and so the newly appointed ‘benefit’ from their predecessors’ achievements or ‘absorb’ their failures. Other unexamined factors that could expand boards’ knowledge base include interaction between variables that may potentially influence performance. For example such essential factors as industry effect, type of corporate strategy, characteristics of the organizations’ senior management, and the CEOs. Future investigators will be able to reach more comprehensive and accurate results should they incorporate these avowedly important explanatory variables and by so doing will tap on additional corporate factors that may explain performance more accurately and comprehensively. Other unanswered questions are whether financial performance affects boards’ characteristics investigated in the present study. We recommend that future studies

3

This is a known limitation pertaining in most research focusing on a specific point in time and not in a number of points in time (cross-sectional versus time series analyses).

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also focus on the direction of the relationships investigated in the current study. It seems clear that the directions are bidirectional (simultaneous) and dynamic. In other words, the board influences performance and performance affects the board. In this vein, a longitudinal study is called for in order to produce more causative and robust results.

References Aaker, D. A. (1988/1989). Managing assets and skills: The key to a sustainable competitive advantage. California Management Review, 31(2), 91–106. Amit, R., & Schoemaker, P. J. H. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14, 33–46. Bantel, K. A., & Jackson, S. E. (1989). Top management and innovations in banking: Does the composition of the top team make a difference?. Strategic Management Journal, 10, 107–124. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. Baysinger, B. D., Kosnik, R. D., & Turk, T. A. (1991). Effects of board and ownership structure on corporate R&D strategy. Academy of Management Journal, 34(1), 205–214. Boeker, W., & Goodstein, J. (1991). Organizational performance and adaptation; effects of environment and performance on changes in board composition. Academy of Management Journal, 34(4), 805–826. Boyd, B. (1990). Corporate linkage and organizational: A test of the resource dependence model. Strategic Management Journal, 11, 419–430. Fiegenbaum, A., & Thomas, H. (1995). Strategic groups as reference groups: Theory, modeling and an empirical examination of industry and competitive strategy. Strategic Management Journal, 16(6), 461–476. Finkelstein, S., & Hambrick, D. C. (1990). Top management team tenure and organizational outcomes: The moderating role of managerial discretion. Administrative Science Quarterly, 35, 484–503. Gross, Y. (1989). Company directors and executives. Jerusalem: Keter Publishing House, (Hebrew). Hall, R. (1992). The strategic analysis of intangible resources. Strategic Management Journal, 13, 135–144. Hamel, G., Doz, Y. L., & Prahalad, C. K. (1989). Collaborate with your competitors and win. Harvard Business Review, 67(1), 133–139. Hitt, M., & Ireland, R. (1985). Corporate distinctive competence, strategy, industry and performance. Strategic Management Journal, 6, 273–293. Judge,, W., & Zeithaml, C. (1992). Institutional and strategic choice perspectives on board involvement in the strategic decision process. Academy of Management Journal, 35(4), 766–794. Kesner, I. F., & Johnson, R. B. (1990). Research notes and communications and investigation of the relationship between board composition and stockholder suits. Strategic Management Journal, 11, 327–336. Lang, J. R., & Lockhart, D. E. (1990). Increased environmental uncertainty and changes in board linkage patterns. Academy of Management Journal, 33(1), 106–128.

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Lesitzky, D. (1995). The relationship between the board of directors and financial performance of Israeli companies. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). Murray, A. (1989). TMT group heterogeneity and firm performance. Strategic Management Journal, 10, 125–141. Norburn, D. (1986). Gogo’s Yoyo’s and Dodo’s: Company directors and I industry Performance. Strategic Management Journal, 7, 101–117. Norburn, D., & Birley, S. (1988). The top management team and corporate performance. Strategic Management Journal, 9, 225–237. Pearce, J. A., & Zahra, S. A. (1991). The relative power of CEOs and boards of directors: Associations with corporate performance. Strategic Management Journal, 12, 135–153. Rotem, Z. (1994). The relationship between company resources, environmental characteristics and success — resource based competitive strategy. Unpublished doctoral dissertation, Tel Aviv University, Tel Aviv. (Hebrew). Singh, H., & Harianto, F. (1989). Management board relationships, takeover risk, and the adoption of golden parachutes. Academy of Management Journal, 32(1), 7–24. Tel Aviv Stock Exchange Traded Companies Financial Data. (1994). The Tel Aviv Stock Exchange Ltd. (Hebrew). The Government Companies Law. (1993). Reshumot [Official Gazette], Code of Laws (Hebrew). Zajac, E. J. (1990). CEO selection, succession, compensation and firm performance: A theoretical integration and empirical analysis. Strategic Management Journal, 11, 217–230.

Chapter 10

Competitive Intelligence1 This is an exploratory study based on a questionnaire developed and applied by The Future Group in the US. The study focuses on competitive intelligence perspectives and then compares and discusses them with foreign companies mainly the US ones. Based on a sample of 30 companies, the major findings reveal the lack of formality in intelligence operations. There is no organized system for gathering, analyzing, and distributing intelligence, and Israeli companies are far behind their American counterparts. On the other hand, as opposed to their American counterpart, Israeli managers will roll up their sleeves and gather intelligence directly. This fact enhances the strategic use of intelligence; perhaps even more than what is customary in the United States.

10.1. Introduction After many years of submarine duty and more than a few years of equally bitter struggles on the battlefields of the business world, I found that the experiences of captains in these different fields were quite similar. Both the submarine captain and the company CEO must navigate hostile waters most of the time and must make decisions quickly under conditions of stark uncertainty. The submarine commander has a skilled support system that zealously collects the few fragmented signals the submarine receives from the depths of the sea and processes them into a stable picture of the situation to provide a basis for his decisions. However, the CEO must face an entirely different reality (Yaniv Dinor 1999). Andrew Grove, Intel founder, who led the company to become the largest computer processor manufacturer, wrote a book about his life at Intel whose title, Only the Paranoid Survive, captures the essence of his doctrine. Grove’s message is that in a world where technologies change in the blink of an eye and innovation flows incessantly, competitors are waiting with bated breath for their business rival’s moment of weakness, and a company that wishes to survive must be on guard 24 hours a day 365 days a year.

1

This chapter is based upon the thesis of Yaniv Dinor as part of the requirements for the MSc degree. The thesis supervisors were Prof. Avi Fiegenbaum and Prof. Ben Gilad and it was submitted for approval to the Senate of the Technion — Israel Institute of Technology in 1999.

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If we accept the fact that a company is in a battle for survival in a competitive world, then, as in war, the commander must understand that without an intelligence gathering and analysis system, without building a picture of competitor operations (products, research directions, marketing channels, and more) and market activities (mergers, trends, capital markets, etc.) and most of all, customer behavior (tastes, preferences, etc.), he does not have the tools at his disposable to win the battle. Paraphrasing Grove, it is not enough to be aware of the risk (or to ‘‘suffer from paranoia’’); rather, we must create working tools to fight it. The first and foremost tool required is competitive intelligence. Competitive intelligence enables a company to understand itself better, to avoid surprises, to identify the threats and opportunities, and to achieve competitive advantage by improving its strategic and tactical programs as well as by reducing its response time, thus bringing about improved performance (Kahaner 1996; Gilad 1996). Peter Drucker (1998), the prophet of modern management theory, suggests that external intelligence gathering will be the forefront of company administration in the next 15 years. The findings of the current study indicate that Israel is not there yet, even though Israeli senior executives understand they should be there. The perception that the road to this goal passes through formalization of processes has yet to permeate the avenues of domestic management.

10.2. Theoretical Background and Research Questions Herring (1992) describes competitive intelligence as a systematic program for gathering and analyzing information about competitors’ operations and about general business trends in order to advance one’s own company’s objectives. Herring presents the six functions of competitive intelligence in a business organization: (1) increasing management’s sensitivity to competitive activities in its business environment; (2) creating a set of specific criteria for comparing the company to its competitors; (3) legitimizing proposals and suggested lines of activity; (4) inspiring ideas to help identify what other companies would do in similar circumstances; (5) assisting formal planning processes; and (6) contributing to operational and tactical decision-making process. A number of leading researchers have focused on the mission of business intelligence in its more strategic capacity. Accordingly, Herring (1992) and Gilad (1996) defined the main role of business intelligence in examining fundamental assumptions and blind spots in an organization’s strategic thought process, with the aim of developing new strategies and determining the suitability of current strategies to the changing competitive environment. Sutton (1988) suggested that competitive intelligence enables organizations to understand themselves better, to avoid surprises, to identify threats and opportunities, and to gain a competitive advantage by improved planning and reduced response time. On the other hand, cultural differences must be considered in evaluating how companies use competitive intelligence. It was expected that an a priori analysis of the competitive situation in Israel would reveal that high awareness regarding the

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importance of intelligence would be reflected in a high level of intelligence within the companies as well. And since a large number of former high-ranking IDF officers hold senior positions in the Israeli economy, it can be assumed that their understanding of this subject will be higher than average. Hence, it can be assumed that most Israeli companies will adopt the concept of intelligence wholeheartedly. As a counterargument, it can be said that Israeli management culture is not as developed as in America and is not characterized by the definition of clear formal processes required for constructing and implementing an effective competitive intelligence setup. Taking into consideration Israel’s unique experience in the area of military intelligence, it is even more interesting to examine how Israeli companies perceive business intelligence and how they implement business intelligence operations. By applying on Israeli companies the same tool used to examine the role of business intelligence in American companies, we can make significant comparisons between the two countries. The study is divided into two main questions. The first is an attempt to understand the practices of Israeli organizations toward strategic competitive intelligence. The questionnaire constructed for this purpose focuses on the level of formality, areas of coverage, organizational obstacles, information gathering sources, and structure of competitive intelligence units (Prescott & Smith 1989; Stanat 1993; Prescott & Bhardwai 1995; Ostriches & Eagles 1995; Hall & Bensoussan 1996; Simon & Blixt 1996). The second question provides global competitive perspectives by comparing and discussing the findings of Israeli competitive intelligence practices relative to foreign companies (Ghosal & Westney 1991).

10.3. Methodology The questionnaire developed for this purpose is based on the extensive questionnaire prepared by Ostriches and Eagles (1995) from The Future Group consulting firm. The questionnaire includes 18 questions as described in the appendix. They contain the major aspects of competitive intelligence provided in the background section. Each one of these questions will be described and analyzed in the results section. In regard to data collection, first, a preliminary version was constructed and presented to managers of business companies. Based upon this pilot study, the questionnaire was modified. Second, 350 questionnaires were distributed to a list of companies ordered from Dun & Bradstreet. The sample included the 250 largest companies in Israel, without focusing on any particular business or operational area, in order to present the broadest picture possible in this initial study. In addition, another 100 questionnaires were distributed to smaller companies, among them startups in order to examine size of corporate maturity differences between the two groups of companies. Response rate was 8.6% (30 questionnaires were returned). Among the large companies (sales exceeding NIS 300 million) the response rate was 7.6%, while among the smaller companies the rate was 11%. This low response rate is typical of broad samples, such as that of Stanat (1993).

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10.4. Results 10.4.1. Descriptive Statistics 10.4.1.1. Level of formality in competitive intelligence (question 1) This question examined the level of organizational formality in supplying competitive intelligence to decision-makers. On a scale of 1 (no formal setup) to 7 (formal setup), the average score was 3.53, with a standard deviation of 1.7, mirroring a relatively informal situation in the total sample.

10.4.1.2. Intelligence gathering structure (question 2) This question examined the firm’s intelligence gathering structure; 40% of the responses indicated that intelligence was gathered by senior management, while an additional 37% reported on intelligence gathering on the strategic, organizational, or divisional level. This finding is reinforced by the responses to question 5 below, indicating that Israeli management both gathers and uses intelligence.

10.4.1.3. Goal of intelligence gathering (question 3) This question examined how the goals of intelligence gathering are perceived. The majority of respondents (25, or 83%) skipped this question. Therefore, the question was excluded from the analysis.

