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BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP y OPPORTUNITY, STRATEGY nl AND ENTREPRENEURSHIP: A META-THEORY O VOLUME TWO: THE SOURCES OF OPPORTUNITY, RESOURCES, SKILLS, COMPETENCIES AND CAPABILITIES, fs NETWORK, THE COMPETITIVE ENVIRONMENT AND THE OPPORTUNITY FRAMEWORKooPr
BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP Additional books in this series can be found on Nova’s website under the Series tab. y Additional E-books in this series can be found on Nova’s website under the E-book tab. nl O fsooPr
BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP y OPPORTUNITY, STRATEGY AND ENTREPRENEURSHIP: nl A META-THEORY O VOLUME TWO: THE SOURCES OF OPPORTUNITY, RESOURCES, SKILLS, COMPETENCIES AND CAPABILITIES, NETWORK, THE COMPETITIVE ENVIRONMENT fs AND THE OPPORTUNITY FRAMEWORKoo MURRAY HUNTERPr Nova Science Publishers, Inc. New York
CONTENTS y nl Preface vii Chapter 1 The Sources of Opportunity 1 Chapter 2 Resources: The Bedrock of Opportunity Exploitation 89 Skills, Personal Competencies and Enterprise Capabilities 119 Chapter 3 Chapter 4 Chapter 5 Chapter 6 O Networks: Technical Know who Is what Makes a Business The Competitive Environment: A Framework for Observing Industry Evolution Strategy: The Means of Opportunity Exploitation 185 215 243 fs Chapter 7 The Opportunity Framework 325 Summary 355 Index 357 ooPr
PREFACE y The first volume of this book dealt with the nature of opportunity, time and space, the nl vision platform, and making connections. In the first volume, chapter one introduced the concept of opportunity. Opportunity was described as both an environmental and individual phenomenon where aspirations and imagination were just as important as changing social, economic, technological, and regulatory structures and conditions. It was explained how four O basic types of opportunities exist. Imitation based opportunities occur with little innovation and value creation. Allocative opportunities occur because of mismatches in supply and demand. Discovery based opportunities occur from shifting consumer preferences, regulation, and economic conditions. Construction based opportunities don’t exist until someone constructs and develops them through the process of effectuation. Opportunity was seen as a dynamic and ever shifting, where successful firms are those that match their strategy with opportunity. Opportunities begin through images which are connected with other images fs forming concepts which are developed, evaluated, and elaborated into ideas. The chapter concluded with a discussion about emotional sensitivity and the role it plays in seeing opportunities, the idea evaluation process, and chance and fate. Chapter two examined opportunity from the socio-economic, economic history, economic geography, political economy, and biographical perspectives. Chapter two arguedoo that opportunity and our consequential actions occur within the realm of time and space. Due to our evolutionary accumulation of knowledge, technology advancement, and social evolution being time and spatially based, opportunity to a large degree is a product of time and space. For ideas to become valid opportunities, all the elements that enable opportunity gestation and its subsequent exploitation must be in place. The trajectories that entrepreneur/inventors take are also a product of time and space as opportunity and strategy are socially bounded. This chapter was divided into three parts. Part one examined the phasesPr of national development through the stages of a traditional economy, under-developed economy, developing economy, developed economy, and post industrial economy. Each particular stage of national development lends itself to certain types and scope of opportunities. The second part of the chapter looked at the biographies of a number of inventor/entrepreneurs during the industrial revolution to the turn of the twentieth century. Looking directly at biographical contexts allowed us to look at the flow of events in time and space in terms of innovation, invention, promotion, and effect on society at the time and into the future. This approach provided a window into how inventor/entrepreneurs gained insight and were able to develop their inventions into commercial reality. One can also get some
viii Murray Hunter feeling about the motives they had, challenges they faced and see how their development of business models was crucial to the success of their ventures. Part three took us into the twentieth century beginning in the post World War II era. A look was taken at some of the important entrepreneurial events during each decade until today. Certain entrepreneurs and their ventures were examined in the light of the social and economic conditions evident through those times. Chapter three examined the ways we look at the world through a number of different paradigms and metaphors. The chapter was an attempt to explain how we perceive and what influences our thinking. This chapter was also broken into three parts. The first part looked at how we perceive through examining the sociological factors influencing us. These include y demographic factors like family and peers, domicile outlook, the need to survive, work and life experiences, education, skills and abilities, age, and gender. The section finished with a look at generational differences and culture. Part two explained how our cognitive system nl works, emphasizing its limitations and how this is compensated for. Part three took us into the psychological domain where a number of mechanisms influence how we perceive, think, and make decisions. These include our emotions, emotional attachment, our ego, identity, and self, the unconscious, defence mechanisms, group views of reality, transference, symbolic and ritualistic delusion, groupthink, motivational bias, tiredness and complacency, cognitive traps, O personality traits, entrepreneurial typologies, power and conflict, genetic inheritance, and mid life crisis and transition. Imagination, passion, enjoyment, energy, personal discipline, and what constitutes a motivational trigger are examined as processes that facilitate a person see and react to opportunity. Finally the chapter hypothesized that opportunity is as much a product of ourselves as it is of the environment around us. Chapter four was concerned with creativity, a concept that is not totally agreed upon as some people see creativity as a process, while others view creativity as a product. Creativity fs is totally interlaced with opportunity, strategy, and entrepreneurship where both its process and product are fundamental to the whole phenomenon. Creativity is necessary in idea creation, its evaluation, opportunity construction and effectuation, developing the sources of opportunity, the gathering and combining of resources, networking, and the crafting ofoo strategy to achieve a vision and solve problems along the way. Although we know most of the cognitive processes related to creativity and can identify most of the characteristics associated with it, we still need to explore creativity through metaphors, various styles, and applications. The second half of the chapter looked at a few different approaches to applying creativity and concluded with a discussion about the barriers to creativity and how they can be overcome. In this volume, chapter one introduces the sources of opportunities. As opportunities can be considered gaps in the market where there is potential to do something and create value,Pr these gaps must have a causal source. There are six basic major sources of opportunity consisting of market voids, technology infusion, structural changes, resource monopolies, regulation and non-innovative sources. Any opportunity is likely to be based on one or more of these sources, carrying multiple characteristics, but they are in fact very hard to really see and understand. Once the correct sources of opportunity have been identified, resources, capabilities, networks, can be configured to develop strategies to exploit them. Chapter two considers the issue of resources in relation to opportunity exploitation. Resources comprise of anything that is of use to an entrepreneur, either within a tangible or intangible form. A business model can be considered a higher level resource, as it reflects how an entrepreneur combines resources to create value from those at his or her disposal. The
Preface ix chapter briefly discusses how needed resources for a new value chain can be identified and allocated within the venture to build the resource base. The resources base is from where enterprise capabilities and ultimately strategies are built upon. Difference types of resources are needed during different stages of a firm’s evolution. Eventually the entrepreneur will be able to build specialized resources that cannot easily be copied by competitors and can form the basis of some form of competitive advantage. The chapter concludes with a brief discussion about how resources can be utilized as barriers to entry and outlines the resource cycle of a firm. Chapter three considers skills, personal competencies, and enterprise capabilities. The beginning of the chapter looks at personal talents and abilities and how they can be developed y into skills. Various types of skills exist along a continuum spanning between those that are domain specific and the broader cognitive and interpersonal skills. Sets of skills can be developed into personal competencies which enable a person to become an expert in a nl particular field and within an entrepreneurial start-up, form the basis of enterprise capabilities. Enterprise capabilities are distinctive enterprise competencies directly related to various aspects of the business. They include management capabilities, entrepreneurial capabilities, organizational culture, learning capabilities, innovative capabilities, and dynamic capabilities which assist the firm change according to the trajectory of opportunities within the O environment. Enterprise capabilities form the basis of strategy that the firm employs to exploit opportunities. Chapter four examines networks which are an entrepreneur’s connection both within his or her organization and to the outside environment. Networks can be formal or informal and enable the entrepreneur to acquire resources and finance, gather market intelligence, develop new products, develop bridges where they lack capabilities, gain access to new markets, and enable the sounding out of ideas and access to emotional support. There are many formal fs network mechanisms including licensing agreements, sub-contracting, strategic alliances, agency and distribution agreements, and routine mechanisms like sales calls. Informal mechanisms can include social connections, family and peers. Networks are an important source of learning and have diverse influences upon decision making. The remainder of theoo chapter looks at network based strategies such as strategic alliances, relationship marketing, and looks briefly at network based opportunities, and network building strategies. Chapter five outlines the composition of the competitive environment, the actual field where opportunities manifest and are exploited. The competitive environment incorporates customer and supplier influences, substitute and complementary good influences, barriers to entry, and the competitive field itself. This is continually influenced by the state of the economy, social trends, technology, and government intervention. Consequently thePr competitive environment is dynamic and continually changing with its own lifecycle, which influences the nature of competition. Firms are able to segment the competitive field or with radical new technology, new processes, and/or business models, create new competitive fields. The opportunity-strategy nexus is based on the sources of opportunity, the nature of the firm’s resources and capabilities, which form the basis of strategy creation. The chapter concludes with a brief discussion about the steps involved in environmental analysis. Chapter six concerns strategy, where strategy is seen as a process of finding out what works within the competitive field through effectuation and trial and error. Strategy is seen as an intuitive rather than an analytical process. Developing strategy requires prior knowledge and experience about ‘what works’, constrained by the firm’s resources and capabilities.