10.4.1.4. Formality of competitive intelligence (question 4) This question examined the degree of formality in an organization’s business intelligence by means of the number of individuals involved (complement question 1 about the level). In 60% of the organizations, not a single person was engaged in business intelligence on a fulltime basis. At the other end of the scale, one organization had eight full-time employees and another had four full-time employees whose jobs involved gathering and analyzing competitive intelligence. These two organizations were state-owned enterprises specializing in defense-related manufacturing and export. In response to the second part of the question, we identified that two-thirds of the organizations had at least one person employed half-time in the area of competitive intelligence. In 30% of the organizations, one or two people held such half-time positions, with the average standing at 3.5 half-time positions. For both parts of the question, the answers were biased upwards by four organizations in the defense sector. The above findings clearly show that despite the upward bias from the defense organizations, in general the level of formality in intelligence gathering in Israel is noticeably low.

10.4.1.5. Consumers of competitive intelligence (question 5) This question attempted to discover who the intra-organizational consumers of competitive intelligence are. This item was formulated as an open question, and the answers were used to construct a scale of seven responses. More than 80% of the responses indicated that the

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consumers of competitive intelligence in the organization included the CEO, the deputy CEOs, and the marketing and business development managers.

10.4.1.6. Implementation of competitive intelligence (question 6) This question examined the level of implementation based upon ‘‘success’’ percentages assigned by the respondents. The findings indicate a noticeably broad range in respondents’ satisfaction with the success of the intelligence setup in their organizations (an average of 50 out of 100, with a standard deviation of 25).

10.4.1.7. Measuring the effectiveness of competitive intelligence (question 7) This question examined the way in which competitive intelligence is measured. The responses indicated that this measurement (when it exists) is primarily qualitative. In around 25% of the organizations, effectiveness was measured by examining the actions taken as a result of competitive intelligence, in another 22% effectiveness was measured by examining new sales opportunities, and 20% did not measure the effectiveness of the company’s competitive intelligence setup.

10.4.1.8. Sources of competitive intelligence gathering (question 8) The first part of this question examined the sources of competitive intelligence gathering in the sampled companies, offering nine possible responses. The second part of the question attempted to focus the responses in order to determine the two main sources. In response to the first part of the question, the following sources received the highest scores: publicity and advertising (16.1%), events and meetings (16.1%), company employees (14.9%), Internet (13.7%), and company suppliers and customers (13.1%). The other responses, among them on-line services, commercial data bases, experts in the field, and outsourcing of competitive intelligence, received less than 10% response. In the second half of the question, the best source of competitive intelligence was found to be company suppliers and customers (27.1%), after which were the Internet and company employees (18.6% each) and publicity and advertising (13.6%). It is interesting to note that events and meetings were ranked lower than 12%, indicating incorrect and inefficient use of exhibitions and conferences for intelligence gathering.

10.4.1.9. Current and future competitive intelligence topics (questions 9A, 9B, and 9C) Combined the three parts of question 9 constitute a research tool we refer to as ‘‘covering the topic.’’ The variable was calculated in two stages: the average of the six statements in question 9A (a ¼ 0.87) and then the average of all the statements in question 9, including the new score for question 9A (a ¼ 0.84). The question examined the situation with respect to issues for which the intelligence gathering system (formal as well as informal) provides information and to what degree this information is provided. In order to obtain an overall picture of the situation for the sample

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Table 10.1: Topics of competitive intelligence. A. Current: B. Future: C. Differences Mean (SD) Mean (SD) (BA)a A. Competitive activities Technical Economic (financial) Marketing Production Commercial Legal

4.30 3.73 4.57 3.47 3.83 3.63

(1.64) (1.70) (1.13) (1.81) (1.39) (1.63)

4.80 5.27 5.97 4.37 5.43 4.50

(1.73) (1.64) (1.06) (2.17) (1.30) (1.87)

0.50 1.54 1.40 0.90 1.60 0.87

B. C. D. E. F.

4.97 4.40 4.87 4.87 4.13

(1.65) (1.40) (1.83) (1.55) (1.87)

5.50 5.70 3.83 4.60 4.90

(1.38) (1.42) (1.78) (1.77) (1.73)

0.53 1.30 1.04 0.27 0.77

4.07 (1.80)

0.23

Changes in market or sector structure Customer or supplier activities Global economic situation Emergence of technological changes Intentions and activities of government agencies G. Political situation a

4.30 (1.76)

Note: Most differences reported in column C are statistically significant.

population, Table 10.1 summarizes the answers to each of the questions asked as an average of the entire sample: column A related to question 9A namely current topics. The view of intelligence that emerges from analyzing these results is an intermediate level. A somewhat higher level of intelligence than the general average for the answers was found for changes in the market or sector structure (4.97 average), the global economic situation and the emergence of technological changes (both with an average of 4.87) and the marketing aspect of competitors’ activities (4.57 average). The lowest level of intelligence was found for production aspects of competitors’ activities (average of 3.47). An analysis of the range shows that it covers the entire spectrum from not at all (1) and very much (7). Question 9B was a followup of question 9A, though in contrast it does not attempt to draw a picture of the existing situation, but rather to understand the wishes of the sampled population regarding the changes they would like to see. This question attempts to present the wish list of a company’s topics of intelligence information and it is presented in column B (Table 10.1). 1Column C presents the differences between the current situation (question 9A) and the optimal situation as the respondents would like it to look (question 9B). The most conspicuous lack of intelligence is in the area of competitors’ commercial activities. Other noticeable gaps can also be identified in the need for economic and marketing intelligence regarding competitors’ activities as well as in customer and supplier operations and in competitors’ production activities. On the other hand, the findings also show that in a number of areas the information provided by the competitive intelligence system exceeds the need shown in this study. This indicates that in certain areas, the energy invested in intelligence gathering is not channeled to the organization’s actual needs.

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Question 9C gave respondents the opportunity to freely list the problematic areas in their company’s intelligence system. From these answers, a scale of eight responses was constructed. The categories mentioned as the factors most lacking in the organization’s competitive intelligence were as follows: an organized procedure for handling intelligence (33.3%); economic information (22.2%); capabilities for completing information (18.5%); and analytical focus (11.1%). Recognition of the need for a formal procedure to handle intelligence is of dual significance here. The need for economic information as one of the requirements of a competitive intelligence system corroborates the findings of question 9B. That question indicated a large gap (ranked 2) between wishes and reality with respect to the need for economic information. In effect, the next two identified categories, ability to complete information, and analytical focus, represent the outcome of a formal and professional system of competitive intelligence.

10.4.1.10. Satisfaction and obstacles for improvement (questions 10A and 10B) Question 10A reexamined the degree of satisfaction of sample respondents with the effectiveness of the intelligence system in their company, on a scale of 1 to 7. This question, after standardization, represents, together with question 6, a measure of intelligence performance. The answers to this question revealed a bi-polar distribution, indicating one of the following: either a high level of dissatisfaction with the effectiveness of the system (30% of the answers were 1 and 2), or a very high level of satisfaction (47% of the answers were 5 and 6), though 7 was not chosen by any of the respondents. Question 10B is a measure of ‘‘organizational obstacles’’ (reliability 0.72). The question proposed eight factors presenting obstacles to improving the effectiveness of the company’s intelligence system. The answers are summarized in Table 10.2. The top ranking is that there is no formal procedure and it corroborates the major finding of question 9C, which points to the recognition and need for a formal procedure for gathering and handling competitive intelligence. Shortage of skilled personnel in this area as an obstacle of great import is raised for the first time in this Table 10.2: Organizational obstacles. Rank 1 2 3 4 5 6 7 8

Answer

Percentage of Responses

No formal company procedure for information transfer A shortage of skilled personnel in this area Insufficient awareness on the part of management A lack of a sponsor in the company (at the higher echelons) Do not see the value of activities in this area Insufficient awareness on the part of the board of directors People in this area don’t understand management’s needs Legal and ethical concerns regarding this matter Total

27.1 25.7 20.0 8.6 7.1 5.7 2.9 2.9 100.0

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

study. The 20% response to this question should be augmented by the 5.7% response to the question addressing with the insufficient awareness on the part of the board of directors in order to gain a complete understanding of the true weight of this variable. Despite management’s direct involvement in intelligence gathering, and perhaps because of this involvement, management is seen as being unaware of intelligence operations on the lower levels of the organization or of the need for a formal system of intelligence. The low percentage (7.1%) that gave the answer ‘‘Do not see the value of activities in this area’’ corroborates the assumption that, at least in Israel, the defense background of senior managers leads them to understand the need for intelligence, even if they do not agree on its formal nature. 10.4.1.11. Organizational obstacles (question 11) This aspect examines the reliability of the previous question in constructing a measure of organizational obstacles. The question proposed ten factors constituting obstacles to improving the effectiveness of the competitive intelligence system in the firm, taking into consideration the possibility that the company has no organized intelligence procedure. Out of a sample of 30, the following 22 responses were received (Table 10.3). The responses indicate that if we collect all answers related to an insufficient awareness on the part of management (1, 3, 4, 5, and 6), we will discover that this category received the highest score as an organizational obstacle to setting up a formal system of intelligence. 10.4.1.12. Competitive intelligence (questions 12– 14) This category explores three questions related to the Israeli companies’ awareness of competitive intelligence outside the company and their understanding about the meaning of the term. Question 12 examines whether particular companies in Israel and worldwide have manTable 10.3: Improving organizational obstacles. Rank 1 2 3 4 5 6 7 8 9 10

Answer

Percentage of Responses

No formal company procedure for information transfer and sharing Insufficient awareness on the part of management A lack of skilled personnel in this area Insufficient awareness on the part of the board of directors Do not see the value of such a process/organized procedure A lack of a sponsor in the company (at the higher echelons) No understanding of what such a process can contribute Legal and ethical concerns Do not understand what it is Those involved in this area do not understand management’s needs Total

19.2 17.8 17.8 12.3 12.3 6.8 6.8 4.1 2.7 0.0 100.0

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aged to create an image of making good use of competitive intelligence. The intention was to try to analyze the list of companies according to industry and from this to draw conclusions regarding their competitiveness and their use of competitive intelligence as a tool in coping in a hypercompetitive business environment. Due to the small size of the sample, the resulting list was not sufficiently focused, but rather quite distributed over industries, so that it was impossible to draw any conclusions. The only company in Israel that mentioned a significant number of times (total of seven) was ECI, while among the foreign companies Motorola and IBM mentioned the greatest number of times (five times each). Question 13 examined respondents’ subjective perception regarding whether they thought their competitors had ever gathered and analyzed intelligence to be used against their company; 93% of the respondents answered that they believed their competitors had used competitive intelligence against them. This finding is unanticipated for it was expected that such a high percentage would have been accompanied by a higher percentage of companies investing in a formal intelligence system. Question 14 attempted to discover how respondents understand the concept of competitive intelligence. An analysis of these results could contribute a great deal to understanding how this topic is perceived among the respondents and what each expects of a competitive intelligence system. Unfortunately, we only received two answers to this question. It seems that the respondents saw this open-ended question as some form of test and therefore preferred not to answer at all. Future research should attempt to present this issue in the form of a multiple-choice question, since it may shed light on our understanding of how competitive intelligence is perceived.

10.5. Discussion and Conclusions In order to evaluate the state of competitive intelligence among Israeli companies, we compare some of the study findings with the global competitive intelligence situation, particularly in the United States.

10.5.1. Level of Formality (Question 1) In Prescott & Smith’s (1989) survey of 95 American companies, it is difficult to estimate how many of the intelligence systems can be considered formal. All 95 respondents were experts in competitive intelligence in their companies, and the entire survey was geared to members of the Society of Competitive Intelligence Professionals (SCIP). Therefore, from the outset the survey was directed toward formal systems. Even though the survey’s authors did not define a formal intelligence system, answers to two of the survey’s questions shed light on this topic. The answers to one of these questions revealed that only 62% of the respondents had a budget dedicated to intelligence. Responses to the other question indicated that only 50% of

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the companies were organized for supplying ongoing competitive intelligence, while in the remaining companies the competitive intelligence was related to a given project. Though the focus of this research would suggest that the scores on these two questions should be higher, it is clear that these findings are significantly higher than those for the Israeli companies in the current study. In Stanat’s (1993) study of 408 companies, of which 78% were American, the issue of formality in the intelligence system was studied much more directly and resembled the way in which it was examined in the current study. The findings show that 74% of the companies had a formal system of intelligence, to some extent or another. In a study conducted by The Futures Group (TFG) by telephone interviews with senior managers in 104 American corporations, the findings indicated that more than two-thirds (68%) of the surveyed companies adopted an organizational approach of providing intelligence to decision-makers. In a study of Australian industry, Hall and Bensoussan (1996) found that around 30% of the respondents had a formal system of intelligence.

10.5.2. Intelligence Gathering Factors (Question 2) While our study shows a tendency to gather intelligence among senior management personnel, the Prescott and Smith (1989) survey indicates no such tendency. In contrast, American corporations gather intelligence in a decentralized manner through planning or marketing units. Further validation for this conclusion can be found by analyzing the answers to question 5 in the questionnaire. The findings indicate that in Israel, senior management (CEOs, deputy CEOs, marketing managers, and business development managers) makes strategic use of the products of competitive intelligence. In other words, there is no clear separation, as there is in American companies, between those who gather the intelligence and those who use it.

10.5.3. Number of People Engaged in Intelligence (Question 4) Our survey of Israeli companies shows that on average less than one person was engaged in intelligence on a full-time basis, and in most companies not even one person was engaged. The Prescott and Smith (1989) survey reports on an average of three full-time employees engaged in intelligence. Stanat’s (1993) survey indicates that in 80% of the companies surveyed, five or fewer people worked in intelligence on a full-time basis, while six to ten were so engaged full time in less than 10% of the organizations. Regarding the number of employees engaged part-time in intelligence, Prescott & Smith survey reports on two such part-time employees. Stanat’s survey does not report on part-time positions, though 36% of the organizations did report on an organized intelligence network, suggesting that a significant number of people were engaged on a part-time basis in intelligence. An organized intelligence network in an American firm includes employees whose job descriptions involve dedicating part of their job specifically to gathering and analyzing competitive intelligence. In a typical American organization, the number of such employees can range from 50 to 100.

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10.5.4. Sources of Intelligence (Question 8) Regarding sources of intelligence, Stanat’s (1993) study reports that 58% identified secondary sources as their preferred sources of intelligence. Field sources and human sources received only 39% from the respondents. In any case, as expected, regional differences were found, and these differences were dependent upon the accessibility of secondary sources in the region. The studies in Eastern Europe and Australia that we reported, indicate a great deal of dependence on human sources, while studies from Western Europe, show a higher level of dependency on data bases. Our study indicates that Israeli companies rely on human sources, with intelligence gathering by company employees, exhibitions, customers, and suppliers receiving the highest scores. Moreover, in Section 8.1. company customers and suppliers were ranked highest. Among the secondary sources, only the Internet received a high score. Prescott and Smith’s (1989) study does not show any such preference for human sources over secondary sources.

10.5.5. Current and Future Competitive Intelligence Topics (Questions 9A– C) A number of interesting differences were found regarding intelligence coverage. Prescott and Smith (1989) did not indicate a difference between the various sources, and their categorization does not match the categories we used in this study. Instead, they used the following categories: ongoing, periodic, and occasional. According to Prescott and Smith model, the following sources of information were indicated as ongoing (high score): competitors (technical, economic, and market), market changes, and technological developments. Sources of information identified as periodic (intermediate score) related to aspects of competitors’ commercial activities as well as to information about customers. The rating of occasional (low) score was assigned to suppliers, the global economic situation (which explains why the economic crisis in Asia came as such a surprise), government agencies, and political developments. Not surprisingly, Israeli companies, which are more affected and regulated by government decisions, pay a great deal more attention to this topic. In regard to intelligence deficiencies (questions 9B and 9C), Israeli companies resemble American companies in their view of the deficiencies in their competitive intelligence operations. In Stanat’s (1993) sample, 57% reported that their major problem was how to infiltrate competitive intelligence to their decision-makers. Prescott and Smith (1989) reports on this issue as one of the three most problematic issues. This can be compared to the need for ‘‘an organized procedure for handling intelligence’’ reported on in this study, which was indicated by the Israeli companies sampled as the most deficient area (33.3%). Likewise, in Ostriches and Eagles (1995) study as in the current study, considerable gaps were identified between existing intelligence and what was actually required. Competitive operations remained in first place, followed by changes in market structure and customer and supplier activities.

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10.5.6. Ranking Obstacles of Intelligence Issues (Question 10) There is a great deal of similarity between Israeli and American companies in ranking the issues constituting obstacles to improving the efficiency of competitive intelligence. Indeed, these obstacles appear to be universal. In Prescott and Smith’s (1989) study, the following obstacles received a high score: lack of trained personnel, insufficient awareness among management, and lack of a formal procedure for transferring information. These obstacles are similar to those reported by the Israeli companies. Similarly, both lack of a sponsor and lack of understanding of the benefits of intelligence was ranked only of medium importance both in Israel and in the US. The only significant difference was in the category ‘‘legal and ethical concerns regarding this matter.’’ American companies are more aware and suspicious of the legal and ethical problems involved in intelligence than in Israel, where the issue is not even a matter of concern. In the Ostriches and Eagles (1995) study, the question equivalent to 10A in our study (but on a scale of 1 to 10) referring to evaluation of the effectiveness of the system received an average score of 5.86, as opposed to 3.87 in this study.

10.5.7. Competitive Intelligence (Questions 12 and 13) Question 12 explored what is the company ‘‘model’’ for competitive intelligence. It is interesting to note that Motorola, the company that, along with IBM, was most admired by Israelis for its use of intelligence, was also in first place in the Ostriches and Eagles (1995) study. In that study, IBM was in the fifth place, after GE, Microsoft, and HP. In regard to competitors (question 13), contrary to Israeli companies, 93% of which believe their competitors have used competitive intelligence against them, the results of the Ostriches and Eagles (1995) study surprised its American researchers as well; 25% of the respondents reported believing that no competitive intelligence techniques whatsoever had been applied against them. The researchers referred to these companies as ostriches and noted that this finding was surprising to them, particularly in light of the fact that half of the companies in the sample had an annual turnover in excess of a billion dollars.

10.6. Summary In conclusion, the results of this study show that competitive intelligence in Israel can be described as quintessentially Israeli. On the one hand, the most salient finding is the lack of formality in intelligence operations. There is no organized system for gathering, analyzing, and distributing intelligence, and Israeli companies are far behind their American counterparts in this vein. On the other hand, the role of the senior Israeli managers should not be minimized. As opposed to their American counterpart, Israeli managers will roll up their sleeves and gather intelligence directly.

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This fact enhances the strategic use of intelligence, perhaps even more than what is customary in the United States. The clear disadvantage of this individual and informal method of intelligence gathering is exactly what one would expect. It is not systematic, it does not reach every corner of the organization, and it does not provide effective coverage of the competitive environment. Proof of this can be found in the gaps between existing and desired intelligence, as well as in the gaps in perceiving the effectiveness of intelligence. It turns out that in Israeli companies much like their foreign counterparts when relying on a formal organization, the level of satisfaction increases. Hence, we cannot escape the conclusion that if Israeli companies were to learn to integrate the intelligence tendencies of senior management with an organized system of intelligence gathering, analysis, and distribution, they would benefit a significant competitive advantage. Drucker (1998) assumes that external intelligence gathering will be the forefront of company administration in the next 15 years. This study shows that Israel has not yet reached this front, even though senior Israeli managers understand they need to be there. The understanding that the path requires formalization of procedures has not yet permeated Israeli management. Let us hope that this study will in some small way help Israeli and global management to reconsider their competitive intelligence practices.

Appendix — Questionnaire: Competitive Intelligence in Israel 1.

Does your company have a formal setup or organized method for providing competitive intelligence to decision-makers? (Circle the appropriate answer.) 1 No setup

2 3

4

5

6

7 Formal setup

2.

If yes, indicate the type of intelligence gathering structure in your organization: a. Overall organizational structure (vacuum cleaner). b. Divisional structure c. Gathering by senior management. d. Other — Details: _______________________________________________

3.

In your opinion, what are the goals of intelligence gathering? ____________

4.

How many people are involved in the area of competitive intelligence? Full-time basis ________________ Part-time basis _________________

5.

Who are the job holders in your organization that use the results of competitive intelligence? _________________________________________

6.

How do you assess the success of the intelligence system in your organization in achieving the goals indicated in question 3 above? ________________________

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7.

How is the effectiveness of the intelligence setup or method (formal or informal) measured in your organization? a. Steps taken as a result of competitive intelligence. b. New sales opportunities that emerged. c. Changes in market volume assessment. d. Development of new products. e. Achievement of financial goals. f. Other — Details: _______________________________________________

8A. What are your main sources of competitive intelligence? (Circle the appropriate answers.) a. Publications you read (newspapers, professional journals, etc.). b. Clipping services (on-line or printed). c. Commercial data bases (in the library or direct access). d. Internet. e. Company employees. f. Experts in the sector. g. Events and meetings. h. Company suppliers and customers. i. Outsourcing — suppliers of competitive intelligence. j. Other — Details: ______________________________________________ 8B.

Of the above sources, indicate the best two: (a)___________ (b) ________

9A. For which of the following topics do you currently receive intelligence (either formally or informally)? To a large extent A. Competitor activities Technical Economic (financial) Marketing Production Commercial Legal B. C. D. E. F. G. H.

Changes in market structure Customer or supplier Global economic Emergence of technological changes Intentions and activities of government Political situation Other — details

Not at all

7 7 7 7 7 7

6 6 6 6 6 6

5 5 5 5 5 5

4 4 4 4 4 4

3 3 3 3 3 3

2 2 2 2 2 2

1 1 1 1 1 1

7 7 7 7 7 7

6 6 6 6 6 6

5 5 5 5 5 5

4 4 4 4 4 4

3 3 3 3 3 3

2 2 2 2 2 2

1 1 1 1 1 1

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9B. For which of the following do you require better intelligence in order to make decisions. To a large extent A. Competitor activities Technical Economic (financial) Marketing Production Commercial Legal B. C. D. E. F. G. H.

Changes in market structure Customer or supplier Global economic situation Emergence of technological changes Intentions and activities of government Political situation Other — details

9C.

Not at all

7 7 7 7 7 7

6 6 6 6 6 6

5 5 5 5 5 5

4 4 4 4 4 4

3 3 3 3 3 3

2 2 2 2 2 2

1 1 1 1 1 1

7 7 7 7 7 7

6 6 6 6 6 6

5 5 5 5 5 5

4 4 4 4 4 4

3 3 3 3 3 3

2 2 2 2 2 2

1 1 1 1 1 1

What is missing for you in the competitive intelligence in your organization?______________________________

10A. On a scale of 1 to 7, where 7 is the best, how effective, in your opinion, is your intelligence system (or your informal intelligence gathering and analysis)? Not at all

1

2

3 4

5

6

7 Very effective

10B. What are the obstacles to improving effectiveness? (Circle the appropriate answers): a. A lack of skilled personnel in this area. b. Lack of understanding of management’s needs on the part of those involved. c. A lack of a sponsor in the company (at the higher echelons). d. Insufficient awareness on the part of the board of directors. e. Insufficient awareness on the part of management. f. No formal company procedure for information transfer and sharing. g. Legal and ethical concerns. h. Do not see much benefit from such activities. i. Other — Details: ______________________________________________ 11.

If your company does not have an organized procedure for business intelligence, what are the reasons for this lack? a. No understanding of what such a process can contribute. b. A lack of skilled personnel in this area. c. Those involved in this area don’t understand management’s needs.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s d. e. f. g. h. i. j. k.

12.