x Murray Hunter There are a number of basic strategies, and those listed in this chapter are not exhaustive. A firm will usually adopt and modify a particular type of strategy for specific purposes. Basic strategic typologies may be modified or merged to form new types of strategies particularly suited to the firm’s situation. The chapter concludes with a discussion on the components of strategy, developing barriers to entry to prevent other firms imitating a firm’s strategic position. The final chapter synthesizes all the elements; time and space, the vision platform, making connections, resources, skills, competencies and capabilities, networks, the competitive environment, and strategy into what can be called the opportunity framework. Each element is influenced by and influenced the other elements, forming an entropic pattern, y where all the elements are required to create a true opportunity. The essence of the meta- theory is that when any entrepreneur visualizes any potential opportunity. All the elements must exist for there to be any real opportunity. Likewise when the entrepreneur attempts to nl exploit the opportunity, strategy must be built around these interrelationships. O fsooPr
Chapter 1 y THE SOURCES OF OPPORTUNITY nl INTRODUCTION An opportunity is a gap in the market where there is the potential to do something different and create value (Wickham 2004). This represents a potential to serve customers O better than they are already being served through a product or service that offers consumers more utility in terms of satisfying human needs than existing products or services. An opportunity must solve a problem, fulfil a need or want, create a fad or trend for any exploitation of it to have a chance of succeeding. New opportunities continually emerge but don’t necessarily present themselves openly. They must be seen, discovered, identified, or constructed which is the task of entrepreneurs and managers of firms. Not every idea is worthy enough to take action upon. The potential return on the investment of time and effort fs must be large enough to offset the opportunity cost of exploiting another idea or doing something else (Kirzner 1973). All opportunities have a basis or rationale of being. If the opportunity is to be considered entrepreneurial, it must originate from a source of innovation, as entrepreneurial market activity is novel by definition (Frederick & Kuratko 2010). An innovation can be seen as theoo source that enables the successful exploitation of ideas into new products, services, processes or business models. Innovation is critical to enable a firm to grow and remain profitable. Innovation combines knowledge and the needs and wants of consumers that are the base of opportunities. Innovation is not just about the improvement of technology but covers all aspects of a business and the way it organizes itself and operates. Innovation is an ingredient needed to construct most opportunities that seek to exploit changes within the environment. Innovation combines knowledge, resources, capabilities and competencies with socialPr networks to create new means of creating value. Innovation can create new sources of competitive advantage for a firm when it enables incremental changes in the market. Revolutionary innovation can create new industries with new breakthroughs in technology and methods of organization. However there must be a reason for innovation and not just something done for the sake of doing it like what occurred with the launch of New Coke, replacing the well accepted Classic Coke during the 1980s. Likewise technology alone does not automatically yield innovation, imagination, development and marketing skills are needed. Innovation must provide the basis or source of opportunity that is intended to exploit a gap within the marketplace.
2 Murray Hunter However not all sources of opportunity need be innovative and most ventures usually start with non-innovative ideas. In fact very few enterprises have neither, the time, resources, technology or expertise to research and develop new business ideas and innovations (Johnson & Tilley 1999). A business begins with an idea that has been deemed an opportunity through some form of analysis and a person is motivated enough to act upon it. The majority of ideas are derived from the following categories; 1. An old type of business that can be given a new twist or professionalism, i.e., McDonalds or herbal products, y 2. A standard product or service that can be customised, i.e., recording birthdays on customer records so that congratulatory messages can be individually sent to customers by a company, nl 3. New technology that can be adapted to manufacture old products, i.e., desktop publishing, compact disks, faxes and email, etc. 4. Imported products that can be replaced with domestic products, i.e., the basis of many domestic automobile industries, 5. The changing of business models, i.e., sourcing products from a third party rather than manufacturing them, O 6. Developing the same business identity in another geographical location, i.e., The opening up of Coca Cola, KFC and Pizza Hut franchises in other states and countries, and 7. Replicating another business and competing against the original business, i.e., the opening up of a bakery, milk bar, convenience store near another one. fs Although entrepreneurship has been associated with opportunity, there has been very little written about the sources of opportunity. Attention has been focused upon the sources of innovation, rather than the sources of opportunity, which can be innovative or non-innovative. Joseph Schumpeter (1934), the famous Austrian economist was one of the first to recogniseoo the role of entrepreneurship in economic development and identified five sources of (innovative) opportunity; 1. The introduction of a new product, either novel or an improvement upon what is available in the market, 2. The introduction of a new method of production, way of handling things, not necessarily as a result of new technology,Pr 3. The opening up of a new market that has not previously been entered, 4. The conquest of a new source of supply of raw materials or intermediate goods, and 5. The development of a new way of organizating within an industry. Schumpeter saw the economy developing across an evolutionary path where it is in a continued state of dynamic disequilibrium (Schumpeter 1942). Entrepreneurs would find new materials, new processes and ways of organizing that would replace the existing products, methods of production and organization of the business, in a processes of creative destruction. This is in contrast to invention, which may bring a revolutionary change to an
The Sources of Opportunity 3 industry. The effects of evolutionary and revolutionary change to industry are shown in Table 1.1. Through the forces of change derived from dynamic disequilibrium new firms will be formed by entrepreneurs commercializing new products or services, to create new demand and wealth. Consequently the cycle leads to the formation, growth and decline of firms that are replaced by new ones (Kirchhoff 1994). Firms therefore must either adapt through innovation or die. Creative destruction continually changes the economic structure from within, replacing it with a new one. This can be evidenced by the decline in the average lifespan of companies on the S&P 500 from 35 years in 1975 to less than 20 years today (Byers et. al. 2010). y A good example of continuous change is the music industry. The first commercially available recorded music medium was the vinyl record which lasted into the early 1980s, when the cassette tape emerged. The cassette tape disappeared when the compact disk nl appeared the mid 1980s, completely overshadowing other recorded music mediums due to better sound quality. The compact disk industry peaked around the mid to late 1990s when the internet emerged as a means to obtain recorded music. Apple launched the iPod in 2001 and iTunes eventually became accepted as a major means of obtaining music within the music entertainment business. In a world of change entrepreneurs need to reinvent their existence O and continue to seek new opportunities which include the development of new products, the use of new materials in production, the development of new processes of production, the creation of new ways of organizing and entry into new markets to prevent themselves becoming irrelevant (Knopper 2009). Igor Ansoff, regarded by many as the father of strategic planning applied Schumpeter’s sources of opportunity to determining growth vectors and strategies for the firm. Ansoff (1965) divided the product-market field into a grid representing four distinctive growth fs options available to a firm. Corresponding growth strategies based on appropriate sources of opportunity could be developed to meet the growth objective of a firm. Each sector of the field represents a potential growth vector. Pursuing growth through existing products in existing markets requires market penetration strategies. Pursuing growthoo through existing products in new markets requires market development strategies. Pursuing growth through new products in existing markets requires product development strategies and pursuing growth through new products in new markets requires diversification strategies (see Figure 1.1.). Table 1.1. The effects of evolutionary and revolutionary change to industryPr Evolutionary Innovation Revolutionary Innovation Incremental changes to the Major changes to the product/market/industry. product/market/industry. Usually inter-industry changes. Maintain the competitive position within the Creates new industries and may destroy old industry. ones. Part of rivalry strategies within an industry. Results in large scale industry transitions, creating new positions and balances. Short-run economic changes, maybe Long run economic changes of the industry. providing temporary advantage.
4 Murray Hunter Markets Existing New Existing products to Existing products to existing markets new markets Existing Market Market Penetration Development Products y New products to New products to new nl existing markets markets New Product Diversification Development O Figure 1.1. The product-market field matrix. Each sector implies corresponding sources of opportunities that consequent strategies would be based upon. For example, the present technology processed by a firm for its existing products can be utilized for developing similar new products. The firm will couple the source fs of opportunity with its objectives to develop a product-market and growth vector scenario. Through the corresponding strategies the firm may develop a situation where its competencies match the scenario and the objective-product/market-opportunity-strategy-competencies are in synergy. This heightens the firm’s ability to compete in the market with competitive advantage over its rivals (Ansoff 1968, P. 99). Competitive advantage is a driver of change asoo firms must respond to the development of new forms of competitive advantage by rivals through new innovations to maintain their position in the market. However sources of competitive advantage should not be mistaken for sources of opportunity. Alternatively, a new technology through in-house R&D can be used to develop breakthrough new products for the firm, which may make its competitors products obsolete. These breakthroughs or disruptive innovations can create entirely new markets through the introduction of a new kind of product or service that established market leaders have troublePr coping with. This can be seen with the disruption to the airline industry through the establishment of low cost airlines and the need of many post offices around the world to diversify their business operations. The basis of strategy depends upon finding opportunities in the product-market field and synergising competencies to achieve its objectives through deliberate actions. According to Ansoff (1968, P. 100) inherently profitable opportunities are found through threading the product/market scope, growth vector, competitive advantage and competencies together in response to the external environment. Ansoff saw the importance of synergy as a key ingredient to make a product/market entry successful.