A lack of a sponsor in the company (at the higher echelons). No formal company procedure for information sharing and transfer. Legal and ethical concerns. Insufficient awareness of expected benefits of an organized procedure/setup. Insufficient awareness on the part of the board of directors. Insufficient awareness on the part of management. No understanding of the topic. Other — Details: ___________________________________________

List three companies that you believe make good use of competitive intelligence:

In Israel a. ______________________________ b. _______________________________ c. _______________________________

Abroad a. ______________________________ b. _______________________________ c. _______________________________

13.

Do you think that any of your competitors have ever used competitive intelligence against you (circle the right one): (a) Yes (b) No

14.

Define ‘‘competitive intelligence.’’______________________________________

15.

Indicate your company’s annual sales turnover. a. Less than 1 million shekels. b. From 1 million to 5 million shekels. c. From 5 million to 300 million shekels. d. Over 300 million shekels.

16.

To what business sector does your company belong? (Circle appropriate answer.)

a. Electronics b. Computers c. Chemicals d. Services

e. Defense industry f. Communications g. Software h. Food

i. Metallurgy j. Textiles k. Medical equipment l. Other: ______________

17.

Would you like to receive a copy of the study’s findings? (a) Yes (b) No

18.

In order to make sure to receive a copy, please fill in the following information and return the questionnaire in the envelope provided.

Name: ____________________________________________ Position: __________________________________________ Company: _________________________________________ Address: __________________________________________

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References Dinor, Y. (1999). Strategic competitive intelligence in Israeli firms. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). Drucker, P. F. (1998). New paradigm: The sage of management offers his guide for prospering in the new economy. Forbes, 162(7), 152–177. Ghosal, S., & Westney, D. R. (1991). Organizing competitor analysis systems. Strategic Management Journal, 12, 17–31. Gilad, B. (1996). Business blind spots. Chicago: Irwin/Probus. Hall, C., & Bensoussan, B. (1996). The role of business competitive intelligence in strategic management: Results from an Australian survey. Journal of AGSI, 5(3), 92–100. Herring, J. P. (1992). The role of intelligence in formulating strategy. Journal of Business Strategy, 13, 54–60. Kahaner, L. (1996). Competitive intelligence. New York, NY: Simon & Schuster. Ostriches & Eagles (1995). A report by the futures group. Greenwich: The Futures Group. Prescott, J., & Bhardwai, G. (1995). Competitive intelligence practices: A survey. Competitive Intelligence Review, 6(2), 4–14. Prescott, J. E., & Smith, D. C. (1989). A survey of competitor intelligence professionals in advances in competitive intelligence. VA: SCIP Publications. Simon, N., & Blixt, A. (1996). Navigating in a sea of change. Alexandria, VA: SCIP Publications. Stanat, R. (1993). A survey of global competitive intelligence practices. Competitive Intelligence Review, 4(2/3), 20–24. Sutton, R. (1988). Learning to predict by the methods of temporal differences. Machine Learning, 3(1), 9–44.

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Part V Development of New Industries Part V discusses the development of new industries. Both chapters focus on the same medical technology industry although with different complementary perspectives. Chapter 11 considers theoretical aspects and statistical examinations of the entire industry. In contrast, Chapter 12 discusses six companies and describes and analyzes their evolution and it is based on interviews made with the companies’ founders. This part’s central claim is that both methodologies are important to understand the role of the new medical technology industry to influence the Israeli high-tech momentum in the 1990’s.

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Chapter 11

Medical Technology A: Industry Analysis1 Globalization presents organizations with fascinating economic opportunities but also intensifies pressure and imposes new demands, mandating strategic reassessment and action to suit changing realities (Bartlett & Ghoshal 1987). These changes are characterized by high uncertainty and complexity, frequent technological changes, increasing competition in global markets, and dependence on resources of various types. The study explores the development of the industry and the changes adopted between 1995 and 1998. The sample comprised 45 Israeli medical technology firms. Research questionnaires were filled out during interviews with each company’s CEO or other senior executives. We demonstrated that the industry and its component firms changed substantively during the designated three-year period and then focused on the influence of various factors on company performance. First, we found that both industry globalization and attractiveness increased. Second, those companies enhanced their strategy in terms of strategic capabilities. Finally, the companies have changed their performance goals as well.

11.1. Review—Medical Technology Development in Israel Since the 1950s, Israel has been considered a worldwide pioneer in medicine. Israeli hospitals and research institutes constitute a paragon of research activity and innovation for physicians in a broad range of specialties but did not cultivate commercial applications for clinical discoveries. The first such application was an imaging device produced by Elscint in 1969. It was only two decades later that the medical technology field began to develop in Israel, soon becoming a significant component of the country’s high-tech industry. Such companies as Laser Industries, ESC, InStent, Medinol, and Biosense paved the way for the dozens of Israeli startups active in the late 1990’s that sought medical solutions incorporating special technological developments. In the 1970s and 1980s, research foundations of academic institutions consented to invest in pharmaceuticals and biotechnology but avoided medical technology. The agencies determining high-tech investment at that time were Elron — that established Elscint — and the Kremerman and Yehudai families, a group of investors who 1

This chapter is based upon the thesis of Ezra Cohen as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion—Israel Institute of Technology in October 1999.

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financed the establishment of Laser Industries. Despite the difficulties indicated earlier, several medical technology companies were established during the 1980s (Mennen Medical, Orgenics, Mego Afek, Savyon Diagnostics, and others). Lacking substantive sources of financing, they had to use income from sales to promote development, as they could not allow themselves to sustain operative losses demanding private investment. Throughout that period, medical technology industries had no financial sources available. Difficulties in financing development led two such companies to raise capital on U.S. stock markets: Elscint raised $4 million in 1972 and another $17 million in 1980 and Laser Industries first raised $6.6 million in 1981 and another $31 million in 1985–1986. The situation began to improve in the early 1990’s. Yozma, a venture capital fund set up with the support of the government, began forming extensive cooperation agreements to set up several specialized funds. One of them, Medica, was established with a budget of $20 million for investment in the medical field alone. Other Yozma specialized funds invested in this field, although to a more limited extent (the Nitzanim Fund invested $1 million in ESC). Besides these government-assisted funds, some private venture capital funds that began operating in Israel opted for investment in medical industries, enabling new companies to raise substantive capital at various stages of establishment. Another significant factor in this respect was the interest in Israeli medical technology companies displayed by several private experts, particularly Lou Pell, who left his position as a broker with Bear Stearns and provided several companies (Biosense, InStent, and Influence) with the benefit of his vast experience, extensive contacts, and even his private capital. For experts in Israel, as well as analysts abroad, the term ‘‘Lou Pell companies’’ is still used to describe the firms in which his intense involvement increased their chances of success significantly. Fledgling companies, especially those participating in technological incubators, were also eligible for allocations from the Chief Scientist’s Office of the Ministry of Industry and Trade. The State of Israel’s R&D budget was and remains earmarked for R&D-based companies, but during the period under study, the Chief Scientist’s Office began participating more aggressively in medical technology company budgets — 35% of the companies that received grants or loans for development in 1996 were in the medical technology field, a percentage that has remained constant up to the time of writing (see Chapter 2 — technological incubators). Israel possesses several competitive advantages applicable to medical technology development (Cohen 1999): First, research institutes and hospitals at the highest professional level that are ready and willing to adopt innovations through clinical trials and intra-organizational research funds; second, extensive technological infrastructure in a variety of fields and technologies that are applicable in medicine and have considerable experience in development process management; third, more than twice the worldwide average number of physicians per capita. The life sciences were consistently the least developed sector of high-tech industries, compared to such fields as electronics, software, and communications. By 1994, 28 Israeli high-tech companies had issued stock on American exchanges, only two of which — Elscint and Laser Industries — were in the medical technology field. While

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Israeli high-tech industries continued to acquire marked presence on American stock exchanges during the 1990’s (about 100 companies as of the end of 1999), fewer than 10% of them specialized in the life sciences, mostly pharmaceuticals. Analysts and experts in the field note several principal factors that prevent more rapid development of the industry in Israel: A shortage of specialized marketing personnel who are capable of using their knowledge to establish and develope medical technology companies. In traditional high-tech industries, managerial skills and knowledge-intensive product marketing capabilities largely developed in military organizations and defense industries that invested considerably in HR development, relevant well-established Israeli firms (ECI, Aurec, Comverse), and international companies with development centers in Israel that invest in and develop training programs for their employees. The medical technology field did not have a management-training tradition because so few companies were involved and even fewer were marketing their products independently. The market’s unique structure renders independent activity difficult: expenditures for health range between 7% and 13% of the GNP of Western countries. These large sums of money are allocated primarily for acquisition of services and products for the health system. Prevailing trends over the past few decades led to the emergence of two central blocs, HMOs and equipment suppliers, with the latter enjoying critical advantages of scale and conducting efficiency measures as consumers unite to demand constant price reductions and cuts. The presence of giant corporations with exclusive marketing pipelines leaves few alternatives for fledgling equipment suppliers, but to form that takeover by one of the conglomerates as the only option for marketing products. Complex, extended, and costly regulations as an integral part of the medical technology company life: compliance with FDA and CE standards entails a long process (ranging from at least six months up to five to six years for more complex products). The clinical trials required by the FDA are costly as well and demand complex management. Most such activities take place at hospitals throughout the world, using international monitoring and services that increase costs considerably. Returns on investments begin to accrue much later than they do in alternative fields (software, communications), deterring investment by venture capital funds. Developmental improvement is insufficient — revolutionary change is required. Unlike software and hardware products, for which a 20% improvement in performance over existing solutions means success, medical technology applications have to prove that they institute revolutionary change to succeed in the medical market.

11.2. Theoretical Background The research explores three fundamental components of industry and competitive strategy (Porter 1980). First, we explore the nature of the industry in terms of globalization and industry attractiveness (Porter 1986). Second, we explore the nature of industrial firms in terms of their strategic capabilities (Barney 1991). Finally, we explore the nature of industrial firms’ performance measures that cover a wide

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range such as cost reduction, profit, and risk. The major hypothesis of the study is that, given the changing nature of the industry, both industrial firms and performance will change in order to keep the fit with the environment.

11.3. Methodology Research data were gathered through the questionnaire described below. Responses were received from 45 medical technology firms in Israel, constituting the research sample (see Table 11.1), provided by each company’s CEO or CFO, marketing or development managers. Initially, we conducted a preliminary test of the questionnaire with the participation of three academic experts in questionnaire drafting and three industrial managers whose comments and clarifications were taken into account in formulating the final questionnaire. At this stage, the research questionnaires were sent to 80 companies listed under the ‘‘medical technology’’ heading in various on-line information sources, such as those of the Israel Export Institute, the Israel Ministry of Industry, Trade and Labor and Dun’s Guide. Most questionnaires were filled out during an interview that took place with one of the company executives and a few were faxed back by participants. Responses consisted of the participants’ subjective evaluation of statements referring to two periods of time: the year the study was conducted (1998) and three years earlier (1995). Research variables are ranked on a scale of 1 to 7 according to reactions to statements, with a score of 7 representing full agreement, 4 indicating indifference, and 1 total disagreement. The questionnaire comprises eight parts: (1) (2) (3) (4) (5) (6 and 7)

(8)

Company entrepreneurs, their age, education and previous place of employment. Entrepreneurs’ technological and marketing background and global management experience. Global strategic assessment of the company in its principal spheres of activity: R&D, production, and marketing. Performance, product quality, costs, response to customer needs, adherence to schedule, and risks taken by the company. Attractiveness of area of specialization and extent of its globalization. Alliances: Participants were asked to indicate the type of alliances their companies maintain in various spheres of activity and to assess the degree of trust and efficiency of both local and international alliances. Significant sources of financing for company operation.

11.4. Results First, we describe specific aspects of the industry and then we address dynamic changes that took place in this industry between 1995 and 1998.

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Table 11.1: Medical technology firms in Israel. No.