The Sources of Opportunity 5 Porter (1980) examined innovation in regards to industry evolution and saw that three types of innovation can lead to opportunities for growth. Product innovation is a major source of industry change through technological innovations. Product innovation can widen markets and drive industry growth. Product innovations can come from outside the industry like digital calculators and watches and completely change the marketplace where incumbents within the industry have little flexibility (Porter 1980, P. 178). Marketing innovations involve novel uses of advertising, new marketing themes and new channels to reach new consumers and reduce price sensitivity through greater product differentiation. Innovation in marketing and distribution can affect industry mobility and cost levels, thus changing the balance of competitive advantage within the industry. Finally process innovation can change industry y structure through changes in manufacturing methods. Innovation can make a manufacturing process more of less capital intensive, thus changing the economies of scale of the process. For example publishing technologies have reduced in cost allowing smaller firms or nl individuals to enter the industry. Polaroid cameras dramatically lost market share when digital camera technology emerged. Porter (1980, pp. 180-184) also mentioned a number of changes that would create new sources of opportunities. Structural changes in adjacent industries could have potential consequences for the direction of industry evolution. Hypermarkets and chain variety stores O have changed the nature of retailing, thus lessening potential opportunities for individual stand-alone retail formats but increasing opportunities for global distribution. Government regulation change about what products can be sold and how products can be sold has great affect upon the types of products in the market and companies that produce and sell them. Government policy in various areas will affect the nature and structure of the products companies offer and the nature of competition and the industry, i.e., medical insurance fs automobile insurance, medical services, types of agricultural products and medicines that can be sold, entertainment and gambling laws, trade practices and regulation, etc. The barriers of entry and exit and capital set up costs involved within an industry have great bearing upon opportunities within that industry. Entry costs as a deterrent are relative to the size and growth of an industry. Incumbents that have great infrastructure advantages,oo maybe sufficient to keep other companies out of the industry. However according to Porter (1980, P. 183) sometimes these high entry costs can be circumvented by developing new brands and business models as US firms did when they entered the low cost wine market. Peter Drucker’s (1985) seminal book Innovation and Entrepreneurship stated clearly that innovation is the specific function of entrepreneurship, whether it is in an existing business, in a public service institution, or within a new venture. Innovation is the means by which the entrepreneur develops new resources or improves the efficiency of existing resources byPr which more wealth is achieved (Drucker 1998). Drucker continues on to state that although there may be innovations that spring from pure genius, but most innovations are the result of conscious, purposeful, search for innovation opportunities, which are found only in a selected number of situations. Drucker identified seven sources of innovation, which account for the vast majority of all innovation opportunities; • Unexpected occurrences, • Incongruities, • Process needs,
6 Murray Hunter • Industry and market changes, • Demographic changes, • Changes in perception, and • New knowledge. Drucker’s seven sources of innovation largely went unnoticed until a about decade ago, when writers within the discipline of entrepreneurship realized their importance in explaining the nature of opportunity and the practice of entrepreneurship. Both Schumpeter’s and Drucker’s sources of innovation are very similar except where Drucker identified unexpected occurrences as a source of opportunity. Although the y unexpected success or failure shows a person’s or group’s limited vision or blindness (Drucker 1985, P. 41), the unexpected should not directly be considered as a source of innovative opportunity. The unexpected is a sign of other factors in operation. What may look nl like chance isn’t, as there are a number of underlying factors in the background, which can either accelerate the process by which an industry develops (Porter 1990, P. 112). For example, the Coca Cola Company by chance had the opportunity to rapidly expand distribution around the world due to US involvement in World War II. In 1980 PZ Cussons Australia launched the ultra dishwashing detergent Morning Fresh1. The product had poor O consumer off-take until a transport strike in 1982. After a few days only bottles of Morning Fresh remained in the dishwashing section of supermarkets and consumers had to purchase the brand if they wanted any dishwashing liquid. Once consumers had the forced opportunity to try the product sales continued to rise until it became the No. 1. dishwashing detergent on the Australian market. Chance events are outside the control of firms. These can include discontinuities that may cause demand surges, factors that nullify the advantages of natural fs leaders, breakthroughs in basic technologies, external political developments, or major shifts in foreign based demand which create unforeseen opportunities from a number of different sources of opportunity that can reshape the industry structure. Chance is what happens when unrelated events churn around the planet. Luck occurs when a highly alert person snatches meaning from chance. Luck doesn’t just happen, itsoo arranged, by one’s own doing. Lucky people or firms are those that co-opt chance and exploit it. Bad luck occurs when one is blind to events. Edward de Bono (1993) gave a list of attributes that can in combination be seen as sources of opportunity. If employed correctly these characteristics will place the firm with distinct advantage in the marketplace, and thus may be seen as sources of opportunity. De Bono talks about developing value monopolies, as against physical monopolies, where competitors cannot complete. This is achieved through creating product/service value throughPr some form or mix of; • Physical uniqueness, i.e., a hotel or restaurant location, • Technological uniqueness, i.e., a patent on a valuable technology behind a product like Polaroid Cameras, where Polaroid won a court case over Kodak for infringement over patents in 1986. • Name recognition, i.e., James Bond, Disney, Calvin Klein, Caltex, Toyota, Soy, Microsoft. 1 An ultra dishwashing liquid is a concentrated one.
The Sources of Opportunity 7 • Dominance, i.e., Boeing, Toyota, IBM, Nokia. • Cost of Entry, i.e., Disneyland, Boeing, Airbus, Toyota, etc. • Brand Image, i.e., McDonalds, Nokia, Wal-Mart, London School of Economics, and • Segmentation, i.e., McDonalds, Nokia, Wal-Mart. Together these attributes can create a market positioning that is extremely difficult to compete against, thus ensuring leadership for the firm that can develop these characteristics and therefore in an integrated way be seen as a source of opportunity. y THE PHASES OF OPPORTUNITY DEVELOPMENT Business development is concerned about the art of seeing and exploiting opportunity for nl the creation of value, which may contribute to the firm’s profitability, growth and/or survival. This process goes through four basic phases; 1. The discovery, identification or construction of ideas about opportunities through the creative process, O 2. The screening of these ideas to determine whether an opportunity exists that has potential to be exploited, 3. The crafting of a useful strategy that is able to exploit the identified opportunity, and 4. The implementation of the strategy in a way that adds value to the firm. There is an abundance of management theory about the identification and exploitation of fs opportunities from various points of view. Andrews (1965), Ansoff (1965) and Porter (1980, 1985, 1990) take the point of view that opportunity identification and strategy development is rational and analytical through convergent thinking process. Ohmae (1982), Mintzberg (1994) and Stacy (1993) see opportunity identification and strategy development as more intuitive and a creative process through divergent thinking. Others like Wilson (1994, 1998), Raimondoo (1996), Liedtka (1998a, 1998b) and Heracleous (1998) see opportunity identification and strategy development as a mixture of art and science. What seems to be important is a firm’s ability to recognise what information is important in opportunity recognition and subsequent innovative processes, its prior and related knowledge and experience (Cohen & Levinthal 1990), and its alertness, self efficacy, creativity, social networks and the type of opportunity itself (Ardichvili et. al. 2003). Previous entrepreneurial experience may assist in developing an ‘opportunity intellect’ that aids the identification of opportunities and provides aPr framework that allows informed and experienced based decisions about how to exploit an identified opportunity (Kaish & Gilad 1991). The process of opportunity identification would appear to be an emergent rather than a deductive process, requiring divergent rather than convergent thinking. Innovation is generated through social interaction where data cannot be analyzed in logical ways. For example quantitative market research may be very limited in the information it can provide a person who foresees the possibility of opening a sandwich bar next to a commuter train station or a courthouse. Understanding consumer behaviour, their wants and needs will be more important in making any decision to exploit the perceived opportunity. Therefore seeing
8 Murray Hunter opportunity is more related to the ability to imagine and associated emotions. New ideas are constructed, not analyzed. The future cannot be forecast, it can only be explored (Schumacher 1974, P. 200). In order to see the potential sources of opportunity one must be able to take a strategic view of the firm and the environment. A strategic view is one that can pick up subtle changes in the environment through a degree of sensitivity and alertness and be able to extrapolate any linkages and connections discovered into idea scenarios that can be evaluated. An individual will tend to be more sensitive and alert in domains that he or she already has knowledge and experience. To see opportunity there must be motivation or intent. Hamel and Prahalad (1989) y conceptualized the concept of strategic intent where there is an intuitive vision of the future direction of the firm. This helps to provide focus on the domain and selective parts of the environment that are considered important to the firm’s future. Therefore as well as being a nl motivator, strategic intent concerns itself with the immediate domain and the firm’s perceived capabilities and prior learning linked through prior knowledge. Strategic intent also gives a sense of destiny and direction (Hamel & Prahalad 1994, pp. 129-130). The discovery of useful sources of opportunity in the construct of opportunities is tied to observation of environment changes over time. Changes in the environment usually occur in O an evolutionary manner which the average person will not be aware and think about. Connectiveness of the past and present to the future must be incubated by the individuals who make up the firm over reflection and time. Alternatively sources of opportunity may be driven by new technologies, either as an incremental step or breakthrough. New technologies incorporated into products, services or improve production processes can potentially add value to a firm. With novel breakthrough technologies a firm may be able to create a new market segment, i.e., P&Gs development of fs Pert/Rejoice 2 in 1 shampoo, or even a new industry, i.e., the advent of cellular phones created a new industry separate to existing landline phone networks. The firm will operate according to a ‘self hypothesis’ which is influenced by learning and prior knowledge. A ‘self hypothesis’ is a shared mental model of the environment and theoo firm’s place within it. The firm’s ‘self hypothesis’ is where the firm perceives its own strengths and weaknesses, those of its competitors, the potential reactions of competitors to an aggressive stance taken by the firm, weak spots and barriers within the field and areas where the firm should not enter or is safe to enter. The ‘self hypothesis’ is the firm’s view of the world, generating a perception of its own self efficacy. The ‘self hypothesis’ can be a barrier to seeing opportunities if one is not aware of the assumptions behind it. Most influence of prior knowledge is manifested through the firm’s ‘self hypothesis’.Pr Prior knowledge contains learning about what can and cannot be done within the market by the firm. One important role prior knowledge plays is in technical and tacit knowledge about products, business models, technology, consumers, and competitors, etc. Through incubation prior knowledge assists the cognitive system make linkages and connections which identify new sources of opportunity for the firm. The huge majority of ideas already exist in one form or another within the existing or another domain, another geographical location or in another time. We remember different ideas from past experience or observation of the environment. Past knowledge may assist in creating unique insights into the consequences of change occurring within the environment.
The Sources of Opportunity 9 Alertness and sensitivity are qualities needed to see and pick up subtle changes in the environment. Our focus also plays a role in assisting to narrow down our attention to what is relevant to potential new opportunities. Finally it is important to know what to look for in finding new opportunities. Our opportunity intellect is a specialised knowledge which guides us through the discovery, evaluation and scenario building process of a potential opportunity. It is a strong entrepreneurial intuitive ability. The components influencing the strategic view are shown in Figure 1.2. Therefore new sources of opportunity can be pushed out by a firm as a new product or service into the marketplace or be pulled by unsatisfied customer needs. Some innovations go on to be successful as the product or service is what customers are looking for, while others y miss fulfilling any latent customer need and fail. In the case of failure mistakes can be felt very quickly with a product, service, or even business failure, which may prove very expensive. nl Field Opportunities O Domain Opportunities fs Motivation & Strategic View Time Intent oo Self Hypothesis Prior Alertness & Opportunity Knowledge Sensitivity Intellect Self efficacy. Prior knowledge The ability to see An understanding Perception of skills, within the domain change within the about what to look capabilities, and field of environment that for in regards to competencies & operations. the majority of potential Pr resources. Experience. others cannot see. opportunities. Views of ability to Expertise and The ability to focus An ability to visualize influence the various types of in on these changes future scenarios environment, etc. knowhow and see potential based on what is A predictive value of connections and seen. the future. scenarios. An intuitive ability to weigh up a potential opportunity Figure 1.2. The components of the strategic view.
10 Murray Hunter THE SOURCES OF OPPORTUNITY Peter Drucker (1985, P. 34) remarked that we cannot develop a full and complete theory of the sources of opportunity, yet we can understand where opportunities may come from. The overwhelming majority of successful innovations exploit social, economic and regulatory change or new and improved technologies. New to the world breakthrough inventions may provoke change as did the aeroplane to commercial aviation, the telephone to communication and the television to entertainment, etc. New technologies often make great changes to the way we live our lives as we are beginning to see through new advances in biotechnology and genomics. y Innovation requires a systematic and disciplined way of work based upon what the innovator sees and learns from the environment, particularly in his or her own domain. All sources of opportunity must be based on purchasing power which is the ultimate driver of nl innovation. For example, very few people in Malaysia could afford to purchase a new Proton Saga car when it was launched in 1984, if it was not for the innovative leasing packages attached to purchases of the vehicles. Finance packages made the Proton Saga car available to many new potential car buyers through its easy access to lower middle income groups. This was the innovative part of the proton business model that enabled the company to gain over a O 70% market share in Malaysia during the late 1980s and throughout the 1990s. Finance changed the Malaysian car market from a supply driven to a demand driven market. These forms of social innovation often have much more impact than technical innovation. For the purposes of this meta-theory, the author has divided the sources of opportunity into six main categories, market void, technology infusion, structural changes, resource monopoly, regulation and non-innovative. Each main category has a number of sub- fs categories (see Figure 1.3.). Further, each source of opportunity will have a different impact upon the environment. It may; • Increase efficiency with small intensely focused productivity improvements by improving what already exists through minimal investment. These types of sourcesoo of opportunity can be seen in many quality programs that manufacturing and service industries engage upon. • Make evolutionary changes incremental to the market place focused on improving existing products and services like bank ATMs, Dell Computer’s mass customization of home computers as per customer preferences and Toyota’s development of specialized distribution channels for the Scion brand targeted at Gen Y, etc., and/or • Make revolutionary changes through radical new additions to the market place thatPr change the way people think about and do things, which may lead to changes in existing structure of the industry and/or marketplace, like the invention of the motor vehicle at the beginning of the 20th century and Henry Ford’s development of the mass production line around 1914 which brought the product from something only the elite could afford to something affordable to the middle classes of the United States (Dent 1994).
y nl Sources of Opportunity (Opportunity Anchors) O Market Void Technology Structural changes Resource Regulation Non‐Innovative Infusion Monopoly Incongruities Invention Changes in Physical Resource Effect on Personal Industry Product Service & Consulting Incremental Capability Resource Demographic Effect on Process Improvement New Changes Duplication Processes Legal Resource Adaptation fs Perceptual Adaptation, Extension Brand Resource Changes combination & integration New Processes Copy/ Scarcity Power Imitation New Materials Cost/value Shift o Strategies for each source of opportunity Figure 1.3. The potential sources of opportunity (Opportunity anchors) for a firm.ro
12 Murray Victor Hunter The result of utilizing a source of opportunity will be; 1. The development of new products which may exploit established technology, simply an improvement of what is already available or may offer a new radical way of doing something. 2. New services, 3. New production technologies, 4. New operating practices, 5. New ways of delivering the product to the customer, 6. New means of informing the customer about the product, or y 7. New ways of managing relationships between entities. Sources of opportunities are also viewed from different perspectives depending upon who nl is looking at the environment. Individuals with limited ideas, capital, experience, expertise and networks may look for an opportunity that returns them a wage rather than a profit. An entrepreneur with good domain knowledge and experience within an industry may have his or her own theory of ‘how things can be done better’ believing they have a personal theory of success and be very focused upon specific types of opportunities. A corporation will take a O strategic view and analyse potential opportunity space looking at how to minimize or eliminate risks and uncertainty before moving into any form of action. Therefore each individual will look at different levels of return and profitability and approach the environment with different levels of capital, resources, skills and capabilities and networks. fs MARKET VOID Market void opportunities are those potential opportunities that may exist due to an unnoticed gap or un-serviced portion of the market. They include incongruities, demographic, and perceptual changes, discussed below.oo Incongruities Peter Drucker in his book Innovation & Entrepreneurship identifies incongruities as a source of innovation. He defines an incongruity ‘as a discrepancy, a dissonance, between what is and what ‘ought’ to be’ (Drucker 1985, P. 57). An incongruity is a symptom of anPr opportunity to innovate. Consumers are aware of them, but not in an overtly conscious way that leads to the expression of their unmet needs. It may be a latent need, a yearning for some improvement or a want that there was something that could solve their problem. However these incongruities may only be visible to people with experience of the industry, being very difficult to detect by those outside the industry. Alternatively they may be visible to people who have that need. If incongruities are detected and exploited, they can be very powerful sources of opportunities that can lead to substantial growth for a firm.