Company

Specialty

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

Medisal Influence Medical Biosense Israel Algotech Systems N.A.S.S. Degania Silicon Medispec Opgal Sightline Technologies Aerotel Trans Scan Lipogen Galilee Medical Carmel Biosensors Optimedic Diasonics Israel Z.M.L. Medical Equipment Industries Danex Dec-Tec Shai Sig Innovations and Motion Medisim Savyon Diagnostics Digident Applied Spectral Imaging Bargold Electronics ELGEMS Elbit Medical Imaging Applied Biomedical Instrument Cecil Gottlieb Rimlin Talia Technology Medical Intelligence Omrix Biopharmaceuticals Contac Medical Odin Technologies Telesense CMT Medical Dynamics Biotest ESC MIS Elscint Organix Rotem Industries

Orthopedics Diagnostics Cardiology Computer systems Medical equipment Medical equipment Urology Cardiological imaging Medical imaging Cardiology Diagnostics Electro-optics Electro-optics Diagnostics Electro-optics Diagnostics Medical equipment Medical equipment Electro-optics Electro-optics Medical imaging Diagnostics Electro-optics Diagnostics Medical imaging Nuclear medicine Medical imaging Not specified Biotechnology Medical equipment Orthopedics Not specified Diagnostics Biotechnology Not specified Medical equipment Not specified Cardiology Medical equipment Biotechnology Electro-optics Not specified Medical Imaging Biotechnology Not specified

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11.4.1. Entrepreneurs’ Age The average age is 40. Furthermore, most entrepreneurs are apparently between the ages of 45 and 55 and few are relatively young (25–35) or old (65–75). Figure 11.1 present their distribution. 11.4.2. Background A vast majority of entrepreneurs (87%) possess undergraduate degrees, mostly in engineering (37%); 22% are physicians and a decisive majority previously held salaried positions. Figure 11.2 presents their academic background and we can learn that only 20% have a social science degree while the others have engineering, science, and medicine degree. 35

Incidence

30 25 20 15 10 5 0 25-35

36-45

46-55

56-65

66-75

Age

Figure 11.1: Age distribution—medical technology firm entrepreneurs.

Social sciences 20%

Natural sciences 3%

Medicine 23%

Exact sciences 17% Engineering 37%

Figure 11.2: Entrepreneurs’ field of study.

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No. Companies in Category

30 24 20 10 10

3

2

0 `1-6

`7-12

`13-19

`25-31

Company Age (years)

Figure 11.3: Company age distribution. 11.4.3. Company Age Most companies are young; the average company age in 1998 was 7.44 years. The early 1990’s mark the beginning of a sharp increase in number of companies established (Figure 11.3). Some 61.5% of all companies participating in the sample were established after 1992 and were thus under six years old at the time of writing.

11.4.4. Sales and Number of Companies Sales volume of most companies did not exceed $10 million (about 57% of all companies participating in the study). These figures conform with the relatively early development status of a majority of these firms, characterized by low sales volume, as the companies were still at the R&D stage or only taking their first commercial steps. From Figure 11.4 we can learn that the number of new companies started at 1998 was much higher than the number of companies till that year. We can see a sharp ‘‘take-off’’ and all these companies were global oriented. To sum up, the outstanding features of medical technology entrepreneurs are: relatively advanced age (38–48 when enterprise established), undergraduate degree in engineering or M.D. degree, professional experience. They are young (established after 1992), private and small (relatively low sales volume, few employees).

11.5. Evolutionary Perspectives: Comparing 1998 and 1995 The scales representing the research variables are classified according to the three categorical variables: industry, strategy, and performance (Table 11.2). The average and standard deviations were calculated for each. Finally, the Cronbach’s a coefficient was calculated for each scale and their calculated coefficients was more than 0.6. It can be seen that all values in 1998 were significantly higher in 1998 than in 1995. We now describe each one of these three perspectives.

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35 30 25 20 15 10 5

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

0

Year Founded

Figure 11.4: Cumulative number of companies. Table 11.2: Research perspectives, variables definition and differences between the two time periods (1998 versus 1995). Perspective

Variables

Avgerage 1998

Avgerage 1995

Difference

Significance (2-tailed)

% Change

A. Industry

Attractiveness Globalization

4.99 6.14

4.15 5.66

0.84 0.48

0.00 0.02

20 9

B. Strategy (Capabilties)

R&D Production Marketing Knowledge Vision

4.82 3.70 5.70 4.03 5.41

3.58 2.68 4.13 3.43 4.10

1.25 1.02 1.56 0.60 1.31

0.00 0.00 0.00 0.00 0.00

35 38 38 18 32

C. Performance

Cost (reduction) Customers (satisfaction) Quality (improvement) Time (reducing) Risk (taking)

4.68 5.79

4.33 5.12

0.34 0.67

0.05 0.00

8 13

5.63

4.67

0.97

0.00

21

5.64 4.12

4.93 4.57

0.71 0.44

0.01 0.03

15 10

11.5.1. Industry We can learn (Table 11.2) that globalization of the industry in 1998 was significantly higher than the average for 1995. This means that the business environment in which medical technology companies operated became more global, with international

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customer centers and competitors playing a more significant role than domestic ones. The industry’s attractiveness also increased significantly meaning that sales volume and demand grew and average profitability was high.

11.5.2. Strategy An examination of strategic capabilities’ changes show that all were statistically increased although with a different rate. Four capabilities were increased with more than 30% from the 1995 time period: R&D, production, marketing, and vision. The lowest relative change was observed with knowledge.

11.5.3. Performance Differences in company performance over time may be derived from the following variables: risk taking, adherence to schedule (time), product and service quality (quality), response to customer needs (custom), and cost reduction (cost). For each of these variables, the findings show significant differences (po0.05). The measures cost reduction, customers’ satisfaction, quality improvement, and time reduction, the changes are positive and they range from 8% to 21%. For risk taking, the 1998 value in 1998 (4.12) is significantly lower than in 1995 (4.57) indicating that risk taking is perceived to be lower over time when the companies and managers are more experienced.

11.6. Discussion The study clearly indicates that the medical technology industry in Israel has become highly globalized. The most outstanding signs of this development include principal customers and competitors located overseas, control by foreign corporations and the bulk of sales aimed at global export markets as attested to by a comparison of current and past industry globalization. Interviews with company executives show that the medical technology has developed into one of Israel’s chief export industries, with most products developed, manufactured, and marketed globally. In regard to strategic capabilities, the findings indicate that companies drew more attention during the second time period. The executives reported that the most important one is marketing (5.7) and that indicates the importance of looking forward into the marketing arena, which is distanced from the home headquarters of Israeli companies. Interestingly, this aspect also received the highest change from the 1995 time period. Israeli executives realized the importance of marketing although most of them had either engineering or a science degree. The lowest one in 1998 is production capabilities (3.70) that also got the lowest at 1995 (2.68). This indicates that Israeli manufacturing capabilities do not have a competitive advantage and represents the movement of production outside Israel.

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Noteworthy are the clear differences in changes in company global strategic measures, global outlook, R&D, production, marketing, and performance during the two respective periods studied (1998 versus 1995). The results show that companies are increasing their overseas activity and that a global outlook is a key and vital component of their business strategy. These results are supported by several statistics obtained in an industry survey, most prominent of which is the rapid growth of exports from $623 million to $900 million and the sale of these products on more than 250 distinct overseas markets. Concurrently, the research findings show differences in company performance between those two respective years and the companies’ respective ages. Improvement is evident in lowered costs, response to customer needs, service and product quality, and risk reduction. The substantive change in global activity among medical technology companies is also explained by nationwide factors. The peace process, a modern infrastructure for technological development, educated and skilled personnel, government assistance, and a conducive business atmosphere are nationwide factors that help accelerate globalization, augmented by such industry-specific factors as strong research infrastructure, extensive medical experience and numerous startup firms involved in medical technology. With the rise in demand for company products and the increase in profitability, competition intensifies. All these developments led Israeli companies to develop a global outlook and deploy their R&D, production, and marketing activities abroad, as well as to seek executives with international marketing and technological backgrounds and experience and to form alliances, primarily for marketing (Yeheskel et al. 2001). The companies thus seek to develop global strategic capabilities to improve their performance.

11.7. Conclusion Over the years, medical technology developed into one of Israel’s principal export industries, rendering Israel a world leader in the field. Israeli medical firms offer a wide range of products meeting the highest standards of restrictive legislation, sold on over 250 export markets and tailored to meet their specific demands. Exports in the medical industry rose from $623 million to $900 million between 1995 and 1997 and subsequently surpassed the billion dollar mark. This industry, that displayed accelerated globalization, was selected to test the proposed research model. The study indicates that changes in the industry in terms of globalization and attractiveness were followed by firms’ changes in terms of strategic capabilities and performance.

References Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: New organizational responses. Sloan Management Review, 29(1), 43–54.

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Cohen, E. (1999). Strategy and globalization of medical technology companies in Israel. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). Porter, M. (1980). Competitive strategy. Boston, MA: Harvard Business School Press. Porter, M. (1986). Competition in global industries. Boston, MA: Harvard Business School Press. Yeheskel, O., Shenkar, O., Fiegenbaum, A., & Cohen, E. (2001). Cooperative wealth creation: Strategic alliances in Israeli medical technology ventures. Academy of Management Executive, 15(1), 16–24.

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Chapter 12

Medical Technology B: Firms’ Analysis1 During the last two decades of the 20th century, Israeli companies became an integral part of worldwide competition in electronics, communications, and software. On the other hand, developments in medical technology took place at a slower pace because of difficulties and obstacles in technology, medicine, development, regulation, and marketing. Development activity and investments in the industry in the early 1990’s steadily dissipated, compelling companies to develop prudent strategies to attract investors and develop a lasting competitive edge (Israel Statistical Abstract 1970–1999; Incubator Authority Report 1998; Israel High-Tech Yearbook 1999; Giza group 2000). This study contains three parts. First, we describe the competitive development of six key medical technology companies in Israel (Elscint, Laser Industries, CMT, ESC, InStent, and Optomedic). Second, based on the former inductive part, we describe the competitive positioning of the 6 companies along the internal–external dimensions and their relationships to performance via the concept of strategic frontiers. Finally, we formulate firms’ strategic moves along the map we have developed. Basically, it is motivated by firm’s intention to move from a low strategic frontier to a higher strategic one.

12.1. Background In order to explore strategy and competitive positioning in an in-depth manner, the current study focuses on six Israeli companies that have developed around medical technologies and products. These firms were selected following discussions with academics and field personnel possessing the relevant expertise, and the following short review presents some major and important descriptive characteristics. 12.1.1. Elscint Established in 1969 by Elron and Dr. Avraham Suhami, the company developed, manufactured, and marketed computerized imaging systems for non-invasive 1

This chapter is based upon the thesis of Lihu Avituv (2000) as part of the requirements for the MSc degree. The thesis supervisor was Prof. Avi Fiegenbaum, and it was submitted for approval to the Senate of the Technion — Israel Institute of Technology in 2000. We extend our gratitude to Uzia Galil (Elscint), Ami Yachin (Laser Industries), Dr. Shimon Ekhaus (ESC), Prof. Isaac Kaplan (Laser Industries, Optomedic), Alex Harel (Optomedic), Eitan Melitz (Fidelity), Shaul Dukeman (CMT), Shosh Friedman (InStent), Amir Lushkov (InStent) and Prof. Rafael Beyar (Technion) for their cooperation, having donated their precious time for interviews and helpful remarks concerning this study. We also thank Eran Cohen, Rani Yaffe, Limor Sandach, Guy Yachin (Naiot Technological Incubator CEO), Shlomi Katz, Ezra Cohen, and Guy Manor who helped by providing feedback and work interviews.