The Sources of Opportunity 13 Incongruities express change whether caused by changing industry structures, changes in perception, changes in demographics, changes in regulations, or changes in technologies. Therefore there are several different types of incongruities. The first type of incongruity is between what an industry is today and what it should be because of the economic realities of the time. For example, tariffs put on to protect many automobile industries in the 1950s and 1960s led to the production of basic, inefficiently produced and overly priced cars in many markets. With rapid improvements in the production of Japanese cars with lower prices, good fuel economy and many standard extras, an incongruity grew between what is available and what Japanese cars could offer the consumer. This type of incongruity showed how difficult it is to sustain a protected industry producing y inferior goods to those available in other markets. The second form of incongruity is between a present reality and what could be. This source of opportunity occurs where improvements in a business process could bring new nl potentials to the business or industry. Drucker (1985, pp. 62-63) cited the transformation of the international ocean freight industry that transported loose cargo within their ships up to the 1950’s with roll-on, roll-off container shipping that came in the 1960’s. People wrongly perceived that ocean freight would be replaced by air freight, except for bulk commodities and were looking at speeding up ships rather than changing processes as the solution. O There are incongruities between perceived and actual customer values and expectations. This congruity can often occur because of own sets of assumptions about consumers or arrogance in believing we know what consumers want. For example, many pet food companies believed that only low cost pet food would sell in developing markets because consumers would not pay premium prices for the product. However premium pet food sells well in many developing countries because some consumers care deeply for their pets and want the best for them. Likewise, cosmetics are one of the first luxury goods, before other fs types of luxuries that people begin to buy when income gets above a certain threshold in developing markets because of women’s improving sense of self identity. Modelling and acting schools appeal to peoples’ aspirations, an incongruity between what where they are and where they want to be. Companies that can see these types of incongruities before others haveoo a strong source of opportunity to fuel rapid growth. There are sometimes incongruities with a process that consumers have to undertake, where one action in the process is out of step with all the others. Most consumers or users are aware of this it, but it takes someone to pick up this problem and find a solution to it. For example, dishwashing machines need a precise dosage of a caustic detergent to clean dishes and glassware properly. These products are usually powders which have to be scooped from a box and placed in a small compartment inside the door of the dishwashing machine. APr household cleaning product manufacturer adopted the concept of using a tablet rather than a powder to provide a precise dose to the dishwashing process with great success, making the whole machine dishwashing process much cleaner and streamlined1. 1 Ironically this same idea was tried earlier for laundry but failed miserably.
14 Murray Hunter Demographic Changes Demographics represent differences in population distribution, age structure, ethnic and racial composition, employment levels, education status, and income distribution, etc. The proportion and number of women in the population, ratio of blue to white collar workers, unemployed to self employed, births, deaths, and immigration influences both the types and magnitude of opportunities available in a society. What people want, need, and purchase in aggregate can be correlated to specific demographic groups. Age distribution within a specific population is an important determinant of consumption patterns because different age groups buy things for different reasons throughout their life. y For example, teenagers may buy shoes for the brand image and style, but later in life buy shoes for comfort and durability. Peoples needs change over their lives and therefore as demographics change, so do opportunities. nl Consequently demographics are patterns that exist in the external field of the firm where new opportunities can be seen as demographics shift, if studied carefully. Demographics are far from static and continually evolve, change, and underlie emerging trends in an industry/market. A firm must continue to study shifting demographics to maintain its relevance to the community of consumers it serves. O Demographic change has two affects. Firstly, a change in any major demographic distribution shifts demand away from where it exists presently towards new market and industry sectors that may or may not exist. This in turn triggers a shift in resources towards these new market and industry sectors, thus changing its structure and nature of economic activities within it. Demographics therefore has a strong impact on demand, and viewing changing demand through defined demographic definitions and vice versa, helps us identify potential opportunities. fs For example, nations with a high proportion of children are likely to devote a high proportion of resources to their care, which will provide opportunities in related market/industry sectors. In contrast if most of the population is of working age, this will add greatly to economic growth and domestic consumption, providing opportunities in relevantoo market/industries. If a large proportion of the population consists of the elderly then large resources will have to be allocated to their care, which will open opportunities in relevant market/industry sectors. Age distribution is an influential demographic, which affects the level and type of savings, investment, productivity, and consumption in an economy (Bloom & Canning 2001). So as the age distribution changes resources will be reallocated towards producing goods and services that emerging dominant age groups require. The different types of products and services a person requires throughout their life are depicted in Figure 1.4.Pr Other demographics also influence demand and the types of opportunities that will prevail within any economy. Different demographics combine their effect in complex ways and change markets. The surge of young people in many countries within South-East Asia is increasing the affluence of their respective countries through the increases in productivity they bring once entering the workforce, increasing demand for consumer goods, housing, motor vehicles and education, etc. The increasing urbanized workforce quickly dilutes established traditional and replaces them with new modes of behaviour. Demand for traditional goods and services declines in favour of branded goods. With rural-urban drift the cost of firms servicing rural areas is increasing as markets are declining. Urban markets are becomes cheaper to service as population intensifies in concentrated areas. The position of
The Sources of Opportunity 15 women within the workforce is also intensifying, leading to a new class of single professional women with wealth and spending power. Consequently women are having children later in life or forgoing childbirth to concentrate on their careers (McElroy 2001). People’s values are shifting leading to more demand for consumer goods and branded products, rather than the lower quality generic products they bought in the past. Wars and natural disasters also alter demographics, demand patterns, and shape opportunities. Immigration can create an abundance of opportunities through the multiplier effect within an economy (Straubhaar & Zimmermann 1993). Very rarely does a population remain static and different parts of the world will go through different demographic changes, as can be seen through the selected demographics of some countries in Table 1.2. below. y Changing demographics leads to changes in demand for goods and services. Urbanization brings new demand patterns from the same population that once lived in rural areas. The first generation of offspring will be completely urbanized, tending to adopt new urban nl cosmopolitan values, rather than traditional values. With urban values come tastes for the latest electronic gadgets, brands, and goods not long before seen as luxuries to the country. In countries where young populations are declining, local university enrolments will decline, requiring the recruitment of foreign students or investments in lifelong education programs to take up the slack in university enrolments. Aged population will require more care and O medical services, leading to a larger need to retirement and special care homes. Changing demographics lead to behavioural changes which lead to new opportunities. Retirement Age fs Medical Services Entertainment Working life Retirement Clothing Elderly Homes Computer Hobbies equipment oo Lifelong etc Fashion Education Travel & (various forms Leisure and types through age Childcare spectrum) Accommodation Working Dependency Car & Transport Adulthood University Pr Sports Schooling Teens Toys Kindergartens Baby products Infant Figure 1.4. Timeline showing the different types of products and services a person requires during their life.
The Sources of Opportunity 17 Country Population 0-14 15- 65+ Pop. % % % Net % 64 % Growth Unemployed Poverty Urban Mig. % % /1000 Uganda 33,398,682 50 49.7 2.1 3.563 N/A 35 13 -0.02 Ukraine 45,415,596 13.7 70.7 15.5 -0.619 8.8 35 68 -0.1 United 61,284,806 16.5 67.1 16.4 0.282 7.6 14 90 2.15 Kingdom United 310,232,863 20,1 66.9 13 0.97 9.3 12 82 4.25 States Uzbekistan 27,865,738 27.3 68 4.7 0.938 1.1 26 37 -2.84 Venezuela 27,223,228 30 64.7 5.3 1.515 7.9 37.9 93 0 y Vietnam 89,571,130 25.6 68.8 5.5 1.096 6.5 12.3 28 -0.37 Yemen 23,495,361 43.5 53.9 2.6 2.713 35 45.2 31 N/A Zambia 12,056,923 44.8 52.9 2.3 1.617 50 86 35 -2.61 nl Shifts in demographics do not occur instantaneously, they slowly drift towards new patterns, in a similar waythat the age structure of the population evolves. For example, the aging of the baby boomer generation is a gradual process, where demand for products and services that the aged require increases on a year to year basis. Therefore new opportunities O based on changing defined demographics occur gradually and grow according to the size and distribution of the demographic (see Figure 1.5.). Magnitude fs Opportunity too small for incumbent firms to exploit Fertile area for Opportunity start‐up firms oo Increasing shift in demographic Time Pr Figure 1.5. The growing magnitude of an opportunity as demographics change. When potential opportunities based on demographics begin to emerge they are often ignored by firms within the industry, which either just don’t see the changes occurring or refuse to acknowledge that change is occurring. Many established firms that actually spot the changes early also fail to act because the new emerging opportunities represent very small market segments initially. Small market segments suit small start-up firms who can grow with a new emerging market rather than incumbent firms whose infrastructure is organized around existing market segments. Once an incumbent firm sees that the new emerging market
18 Murray Hunter segment is growing rapidly, it is often too late for them to dominate the new segment because start-up firms have become the new incumbents in the newer segments. Changing demographics together with advances in technology can shift the boundaries of an industry. This is especially so if incongruities develop, which cannot be met by existing products3. For example the colour television market once consisted of portable, table models, and consoles, etc. However LED and plasma technologies have created new television market segments, along with home movie systems and colour televisions incorporated into cellular phones. These new market segments merge into other industries. Changing demographics create new market/industry segments where opportunities are to be discovered. To find new opportunities, one must look at the market through currently y defined demographics or create new demographic definitions, see how they are changing, and work out what it means. Creativity is the key here in finding new ways to segment the market/industry, and in identifying new classes of potential new buyers (Porter 1985, P. 248). nl This may involve the discovery of new segments which don’t yet exist in the market and go beyond conventional and accepted industry classification schemes. For example the automobile market was defined by the U.S. automobile industry by income segmentation. This missed the potential of segmenting cars according to lifestyle where many new potential opportunities for creative segments could have been identified and were identified by others O in the 1980s. These were the safety segment – Volvo, SAAB and Mercedes Benz, city commuting segment– many Honda, Toyota, and Suzuki models, and the off road 4WD and SUV models. It can then be appraised how these new potential segment appeals to different demographics and what designs, functions, benefits and channels they would require (this may result in eliminating features that the identified group does not consider important in their purchase decisions). This may create a new product bundle that can exploit a newly discovered opportunity like the development of discount, no frills hotels that have the fs important amenities that the buyer group requires, without services that are not considered important4.oo Perceptual Changes Opportunities are created when a sizable proportion of a population change perception. A change in perception does not alter the facts, but the understanding and identity of a population alters to the point where meanings change. Changing perception is about changing attitudes, which lead to changing habits. For example some countries in the South-East Asian region have been developing economically very rapidly over the last few decades. SizablePr population has groups have transformed from living a quiet rural life to a hectic urban 3 New technologies can on their own create incongruities where consumers decide that the new functions and/or benefits of the new technology, reflected in the product become a desire, want, or need. 4 Various models for budget hotels exist. The US first saw budget hotels in the 1970s. Motel concepts often follow budget concepts. Japan saw the introduction of capsule hotels in 1979 where the basics are provided within a small capsule the size of a bed. More recently another no frills or limited service concept Tune Hotels was launched by Air Asia in 2007 for the Malaysian market with basic and clean amenities that can be booked online in advance at various rates according to season and demand. These hotels don’t have conference rooms, swimming pools or other amenities one would expect in other hotels, but they are conveniently located near airports, railway stations and shopping centres. New outlets are being currently opened around the Asian region, UK, and Australia.
The Sources of Opportunity 19 lifestyle, in the quest for economic prosperity, by taking up employment opportunities in the large cities. This demographic change has occurred relatively quickly in South-east Asia, changing drastically self perception and the nature of markets. A once rural orientated person is now a prosperous urban consumer. Although the change can be seen as economic and geographic, the major importance of this change is attitudinal. Perceptual changes occur because of transformative drifts in attitudes originating from transitions in lifestyle, working life, education, domicile outlook, and evolving aspirations driven by increasing affluence. Transformative drifts in attitudes are also by influenced experience and new knowledge, global convergence within society, and exposure to new consumer technologies that create new desires. This must be a societal rather than individual y phenomenon. Figure 1.6. shows some of the factors that influence perceptual changes in society. Paramount to any perceptual change is a person’s domicile outlook, explained in chapter nl three of volume one of this book. Domicile outlook to a great degree frames a person’s self identity. If one was born into the black working class of the United Sates in the 1950s or the rural aboriginal population of Australia in the in the last decades of the 20th century, one may feel that this is their station in life that is fixed and adopt a self identity compatible with that belief. As a consequence aspirations will be confined to that station in life where one will O accept where they are now and not aspire to other potential lifestyles. However growing education and employment opportunities and contact with urban culture and global-centric ideas can bring very quick change to perceptions and attitudes, resulting in very different demand patterns. New knowledge about health, fitness, fs food, etc. Urbanization, New growing Changing confidence about Knowledge Domicile social status, etc. Experience Outlook oo Changing traditions Perceptual The Aspirations Changes Environment Where am I now? Where do I Attitudes want to be? Pr Peers and Role New Changing Models Global technology Affluence Convergence Figure 1.6. Some of the factors that influence perceptual changes in society.
20 Murray Hunter In China during the 1970s, the “Flying Pigeon” bicycle was called by Deng Xiaoping a symbol of prosperity, as the whole country moved by bicycles. However over the last decade the bicycle has been almost totally replaced by cars in urban centres. The bicycle is seen as a working class relic, where they now have very little place in daily life. They are reserved for old ladies and men. Car ownership in China has risen from one million in 1999, to over 4.5 million today, and is expected to be over 6 million by 2015. The bicycle today is seen as the past, something old and Chinese now aspire to owning a car and very proud of it once they get it. Table 1.3. Purchases by major US Food Companies of Ethical/Organic Companies y Purchasing Company Purchased Company Takeover date Kraft Boca Foods February 2000 nl Back to Nature September 2003 Pepsi Naked Juice November 2006 General Mills Cascadian Farm December 1999 Larabar June 2008 Dean Horizon May 1999 Alta Dena July 1998 ConAgra Cadbury Schweppes Coca Cola Kellogg O White/Wave Silk Lightlife Alexia Foods Green & Black’s Odwalla Honest tea Morning Star Farms/Natural Touch May 2002 July 2000 July 2007 May 2005 October 2005 February 2008 November 1999 fs Kashi June 2000 Bear Naked November 2007 M&M Mars Seeds of Change 1997 Hershey Foods Dagoba October 2006 Hain Celestial Westbrae October 1997 Westsoyoo Bearitos Little Bear DeBole’s April 1998 Garden of Eaten Arrowhead Mills Nile Spice December 1998 Breadshop April 1999 CasbahPr Health Valley Earth’s Best September 1999 Celestial Seasonings March 2000 Imagine Rice/Dream Soy December 2002 Walnut Acres Spectrum Organics June 2003 SunSpire August 2005 MaraNatha March 2006
The Sources of Opportunity 21 The benefits of exercise and working out in a gym Changing Perceptions Women wanting a safe and secure environment Result in creation Pick up women’s of Fernwood changing perceptions Women’s Health Club Concept y Women feeling intimidated in Not working conventional gyms in the weight out in conventional nl areas. Current situation gyms Figure 1.7. shows the earlier and changing perceptions of women. Australia has long been considered a sporting culture where Australian Rules Football O (AFL) and the National Rugby League (NRL) are believed to be almost sacrosanct in the Australian way of life. However in a recent study undertaken by Live Performance Australia, it was found that Australians now spend more money on art and cultural performances than the football codes, horse racing and film and video production combined (ABC/AAP 2010). New information and knowledge can change perceptions to varying degrees. Smoking once had glamour about it and was the thing to do socially to show sophistication. However fs information emerging about the damaging health aspects of smoking changed peoples’ perceptions about the habit to the point where smoking is now prohibited on air flights, public buildings, and inside private cars, etc. Further knowledge emerging about the effects of inhaling second hand smoke has led to bans of smoking in any public place in some countries. Increasing beliefs about the importance of healthy eating and pesticide residuals inoo conventional foods has led to double digit growth in the purchase and consumption of organic foods. Likewise consumer concerns about exploitation is also bringing double digit growth to the ethical products industry, where major companies have bought over many companies specializing in ethical and organic products to cater for changing perceptions. Table 1.3. shows purchases by major US companies of ethical/organic companies over the last decade. The growth of nutraceuticals, health and ethical products, the fair-trade and Buy local movements have all resulted from changing perceptions of consumers based on newPr knowledge and resulting attitudes. In addition to demand influencing technology development, technology also has a role in influencing demand (van den Ende & Dolfsma 2005). The appearance of new technology that solves specific problems can lead to changes in perceptions that would not be possible without the emergence of the new technology. For example, the oral contraceptives allowed women to change their perceptions about their own empowerment, control of the choices they make, and lifestyle they lead. Once the technology existed, perceptions changed when free of the constraints that existed before the technology was available. There are arguments both ways as to whether demand drives technology development or technology development pushes new demand (Nemet 2009).