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diagnosis. Elscint was the first Israeli company to issue stock on an American exchange (in 1972) and was the flagship of all Israeli high-tech industries for years. The company had four key imaging product lines, each based on a unique technology that combined marked physical capabilities with advanced, sophisticated engineering systems. 12.1.2. CMT Most company income originated in development and production of OEM embedded hardware and software systems for the digital medical x-ray imaging systems of major companies in the field. The company was established in 1984 as AMSI and later changed its name to Fidelity. After a complex incident involving false registration of stock issue in 1991, the company was sold to a group of Israeli investors for a price covering its liabilities alone. Its name was then changed to CMT. 12.1.3. InStent Established in 1991 by an urologist and engineer, InStent developed stents for reconstruction of damaged carriers of vital body fluids. During its first five years of operation, the company manufactured a series of products for the genito-urinary, digestive and circulatory systems. In 1995, it issued stock on an American exchange at a value of $120 million. In March 1996, InStent was acquired for $250 million by MedTronic, one of the world’s largest manufacturers of medical equipment. 12.1.4. Laser Industries Established in 1973 to develop, produce, and market medical instruments based on laser technologies for a variety of surgical purposes, this company was among the pioneers in Israel’s medical industries and one of the first medical laser producers in the world. The company first issued stock on a U.S. exchange in 1981 and achieved peak sales of about $60 million, having developed one of the strongest brands in the surgical field, Sharplan. The company was acquired by ESC in 1997 in one of the largest mergers in Israeli industry. 12.1.5. ESC This company, founded in 1991, developed, produced, and marketed medical devices based on laser and light pulse technology for a variety of non-invasive treatments, including varicose veins, depilation, dermatology (cancer, wrinkles, and reconstruction), and esthetic surgery. The company also develops and markets a line of laser surgery products for electroencephalography (EEGs), gynecology, cardiology, and neurosurgery. The company went public in the United States in January 1996.

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12.1.6. Optomedic Established in 1992 by Prof. Isaac Kaplan and his son-in-law after Kaplan resigned from Laser Industries, Optomedic developed, manufactured, and marketed small, low priced, laser-based surgical instruments. The company raised $10 million in a stock issue in 1998 but went bankrupt in 2000. We focus on these six companies and raise the following three research questions.

12.2. Research Questions and Theoretical Framework The study raises three challenges. First, we describe six in-depth case studies of medical technology companies in order to better understand their evolution and success. We describe the events that transpired for each company, noting key milestones in development, production, marketing, financing, and business positioning. Most information of this type was obtained from printed material on each company, including prospectuses, financial reports, and stock notices, augmented by relevant interviews. Second, we compare and contrast the strategy of the six companies via their positioning on the matrix of the internal–external dimensions as presented in Figure 12.1. Finally, we use the former map in order to formulate firms’ competitive moves within an industry.

High

EXTERNAL

6. ESC

CMT

INSTENT

OPTOMEDIC

LASER INDUSTRIES

SF4

1. ELSCINT SF3

SF1 Low

SF2

Low

High INTERNAL

Figure 12.1: Companies positioning along their internal and external competitive dimensions.

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

12.3. Methodology 12.3.1. Sample Selection The selected companies have several features in common that led to their inclusion in this study. First, they are Israeli Origin: all companies were established by teams that comprised or at least included Israeli entrepreneurs. All maintained development centers in Israel and some production centers as well. A decisive majority received financing from the Chief Scientist’s Office for some of their development and marketing activities. Second, they specialize in Medicine and Technology: all companies developed special technologies for medical applications. Third, all companies are Global: all companies identified global markets as the object for their products. A large majority conducted much of its long-term development work through international medical institutions. Finally, they have a Clear Market Value: each of the companies went public or was sold to a third party, reflecting the overall quality of their performance.

12.3.2. Data Sources Three primary sources have been used in order to collect the data required for this kind of research. First, published material. Taken from Israeli and international business journals, articles, relevant websites, books about entrepreneurs, and companies, etc. In some cases, data gathering included reading trade newspapers and periodicals to gain a better understanding of the technologies and their medical applications. Also included were articles concerning dozens of well-placed industrialists in technology and management. Second, prospectuses, financial reports, and stock notices. They include such reports as progress in investment, sales, profits, and business activity in general and surveys and professional assessments of the markets in which the companies are active. Third, in-depth interviews with entrepreneurs (at least one from each company), executives, and investors. Eleven such interviews were carried out, ranging between 45 minutes and 3.5 hours in duration, as required. All interviews were recorded. They included conversations with Uzia Galil (Elscint), Shimon Ekhaus (ESC), Ami Yachin and Isaac Kaplan (Laser Industries), Eitan Melitz and Shaul Dukeman (CMT), Rafi Beyar, Shosh Friedman and Amir Lushkov (InStent), and Isaac Kaplan and Alex Harel (Optomedic).

12.4. Findings 1: Six Companies’ Case Studies 12.4.1. Elscint (Positioning: High Internal, Low External) Elscint, established by Elron and Avraham Suhami, developed medical imaging equipment. As a subsidiary of Elron, the only high-tech firm at the time, it enjoyed

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more convenient financial and professional backing than other Israeli companies. Elscint began as a small player on an imaging market controlled by several giant multinational corporations with a combined sales volume of hundreds of millions of dollars. The imaging market was relatively stable for the medical field, but competition was fierce and complex. Numerous technologies were available, demanding considerable resources for R&D. Prices of products ranged from tens of thousands to hundreds of thousands of dollars and each sale entailed long technical and marketing procedures. Elscint carried out several impressive strategic steps while still in its early stages, including an agreement with General Electric (GE) and a preliminary stock issue in 1972. The agreement with GE yielded a great deal of know-how concerning imaging market activity, brand name development, and market recognition. It also helped Elscint issue stock, improving its financial robustness and its image in dealing with potential clients. During its first six years (up to 1975), Elscint focused on one medical imaging product, CT scanners, while developing several laboratory instruments as well. In 1975, Elscint decided to concentrate on imaging exclusively and abandon laboratory equipment development, constituting the most significant milestone in the company’s history. By doing so, it adopted a highly appropriate strategy for a small firm in a hypercompetitive market. Elscint initiated focused development of products for a well-defined niche market. After accomplishing market penetration with the assistance of a partner, it began using its development capabilities to enter an allied medical imaging field. Another substantive change occurred in 1982, when the company’s board of directors approved Suhami’s five-year plan, calling for concentration on all types of medical imaging and gaining a substantive market share for each, aiming at an annual sales volume of a billion dollars. The management realized that this ambitious strategy did not suit a small company in a competitive market, but the board believed that the company needed to become a major market player to survive. Flawed implementation of the five-year plan resulted in a temporary collapse of Elscint that incurred, in turn, major losses. Its subsequent impressive turnaround restored a normal sales pace and allowed the company to continue functioning. Ultimately, Elscint’s sale for $375 million in 1998 proved the key contention that there is no room for small players in the imaging market.

12.4.1.1. SRP model analysis Vision: The company image, essentially defined in 1975, calls for focus on the imaging market alone. The organizational vision was reformulated on implementation of Suhami’s 1982 five-year plan, which perceived Elscint as a technological leader in all spheres of the imaging market with sales growth up to $1 billion. Fulfillment of this vision required Elscint to rely on its strategic capabilities, tangible and intangible alike. The company initiated the five-year plan without the required financial resources, believing it would succeed in raising the funds along the way. Its hopes went unrealized, however, leaving the company in a multidimensional crisis regarded as one

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The Take-off of Israeli High-Tech Entrepreneurship in the 1990’s

of the most severe in the annals of Israeli industry. As noted by SRP, a vision’s realization must be supported by capabilities and resources. Elscint defined a competitive, ambitious vision but failed to carry it through because it lacked the necessary resources and capabilities. Capabilities: Observers contend that Elscint developed the most intensive and impressive technology in Israel’s medical industry. The technological development team led by Suhami attained outstanding achievements in imaging and was even the best imaging development team in the world throughout most of the company’s existence. Elscint’s strongest strategic capability originated in its technological team’s extension of scientific knowledge to the development of additional imaging products, thereby building an entire product line. Stakeholders: Elscint’s placement in the external dimension is somewhat surprising and questionable. Although the company sold more that $3 billion worth of merchandise throughout its lifetime, its poor service quality adversely affected its image to customers. Throughout its long years of competition against major players, it failed to gain a substantive share of the imaging market. Even Elscint’s shareholders did not perceive long-term successful results. The share price drop resulting from the company’s collapse in the mid-1980’s engendered a lack of trust on the capital market. Resumption of regular commercial activity restored investors’ trust, but the company’s value continued to decline slowly throughout most of the 1990’s. Its performance notwithstanding, Elscint played a substantial role in Israeli industry when it served as the flagship of Israeli high-tech. Although it only partially satisfied the wishes and demands of its principals, it spearheaded a breakthrough for civilian technology and yielded much benefit for Israel. ‘‘Patriotic’’ results of this kind prevented the company management from instituting such ‘cold’ strategic measures as sale to a multinational corporation in the early 1980’s or liquidation in 1985.

12.4.2. Fidelity/CMT (Low Internal, Moderate External) Fidelity developed digital upgrade systems for analog angiogram imaging equipment and CMT manufactured digital x-ray imaging systems. The discussion below differentiates the two companies, each of which formulated a different strategy, had different shareholders and management teams, and developed different products. Fidelity was established by two former Elscint employees who identified market needs: digital imaging began to become the standard in the medical field, but acquisition of new systems was a costly and extended process. Fidelity offered its customers an inexpensive and rapid upgrade of existing systems to digital standards. The company faced two types of competition: major corporations that offered customers new, expensive and high-quality equipment and smaller companies that offered cheap upgrades. Throughout its activity, Fidelity realized that it was operating within a window of opportunity offered by the worldwide presence of analog equipment. Installation of new digital systems or upgrades would halt subsequent orders of company products.

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Fidelity failed to develop innovative technology that would accord it added value over other available alternatives. Furthermore, it did not calculate the results of measures instituted (attempts at becoming an OEM for major players adversely affected its financial situation) and did not succeed in positioning its products preferentially on the market. Fidelity was consistently dependent on the active capital raising efforts of one of its founders, Ephraim Landa, whose regular solicitations sustained the company through its constant losses. Termination of capital influx led to a marked slowdown in activity in 1990–1991 and the legal problems that accompanied stock issue in 1992–1993 led to the company’s sale to a group of Israeli investors for no consideration whatsoever. SRP theory analysis offers no encouraging conclusions. The company did not manage to develop substantive strategic capabilities (its technology resembled another already on the market), nor to define its activity vision once its window of opportunity closed (in an interview, Eitan Melitz indicated that the company did not decide which strategic guidelines to follow with the capital raised in the 1991 stock offering). The situation is similar in the external dimension: Fidelity did not offer products superior to those of its competitors, nor did it satisfy investors, who saw their money being exhausted as time went on. Company acquisition by Israeli investors did not lead to the desired change. Only the appointment of Shaul Dukeman as CEO achieved a strategic revolution in the company that had changed its name to CMT. The business strategy mapped out by Dukeman suited most recommendations for a small firm in a hypercompetitive market.  New product definitions and a focused market as the heart of strategic activity:

CMT began manufacturing full systems as a replacement for the upgrade line it gradually abandoned.  Business focus concerning both product nature and appropriate work partner identification: at the first stage of market penetration, CMT decided to focus on one partner only and on generating income, realizing the limitations of the resources it had available.  Joining a business partner as an OEM: this step, demonstrating strategic focus and comprehension of the company’s financial situation, enabled CMT to concentrate on R&D alone, a field in which it excelled.  Appeal to Toshiba as a business partner: after Toshiba was designated a suitable partner, attesting to company initiative and activism, CMT invested all its resources in developing a technological platform that could respond to Toshiba’s needs.

12.4.2.1. SRP model analysis Vision: From the time he first began working for the company, Dukeman instituted a strategic change that focused on the vision of building CMT as a leader in development of digital imaging systems to be integrated in major companies’ products. To realize this vision, the company management drew up a plan for raising initial capital and recruiting suitable scientists and engineers and

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began to develop ties with Toshiba, that soon integrated CMT products in its own systems. Capabilities: The innovative technology developed by CMT (the first company to introduce a charged-coupled device (CCD)-based imaging system) provided an option for defining technological capability as strategy. Another strategic capability was the company’s ability to create partnerships with relevant firms in the imaging field. These intangible capabilities were then in their earliest stages, and their subsequent application and development should be examined. Stakeholders: Company positioning in the external dimension is affected by the satisfaction of its shareholders. Stock offerings that enabled investors to realize some of their investments with a handsome profit, as well as improvement in share price over time (the stock doubled in value about a year after it was issued) satisfied investors. Company employees enjoyed a work environment that was not only technologically fascinating but also financially rewarding owing to stock options. As of 1999, Toshiba became the source of most company revenues. Toshiba used CMT’s OEM platform to improve its status in the market and continued joint development for the mutual benefit of the two companies. CMT’s effective focus on satisfying the needs of its chief customer enabled the company to introduce its digital platform among other major manufacturers of imaging equipment, who believed in the qualitative and technological advantages of its products.

12.4.3. Laser Industries (Moderate Internal, Low External) Laser Industries was established in 1972 by a group of private investors. The founding group, that enjoyed stable financial backing, was involved in innovative development of laser-based surgical instruments. Laser Industries is one of the first companies to introduce laser technology for surgical purposes. Today, such technology is an integral part of most operating rooms throughout the world. This substantive innovation imposed marked obstacles to company growth in a hypercompetitive market. Besides addressing numerous development issues, Laser Industries had to satisfy regulatory authorities and influence public opinion notably among physicians. These struggles extracted considerable company resources from the outset, hindering rapid sales growth and market penetration. Sales only began to pick up in the early 1980’s, about a decade after the company’s establishment, thanks to aggressive marketing activity. Although the company sold products for tens of millions of dollars since 1985, it later encountered marked difficulties (losses of $28 million in 1988–1989) and was sold to Arie Genger for $20 million. At that time, the company was crushed by increased market competition and the recession then affecting the medical field. Stagnation continued as a result of the company’s inability to introduce change at a sufficiently rapid pace. Laser Industries’ recovery in the mid-1990’s was the outcome of a change in strategic direction and an appeal to esthetic as well as clinical medicine.

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12.4.3.1. SRP model analysis Vision: Laser Industries’ vision, even if not defined formally, perceives laser technology as an essential component of surgical theaters worldwide. This impressive and focused vision simultaneously constitutes the company’s key problem, as it entails ‘‘reeducation’’ of the medical community — an approach more suitable to giant corporations with extensive financial resources and powerful brand names. Capabilities: At its founding, Laser Industries possessed several substantive capabilities originating primarily in the personal attributes of Prof. Kaplan (contacts, vision, familiarity with the market), who was with the company throughout most of its life. It also enjoyed stable economic backing, enabling it to withstand long-term losses. One more impressive capability is its development team that was capable of applying its technological skills to develop a comprehensive laser-based product line (beginning with CO2 lasers and rapidly advancing to other types). In time, Laser Industries derived critical strategic value from the power of its brand name among physicians. Sharplan became a well-known name among surgeons and constituted one of the company’s key assets. Stakeholders: High positioning in the external dimension demands that a company satisfy its customers and shareholders better than its competitors do. Laser Industries did not always achieve optimal results. Despite its success in supplying high-quality products to its customers during the mid-1980’s, as reflected in sales growth, the tremendous losses it incurred attest to customer dissatisfaction and abandonment for competitors. Investors, too, derived no benefit from their stake in the company. After about 15 years of activity, Laser Industries was sold for $20 million, following two successful U.S. stock issues. Poor performance weighed heavily on the company for some time, as its share price indicated. Moreover, the increase in share value after the business turnaround and sale to ESC for $270 million underscore Laser Industries’ failure to develop trust among its investors. Although both companies displayed similar performance at the time of the merger, ESC enjoyed far higher costing. The person who gained the most from the company’s sale was Arie Genger, who succeeded in improving company value significantly.

12.4.4. ESC (Low Internal, High External) ESC was set up in 1991 by Dr. Shimon Ekhaus, a physicist who spent most of his career in the laser field. After reading a medical article describing laser treatment of varicose veins, he decided that the company would develop light, pulse-based instruments for this type of treatment. In time, the company developed a broad product line based on this technology for various types of esthetic treatments. ESC followed most recommendations applying to small companies in hypercompetitive markets. Clearly identifying and focusing on the target market (esthetic treatment), providing rapid research/technological response to the problem and offering a preferred treatment solution for end users (patients) and a preferred economic solution for intermediaries (physicians in private clinics). Asset Protection: ESC

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learned to protect its technology and its applications rapidly and efficiently through patents and quick, focused market penetration. Finally, within a brief period of time, ESC raised very large sums of money (two stock issues in six months during 1996) that improved its financial situation substantially by enabling accelerated marketing processes and rapid acquisition of technologies.

12.4.4.1. SRP model analysis Vision: ESC’s focused vision that called for light pulse technology penetration of the esthetic surgery market, was a breakthrough for the entire industry. At its peak, ESC controlled 50% of the market, having introduced a variety of products to remove varicose veins, tattoos, unwanted hair, wrinkles, etc. Capabilities: The company’s ambitious vision had to be matched and supported by resources and capabilities that the company sought to develop throughout its lifetime. ESC specialized in light pulse technology — application of powerful, short-duration pulses of light to the area treated. In technological terms, this was somewhat of a retreat from the laser devices then used for esthetic treatments. Nevertheless, ESC managed to maintain its rights to the relevant know-how and consolidated significant status for itself in the market. ESC’s chief problem, according to Ekhaus and capital analysts, concerned management during a period of fast growth. Top management team found it difficult to handle the company’s rapid acquisition of other firms to better its status on the product market. Attempts at increasing and improving the team did not succeed either, as the company grew faster than anyone could anticipate. Its (temporary) failure resulted from inability to stabilize an organization providing strategic, managerial, and operative support of sales growth. Stakeholders: In the external dimension the situation appears different. ESC’s customers acquired its products at a steadily increasing pace, attesting to their satisfaction with the results of treatment. Physicians, who enjoyed creative and profitable (for them) payment plans, were equally satisfied. One of ESC’s problems was the perception of pulse technology as obsolete. ESC addressed this problem in a unique manner by branding the technology (IPL) and developing awareness of the brand name, rather than the method behind it. This is an excellent example of how a company can cope with external issues, compensating for failure of internal capabilities by positioning a brand name that is technologically meaningless yet possesses a substantive marketing advantage. ESC’s performance compared with that of its competitors clearly underscores its dominance of the product market, with a share exceeding 50%. Its products are considered to be of high quality, enabling ESC to build a brand name in the esthetic surgery market. In some cases, to improve its status on this market, it acquired potential competitors and made their products part of its own line. This approach also improved satisfaction among key company shareholders, who enjoyed an accelerated rise in share prices following the stock issue. ESC was long believed to be the best venture capital fund investment in Israel, but the public that bought its shares on the stock exchange enjoyed impressive returns as well. After the merger, ESC became the first medical technology company to attain a value of $1 billion.

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The collapse of company stock after the merger with Laser Industries obviously changed much of what was described above. The merger was planned as a necessary measure for ESC, which aspired to penetrate additional niches by acquiring the strategic capabilities developed by Laser Industries (technological, branding, and presence at hospitals). The measure’s failure was partly the result of ESC’s major problem — failure to maintain a stable organization capable of supporting rapid growth. The inclusion of Laser Industries, that was supposed to improve the merged company’s performance, instead caused to an organizational crisis. The cultural confrontation between organizations, neither of which was supported by an experienced top management team (TMT), engendered serious friction within the merged or newly formed management, that ultimately led to the dismissal of ESC’s founder from the company.

12.4.5. Optomedic (Low Internal, Low External) Optomedic was founded by Isaac Kaplan and Alex Harel in 1992. After years of involvement at Laser Industries, Kaplan envisioned a dramatic increase in the number of surgeons using laser equipment. He proposed the idea of compact, inexpensive laser systems to Laser Industries, which turned it down. Having no other choice, he began to develop the first such project with Harel, his son-in-law, seeking to market it to private clinics, small hospitals, and outpatient clinics. Optomedic initiated several substantive measures during its first year of operation that conform with recommendations applying to small companies in hypercompetitive markets:  Effectively identifying its target niche in terms of product and customer.  Investing much thought in product costing and positioning for customers.  Focused R&D for the first product’s components.

Despite these measures, however, the company subsequently failed in several respects:  Optomedic did not react timely to events in the product market One unfortunate

example involves delays in replacing its American distributor: the first time, financial damage resulted that delayed the company’s debut and wasted resources; the second time, it led to the company’s collapse.  Optomedic failed to protect its assets: even after acquiring a sizable share of the German market, it abandoned it as a result of a serious product malfunction, causing an extended decline in reputation and enabling competing companies to recover their share of the market.  Worldwide distribution of the first products that still suffered from ‘‘childhood ailments,’’ pointing to flawed planning and substantive failure to focus marketing activity.  The constant deficit in financing for activities began to show signs even at the early stages, affecting most company activities.

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The company’s collapse was affected by the above malfunctions that intensified and escalated as company activity developed.

12.4.5.1. SRP model analysis Vision: The company did not define any vision for its activity, although it did have a clear objective: development, production, and marketing of surgical lasers unique for their low price, small size, and convenience. This is a focused objective for whose achievement the company required several capabilities and resources. Optomedic began with sufficient financial resources ($2.25 million) that it raised from problematic sources. Some of its capital was obtained from private investors (without any added value for company activity) but most originated in bank loans. The banks loomed heavily over company activity, which focused on R&D, while private investors failed to inject additional capital when necessary. Cash flow problems exacted heavy toll throughout the firm’s activity. Capabilities: Significant strategic capabilities, based on the personal attributes of Isaac Kaplan, served Optomedic well. Kaplan enjoyed close acquaintance with the market, product marketing processes and numerous physicians. He was a wellknown surgeon who served for a long while as head of the International YAG Laser Society. The company used Kaplan’s superior services as early as the planning stage to map out a convenient and effective interface for surgeons. Optomedic’s products indeed stood out in this respect. According to the company’s customers, reliance on Kaplan continued even when the company was making its first sales. Kaplan contacted several physicians he knew who conducted initial sale of instruments. Sales began too early because of cash flow constraints and products were distributed throughout the world without adequate performance monitoring or service to the physicians and institutions that bought them. Over-reliance on Kaplan’s abilities hurt the company severely. Stakeholders: Insofar as the external dimension is concerned, the situation appears even more serious:  Optomedic utterly failed to satisfy its customers. The company sold about 150

devices throughout its active life, a vast majority of them with serious technical problems that precluded their long-term use. These problems damaged the company’s reputation in Germany and made it difficult to continue activity elsewhere in Europe.  Optomedic’s shareholders were dissatisfied as well. The company’s collapse led to the dismissal of all its employees, who never had the opportunity to realize the stock options they held: Although Optomedic issued stock, its shareholders were not allowed to sell on the free market and were thus left with shares that had no buyers when the company closed.  Although it managed to sell 40 devices in Germany within three months and to acquire a sizable share of the market at an early stage of its development, Optomedic failed to achieve additional sales after disappointing its customers. Despite having obtained excellent feedback from physicians using properly working equipment, it could not cope efficiently with competitors on the product market.

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Optomedic also failed to cultivate effective, long-term relationships with its distributors. After developing substantive dependence on them — the entire Optomedic marketing process relied on distributors — the company discovered that its selection of distributors was flawed. Loss of contact with distributors led to collapse of the Optomedic business model and it was only a short time thereafter that the company ceased operation.