22 Murray Hunter Perceptual changes are based on one’s experience within the environment which is made up of our domicile outlook, aspirations, among external stimuli of new knowledge and technology. As we saw in chapter three of volume one of this book, our view of the environment is as much shaped by internal stimuli as external stimuli, which shapes our assumptions, beliefs and values. Our attitudes are reinforced through our peers and role models in society5. The failure of many products in the market can be often put down to being unable to see changes in perception. The U.S. car industry continued to produce large high petrol consuming cars, even though consumers became conscious of the high costs of running a large car and wanted more economical cars that were just as comfortable as the more y expensive larger models. When perceptions change, there are opportunities for new products in existing markets. It is often necessary to be in the same field to be able to innovate within a domain, as a nl person may be more alert to shifting perceptions. Diana Williams of Bendigo, Victoria, Australia in the late 1980s saw that women wanted to get fit and healthy. She saw that there were very few women would work out with the men on gym weights to work up a sweat. Women tended to restrict their activities to aerobics. However working out in a gym could be intimidating in the company of males. Williams saw that women wanted to do so without O being intimidated by males within a safe and non-threatening environment. She formed the first Fernwood Women’s Health Club Gym in 1989, which eventually grew into the most successful franchise business in Australia with revenue topping AUD $100 million in 2007 (Robinson 2007). Fernwood now has over 80 gyms around Australia in 2008 with more than 80,000 members. Figure 1.7. shows earlier perceptions and changing perceptions of women which Diana Williams perceived in creating the Fernwood Women’s Health Club concept. fs TECHNOLOGY INFUSION Technology infusion is an extremely important source of opportunity. The infusion ofoo new technology into a field brings change and that change usually exposes further sets of opportunities. This can be clearly seen with the introduction of the internet in the 1990s, where over the last decade and a half the way people interact with each other and the rest of the community has drastically changed. Email has replaced letter writing, chat groups and other social media link individuals to the general community and special interest groups. People now seek news and information from conventional and alternative news sites and various sites that contain product information. People purchase products, airline tickets, makePr concert bookings and use commercial services like eBay, Amazon, Alibaba, etc. Social networks now play an important role within national political scenes as was seen during the unrest in Burma during 2007, the 2008 US Presidential election, and the unrest after the Iranian Presidential election in 2009. The internet is a platform for further innovations like the iPad which bring the internet into everyday lives with wide ranges of applications. 5 Many studies point to peer and role model influence in various areas of life. Hope et. al. (1994) found that smoking among peers was the best predictor of smoking, Needle et. al. (1986) found peers are influential in people forming attitudes and behaviors about drug taking, and Ferrell and Gresham (1986) found that peers have influence on people making ethical/unethical decisions in organizational contexts.
The Sources of Opportunity 23 In very general terms, technology innovation is concerned with finding and developing solutions to problems. For example, the transformation of heat into movement or electricity, shaping materials in certain ways to produce useful products, producing new compounds that exhibit certain properties, are all solutions to problems in some way. Technology innovation is about producing or doing something better than before and meeting the cost, financial and marketability requirements of the task. Technology infusion is about creating solutions in the form or a new to the world product or invention, an incremental improvement of what is already in existence, the adaptation of an existing technology to a new problem, or the development of new processes and materials into the field as an improvement upon what already exists. y Solving technology problems involves the use of information drawn from formal knowledge, and tacit and intrinsic knowledge which includes previous experience. Formal or articulated knowledge is technical, accessible, teachable and easily able to be observed nl directly and thus available to all firms in a domain should they wish to seek it. It can be found in published monographs, patents, copyrights and registered designs and other codified content. Tacit knowledge is based on prior experience, not directly able to be observed or taught, it is complex, accumulated and multidimensional and is interdependent with other skills. Tacit knowledge incorporates familiarity with particular product/industry sectors O (Cooper et. al. 1994). Tacit knowledge is therefore very unique to an individual or group and hard to acquire. For example within the domain of microelectronics there are three necessary forms of knowledge necessary for any individual to have any capacity to invent and innovate. These include; 1. Knowledge of solid state physics, e.g. the electrical properties of semiconductors to the sub-micron level, 2. Knowledge about how semiconductors are constructed and tested, and 3. Programming logic. To apply this formal knowledge to any particular application, fs formal knowledge from other domains is necessary to interface with the selected application. Thus for example, one must understand how a particular home appliance, machine tool, manufacturing robot or chemical process operates in order to apply formal knowledge from another domain into the application area. This requires tacit knowledge from prior experience,oo combined with formal theoretical knowledge, which is paramount to the innovative process. Firms need to infuse new technologies into their products and processes to grow. A firm’s ability to develop strategic advantage over another seems to depend upon its ability to acquire new knowledge which requires the use of prior experience and tacit forms of knowledge to be able to invent and innovate6. But in addition to articulated and tacit knowledge, it appears that the ability to recognise technology based opportunities is necessary, in order to invent and be innovative within aPr domain. This seems to be a very complex task requiring an active search, technical problem solving abilities, prior knowledge and even serendipity. These four elements according to Shane and Venkataraman (2000) enable opportunity discovery and opportunity construction. Thus opportunity recognition and construction abilities rest upon the unique mix of knowledge where several studies suggest that prior experience is very important (Klepper 2002, Carroll et. al. 1996, Klepper and Simons 2000). Hindle and Yenken (2004, P. 794) further suggest that in order for an invention or innovation to be commercially viable, the inventor/innovator must possess an entrepreneurial 6 However firms may also be able to acquire technology from outside through contract and OEM manufacture.
24 Murray Hunter capacity, e.g. Entrepreneurial experience, start-up management, risk management, access to business networks and finance raising ability, etc. (Legge & Hindle 1997), without which may leave the invention/innovation within the realms of curiosity7. Invention/innovation also requires knowledge of the techniques that aid creation, such as trial and error processes and product reengineering strategies. The taxonomy of knowledge required in technology invention and innovation is shown in Figure 1.8. Easy to copy Hard to copy y Articulated Knowledge Tacit Knowledge nl • Technical knowledge • Prior experience • Published information • Familiarity of • Patents, copyrights, product/industry registered designs, (not directly able to be observed or • Other codified materials taught, complex, accumulated and multidimensional) and is (Observable, teachable, simple, singular interdependent with other skills) and definable independent skills) O • Opportunity Recognition & Construction Knowledge Active search fs • Technical problem solving knowledge • Prior knowledge • Serendipity Entrepreneurial Capacity oo • Entrepreneurial experience • Start‐up management • Risk management • Access to networks • Finance raising ability Pr • Trial & error Techniques that aid • Reengineering creation Figure 1.8. The taxonomy of knowledge required in technology invention and innovation. 7 However John L. Nesheim (2000) recommends that an inventor find an experienced CEO to acquire the necessary entrepreneurial capacity to commercialize an invention/innovation.
The Sources of Opportunity 25 Media Capacity Technology breakthroughs Kilobytes Flash Drives Gigabytes Incremental technology Laser & Compact Disk improvements 5.25 & 3.5 Inch Drives Megabytes 14 & 8 Inch Drives y nl Tape 1950s 1960s 1970s 1980s 1990s 2000 Figure 1.9. The development of computer memory storage media. O Technology infusion into an industry is a continuous process, although not in a direct linear manner. One particular form of technology will be gradually improved upon until the returns from research diminish. Then once in a while a new technology will make some breakthrough in efficiency or product improvement, which will change the nature of competition in the industry. This point can be clearly seen in computer memory storage media, e.g. tape, 14 and 8 inch drives, 5.25 inch floppy drives, 3.5 inch floppy drives, laser fs and compact disks and flash drive memories, as shown in Figure 1.9. This figure also shows the differences between incremental improvements of technology which follow a linear improvement line across a single product and breakthroughs where there is a jump in the technology utilized within the industry leading to new product forms. Firms that are very competent in one type of technology may lack adequate competenciesoo in the newer emerging technologies and disappear from the marketplace (Christensen 1997, P. 111). This can be seen in the early dominance of companies like Storage Tech, IBM and Control Data in the earlier media technologies, Quantum, Western Digital and Verbatim in the floppy drive technologies, and the compact disk dominated early by Philips and Sony. Numerous companies manufacture flash drives without any single company dominating the market due to disputes about intellectual property ownership. As mentioned in the introduction, when new technological breakthroughs occur, newPr opportunity windows will usually open. For example the development of the microchip lead to the creation of word processors, home computers, game boxes, and mobiles phones, etc. However once firms begin to develop strong competencies and synergise new technologies and merge them into wider applications, there is usually some form of market shakeout of the smaller, weaker firms. This was clearly seen in 1983 when several video game companies crashed into bankruptcy as other companies were able to produce superior quality products with the available technologies of the day. Technology mastery and change can destroy a firm’s value if it does not have the right competencies and skills to compete within the new technology framework.