12.4.6. InStent (Moderate Internal, Moderate External) InStent, established by Dr. Mordechay (Motti) Beyar and engineer Oren Globerman, developed stents of various types. As a startup in the implant field, it entered a hypercompetitive industry. At InStent’s founding, blood vessel implants were controlled by a lone major player, Johnson & Johnson, which began to acquire new competitors who developed better stents and made inroads into its market share. The influx of major medical firms into this profit-rich field led to huge investments in R&D. InStent followed most recommendations applying to small companies in hypercompetitive markets:  Precise segmenting of target markets: InStent began working on stents for the

digestive and urinary systems, with a constant eye towards the blood vessel field.  Focused R&D that was of great assistance in understanding basic scientific aspects

of medicine and materials. InStent switched to mesh stents only after deciding to halt development of the coil variety. Similarly, it began to develop blood vessel stents only after completing development of other types.  Active initiated measures throughout the company’s lifetime: the company chose to abandon pointless R&D, forgo marketing of unprofitable products and more. By reserving its resources for worthwhile projects only, as exemplified by its cessation of the development and marketing of urinary stents, InStent proved itself to be a focused and innovative company.  Lou Pell was a leading, world class business partner in setting up InStent and other young Israeli medical firms, using his abilities and connections with giants in the industry to their best advantage. InStent performed impressively, considering the hypercompetitive nature of the stent market. The company began activity in the blood vessel field after investing several years accumulating extensive knowledge of stent development, greatly facilitating initial development. It also protected the technology it developed through constant development and patent registration. Realizing the limitations affecting a small company in a competitive market, InStent initially linked with a major player in the field (Bard), seeking familiarity with market processes, distribution, and competition. When the company realized that the partner it had selected was unsuitable, it terminated engagement promptly and began aggressively seeking another. In an interview, Shosh Friedman describes a

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procession of potential partners and buyers passing through the office. Its business acumen also motivated the issuing of stock only three years after the company’s establishment, motivated by the need to raise capital quickly and boost financial capabilities. InStent’s most aggressive move was sale of the company to MedTronic. Although InStent had set itself up as a company with its own clinical, financial, and technological values, shareholders chose to sell it to a major industrial corporation. Opinions are divided regarding whether InStent was intended for sale to a third party from the outset, but there is no doubt that throughout its activity, even at the early stages, it was prepared for such a sale (the 1993 agreement with Bard included an acquisition option). Motivation for sale may originate in failure to believe that successful product sales on worldwide markets would continue, or perhaps in the nature of the company’s shareholders. It seems clear though that InStent intentionally and aggressively exploited its window of opportunity, realizing when to sell at the right price.

12.4.6.1. SRP model analysis Vision: It is difficult to determine whether InStent had a clearly defined vision on its founding, but the presence of Lou Pell on its founding team indicates that the company’s concentration on implant technology development for treatment of constriction problems in a variety of bodily passages was selected to facilitate eventual sale to an international corporation. Lou Pell joined InStent after conducting several similar transactions on the American market, in which he was involved as an active investor. All concluded in sale of companies to one of the medical giants. Capabilities: Strategic capabilities are embodied by the inclusion of Pell — with all his experience and extensive ties — in the company’s impressive leading team. The InStent management consisted of superior technologists, innovative and renowned physicians, and experienced investors with a proven track record. InStent’s unique coil stent technology, protected by extended know-how agreements and patents, constitutes part of its strategic capability as well, but the most impressive strategic asset of all is its unique stent-development process. After abandoning coil technology, InStent proceeded to develop mesh, balloon-expandable stents (beStents), achieving remarkable results within a very short time. This innovation is the result of the extensive knowledge that the company accumulated in engineering, medicine, and the combination thereof. Prahalad & Hamel (1990) notes that strategic capabilities are those that increase in value the more they are applied. Development of the beStent, the principal reason for InStent’s acquisition, constitutes a most interesting example of this type. It should be indicated that all InStent’s capabilities are intangible except its equity following stock issue — a normal situation for young technology firms. Stakeholders: InStent’s ability to deal with external factors is noteworthy as well. The company developed technology and products preferable to those of its competitors, as evidenced by its eventual acquisition. InStent was sold for $215 million even though its total cumulative sales as an independent company came to less than

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$5 million. Shareholders and employees — who enjoyed stock options and an interesting and challenging work environment — felt that the company responded to their needs. The most problematic aspect of the external dimension, addressing customer demands, reached a turning point on sale of the company. InStent adjusted its customer definition as its business life progressed, shifting from physicians purchasing stents to commercial bodies acquiring companies. According to this indicator, its efforts proved highly successful. Several competitors negotiated for the company’s outright purchase. InStent’s customer definition renders it superfluous to assess company performance in the product sphere.

12.5. Findings 2: Induction-Based Theoretical Development The six events provide the basis for theoretical ‘‘strategic frontiers’’ analysis. The matrix shown in Figure 12.1 positions the six companies participating in the sample along the two key axes, internal and external and their relationship to firm performance.

12.5.1. Strategic Frontiers We assume that there is a trade-off between the value of the internal and external dimensions in terms of their impact on performance. Then, we define a strategic frontier as groups of companies with similar strategic performance although they can be achieved along different values on the internal and external dimensions (Figure 12.1). Five strategic frontiers may be observed. As indicated, companies on the same axis have similar output, such Laser Industries and CMT on the second frontier from the left. Similarly, the upper right front has higher output than the one to the left of it. The rightmost has the highest output and the leftmost (Optomedic) the lowest. The output of each frontier comprises the company performance in term of market value (or any other measure of performance).

12.5.2. Company Value (Performance) A company’s value, whether measured according to its stock value or sale price to another company, is an indication of its strategic competitive positioning. Among the companies in the sample, ESC managed to climb to a value of a billion dollars and InStent to $215 million, thus obtaining the capital market’s confirmation of their potential and future performance. An organization’s ability to maximize its stock value constitutes a basic indicator of its success, as it enables external objective bodies to determine the extent of their involvement in company processes. The value of a company depends on a lasting competitive edge and on investors’ expectations of growth derived from the

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company’s defined vision and the development of its strategic capabilities, as well as satisfaction of customers’ and shareholders’ needs in a better manner than its competitors. The three companies positioned on the highest frontier succeeded in developing substantive value within a short time: Elscint was sold about eight years after its founding for $100 million, while InStent and ESC were sold some six years after they were established for $215 million and $1 billion, respectively. The strategic frontier analysis emphasizes the need for stress on both external and internal positioning. An organization that concentrates on one dimension only is limited in its ability to advance through the strategic frontiers. As shown in this study, Elscint, InStent, and ESC are positioned along the same strategic frontier, each thanks to a different mix of internal and external positioning along the competitive dimensions.

12.6. Findings 3: Strategic Frontiers and Strategy Formulation Elscint’s advancement to a preferred strategic frontier (Figure 12.2) is contingent on its ability to address the external dimension, satisfying its customers and shareholders better than its competitors can. ESC’s progress, in turn, depends on its ability to focus on the internal dimension — developing strategic capabilities, including substantive improvement in the organization’s ability to handle meteoric growth. Medical technology firms should position themselves as close as possible to the center of the front in which they are situated (near the center arrow in Figure 12.2), facilitating their advancement toward additional strategic frontiers. High ESC

Following a successful merger with Laser Industries

EXTERNAL

Following successful five-year plan implementation

ELSCINT

Low

High INTERNAL

Figure 12.2: Strategic frontiers advancement attempts.

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This study considers several examples of companies that strove to advance on strategic frontiers (D’Aveni 1994; Fiegenbaum & Thomas 1995). Elscint, on the extreme frontier, enjoyed very high internal positioning originating in its vision and marked strategic capabilities. Simultaneously, it had to cope with weaknesses in the external dimension. To improve its positioning on the external dimension as well, the company formulated an ambitious five-year plan in the early 1980’s, aimed at reinforcing the external dimension (dramatic intensification of the pace of sales growth and improvement in share price) while continuing investment in the internal one (technological leadership in imaging). The five-year plan failed because of weaknesses in Elscint’s strategic capabilities (financial and administrative), yet it posited a correct and clear vision regarding the firm’s need to advance to the succeeding strategic front. Another example is the merger of ESC and Laser Industries. ESC is positioned high in the external dimension and displays weakness in the internal one, while Laser Industries developed impressive strategic capabilities. Their combined efforts should have propelled the merged company to a preferred strategic frontier. The merger’s failure, the result of intra-organizational difficulties, led to a severe drop in company share prices, but did not detract from the clear vision that stood behind the strategic measure.

12.7. Limitations and Future Research Directions The study concerns six key Israeli companies that were active in medical technology between 1948 and 2000. Many other companies in this field, including several outstanding firms (Medinol, Biosense, and Compugen, among others) that were not included in the study should serve as the objective of future research. Analysis of each company was based on objective (prospectuses, financial reports, analysts’ reports) and subjective materials (interviews with entrepreneurs and executives). Documentation of events in general and administrative strategic analyses in particular was greatly influenced by the data gathered in interviews and by interpretation of the events. In future studies, a comprehensive series of interviews carried out by several investigators should be conducted with additional parties to reflect an optimal picture of the events taking place. Additional qualitative techniques should be applied such as triangulations and structured tabulation of data to ease both comparison and interpretation. The study is based almost entirely on the SRP Model, whose capabilities and drawbacks should be assessed by application to additional Israeli medical firms and other high-tech companies (communications, software, hardware, biotechnology, etc.), assessing and comparing the competitive strategies adopted by each. Global and quantitative aspects also require examination. A quantitative model should be developed to address issues not covered sufficiently in the present study. The results will yield more objective insights for the benefit of researchers and handson managers alike. The SRP Model should also be applied in other countries highly involved in technological developments. Such studies may delineate differences in

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local culture and their effects on the growth of technological firms and provide tools for achievement of a nationwide competitive edge.

References Avituv, L. (2000). The competitive strategy of medical technology companies in Israel: 1948– 2000. MSc Thesis. Technion — Israel Institute of Technology (in Hebrew). D’Aveni, R. (with Gunther, R.) (1994). Hypercompetition: Managing the dynamics of strategic maneuvering. New York: Free Press. Fiegenbaum, A., & Thomas, H. (1995). Strategic groups as reference groups: Theory, modeling and an empirical examination of industry and competitive strategy. Strategic Management Journal, 16(6), 461–476. Giza Group (in cooperation with IVA) (2000). Venture capital fund activity in Israel, 1999 (Hebrew). Incubator Authority Report (1998). (http://www.incubators.org.il) (Hebrew). Israel Hi-Tech Yearbook (1999). Tel Aviv: D&A Hi-Tech Information (Hebrew). Israel Statistical Abstract (1970–1999). State of Israel, Central Bureau of Statistics.

Subject Index Board demographics, 128, 131, 135 Board of directors, 125, 127–134, 136–138, 140 Board processes, 131 Board resources, 129, 131

Medical technology, 161, 163–172, 175, 177, 184, 190, 191 Middle East, 23, 26, 28, 30

Company value, 35, 42, 44, 47 Competitive dimensions, 102, 108, 109 Competitive intelligence, 143–158 Competitive strategy, 70–72, 81 Corporate social capital, 112, 116, 119

Organizational obstacles, 145, 149, 150

Effectiveness of competitive intelligence, 147 Evolution, 161, 169 Firms’ Analysis, 175 Foreign direct investments, 21–24, 29 Formality of competitive intelligence, 146 Globalization, 19, 21, 22, 24, 26–30 High-tech entrepreneurs, 7, 9, 12 Israeli Defense Forces (IDF), 111 Incubator startups, 83, 86, 90 Industry analysis, 163 Industry characteristics, 113 Israeli market, 22, 23, 26, 27 Managerial challenges, 29 Managers’ attention, 92, 93 Market value, 66, 71–73

Network, 111–116, 119–122

Performance measures, 83–86 Positioning, 175, 177, 178, 181–185, 189–191 Privatization, 33–48 Privatization method, 36–38, 41 Products, 83–88, 92, 95 Startup companies, 65, 66, 80 State-owned enterprises, 38, 40, 46 Strategic capabilities, 66, 70, 73–75, 81 Strategic frontier, 175, 189–191 Strategic management, 3, 4, 6, 11, 13, 15, 16 Strategic positioning, 49, 50 Strategic profile, 128, 131–135, 139 Strategic reference points, 4–6, 10, 13 Strategy formulation, 190 Take-off paradigm, 7 Technological incubators, 63, 65–67, 69, 80, 81 Women as Technology Entrepreneurs, 99

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