26 Murray Hunter Large technological changes may provide larger opportunities than smaller changes and the role of technology is not the same across all industries, where for example various industries relying on electronic technologies are much more technically vulnerable than industries based on chemical production. Invention An invention is a new product that may be a device, a composition or a process based on new knowledge which may be a breakthrough in technology, but not necessarily. As we have y seen in the introduction, an invention is the creation of something as the result of articulated and tacit knowledge, opportunity recognition or construction ability, entrepreneurial capacity and the use of techniques that aid in the process of creation. Inventions are usually based on nl the convergence of different domains of knowledge such as in the case of flight, power propulsion and aerodynamics. Not all inventions are the result of ideas generated by market scanning. They may be bright ideas that improve upon existing problems. Moreover consumers do not always see that they have a problem and a new invention may highlight this problem. For example a O toothbrush sterilizer may highlight the need to keep toothbrushes free of bacteria. There must be what Drucker (1985, P. 126) calls receptivity to the new product by consumers. In this way a new invention is able to construct an opportunity, although in the majority of cases this is usually a very risky and expensive strategy8, which is not always successful. In many cases it is marketing that makes new inventions successful, where for example, DuPont did not did not sell Nylon and Teflon as materials, they marketed the applications of these materials. In the case of nylon, DuPont sold nylon as women’s hosiery and underwear and Teflon was fs marketed as a coating. Inventions must occupy some strategic position in the marketplace to be successful. An invention is usually built upon a number of foregoing pieces of new knowledge and inventions in various domains that fill in the missing links that make the invention possible.oo Until every aspect of knowledge and sub-component exists that is required for the invention to take form, it cannot take form. For example an automobile is a compilation of numerous previous inventions that enable the form of an automobile to exist. Without the ideas of steel, rubber, fuel, concepts of compression and combustion, electronics, tires, braking systems, new alloys, hydraulic systems, road rules and carriageways, the automobile cannot exist (see Figure 1.10.). The creation of inventions that become incorporated into what we call the automobile is aPr continuous process, making incremental improvements to the whole idea and concept. New composite polymer materials and plastics make lighter frames without sacrificing strength, new engine power enhancing systems like turbochargers and fuel injection systems contribute to the enhancement of car performance. The automobile is a system of ideas and also forms part of other idea systems like transport and city planning, etc. 8 These types of strategies are very expensive because they rely on educating the consumer about the problem and the solution.
The Sources of Opportunity 27 Automobile Chassis Engine Tires Control & Braking System Environment management Systems Rubber Suspension Fuel Electronics Alloys Road Rules systems y Compression Chemical Hydraulics Roads & Steel Microprocessors nl & Processes Carriageways Combustion Plantations O Figure 1.10. The hierarchy of inventions that make the invention of the automobile possible. Breakthroughs usually result from the fusion of separate disciplines to create new ones, e.g., biotechnology, nanotechnology, and mechatronics (Miller & Morris 1999, P. 10). The creation of new inventions when disciplines are fused tends to produce disruptive technologies, rather than incremental improvements (Miller & Morris 1999, Hamel 2000). fs However as it is very difficult to forecast and perceive what the future consumer and trade response will be to any new technologies. There will be a high degree of fluidity, uncertainty and confusion about potential trade and consumer acceptance. When new technologies are in their infancy, there is often great experimentation and the development of incompatible standards of product that are not interchangeable with complementary products. This wasoo clearly seen in the VHS and Betamax video cassette wars in the 1980s and more recently in the Blu-ray and HD DVD optical compact disk formats developed by Sony and Toshiba respectively. It was only after many studios and DVD player manufactures adopted Blu-ray that Toshiba abandoned further development of the HD DVD format. New ventures based on new technologies all have high expectations, but these are rarely ever met. Development involves risk and if the invention does not fulfil a consumer need that is either presently perceived or as yet not perceived but exists, then these inventions will mostPr likely fail. An invention must also have a business model in accompaniment. Many large ticket items like automobiles have relied on ancillary services like consumer credit to succeed rather than the actual product itself. The business model employed must in most cases facilitate the creation of a new market. An English physicist Joseph Swan invented the light globe around the same time as Thomas Edison. However Thomas Edison did not restrict his thinking to only the technical aspects of the product. He conceptualized potential applications and ways and means of creating a distribution grid to deliver electricity to consumers. Edison did not so much invent
28 Murray Hunter the light globe; he invented a whole industry and a business model to create a market and acceptance by consumers for his idea. Many firms invest heavily in developing new sources of competitive advantage through new knowledge, manifested in intellectual property. However in the majority of cases intellectual property does not in itself lay any foundation of opportunity to the firm and therefore has little commercial benefit. New knowledge is only part of an intellectual property strategy that will gain consumer acceptance. To fully understand the importance of intellectual property and its true value to the strategy of the firm, one has to appreciate its integration within the core of the company’s mission and objectives. Intellectual property itself highlights the company’s competencies that it uses as its core strategies. To view y intellectual property otherwise would miss the very concepts of creating barriers to entry for potential competitors, creating competitive advantage over competitors and understanding the relative nature of the concept. Intellectual property is the centre of winning customers ‘hearts nl and minds’, gaining trust and reputation in the market place and making a strong emotional connection with customers, which is at the heart of any company’s core mission. (Stamm 1993). Figure 1.11. shows the integration between a firm’s core mission and intellectual property (Hunter 2009, P. 595). If intellectual property is viewed as a box of tools that can be combined in a particular O way to fulfil marketing and protection objectives, then intellectual property strategy can be harnessed to benefit the firm greatly. Thus using intellectual property in this way is the best way to safeguard and protect a company’s products and position in the market place. Intellectual property tools will have different values in different industries, but the general array of tools useful to a firm, which can be utilised in different mixes to achieve an overall business strategy is shown in Figure 1.12. The three prime influences on the firm are the advent of new technologies, product life fs cycles and competition. The firm must be able to apply gathered knowledge to create its source of proprietary knowledge to form the core and basis of its general business strategies to apply to the market place against existing competitors, who will be undertaking their own cycle of strategy development and implementation. The success of the firm’s strategyoo involves packaging its intellectual property into the correct mix of strategies and protections to develop differentiation and relative competitive advantage over its competitors. Skills and knowledge creatively applied to developing a general business strategy to maintain a sustained competitive advantage, which utilises recognition symbols, customer relationships, emotional connections with consumers, correct product forms that are desirable. These are manifested in patents, designs, proprietary knowledge, trademarks and copyright, supported by various employee agreements. For this reason competitive advantage can be a veryPr complex phenomena and difficult to imitate by other firms. Some aspects of intellectual property are easier to copy and emulate than others. This is why continual improvement, change and new product development are the best methods of protection and maintaining a relative competitive advantage over competitors. Failure to improve, change and develop new products will render companies in slow technology emerging industries as a seller of generic products, like in the pharmaceutical, household cleaning, cosmetics and agricultural chemical industries. In the case of fast emerging technology industries companies will become completely irreverent to the market where they may quickly cease to exist, as is the case in mobile telephones, personal computers and
The Sources of Opportunity 29 electronic media storage. Figure 1.13. shows the IP/market scenarios with competitive advantage in slow and fast technology emerging industries. Recognition Desirability To develop public recognition and To enable companies to delivery carry over certain desired values to good products with superior consumers performance to competitors, new Trademarks and certain features, extended product life, etc, Copyright Information so that products are competitive and desirable. y Patents, Registered Designs and Proprietary Knowledge Competitive Advantage nl Form To develop recognizable literary and Emotional Connection visual forms that add value and To maximise financial returns for assist in creating an inherent production undertaken by the desirability to the form of company, add to product communication between company differentiation and develop an and consumer. Copyrights, Trademarks and Registered Designs O emotional connection with consumers. Brands and Trademarks Figure 1.11. The General Tools of Intellectual Property in Business Strategy. fsooPr Figure 1.12. The general tools of intellectual property in business strategy.
30 Murray Hunter Figure 1.13. a. shows the scenario of a slow emerging technology market where changes in technology as well as being steady, tend to be incremental. In the early years, patents are relied upon for protection, but through time as more companies develop new ways to produce the same product, relative competitive advantage can only be improved through a new technology development. Once a new product based on the new technology is launched into the market and consumers except that technology, the existing market based on the old technology continues, but as more companies enter the market, it becomes difficult to differentiate between different products and the market begins resembling a commodity market. Price discounting will become the primary strategy to maintain market share. As further advances in technology continue to change product form, other methods of intellectual y property protection like registered designs to protect the form and branding become more important protection than patents. The situation in the scenario of fast emerging technology markets, shown in Figure 1.13. b. is usually a market protected by patents through the nl complete evolution of the market as new emerging technology changes the basic technology behind the basic product form. As the new technology is proven to be more efficient and cost effective to consumers, the market for the old product will eventually die out. To the firm, the most important aspects of the intellectual property mix are those components that assist the product to sell. There is little point developing a new product that O has good protection, if it does not sell well in the market. Patented technology does not sell the product. More likely, it will be the perception of it the company portrays to consumers. When Nike developed the encapsulated gas membrane within the sole of the shoe, it was introduced as “Nike Air’, conjuring an image of the product’s desirability through consumer emotions and aspirations, identifying with the emotional rewards in sport and leisure with the slogan ‘just do it’. Although the technology of the shoe may have been brilliant, it was the intellectual property of branding, trademarks and copyright that developed the real value for fs the company. As was seen, some parts of the concept was quickly emulated by others, but not the complete winning intellectual property mix, so Nike was able to maintain a relative competitive advantage over its competitors. The images of Mercedes Benz, Harley Davidson, Apple, Listerine, Coca Cola, Marlboro and Calvin Klein conjure up emotional responses inoo consumers about image rather than technical interest for the actual product artefacts themselves. There is often a long lead time between the time when new knowledge is developed and the expression of this knowledge as a product. Rudolf Diesel designed the diesel engine in 1897, but it was not until 1935 that Charles Kettering applied Diesel’s knowledge on redesigning the engines so it was capable of producing propulsion in ships, locomotives, trucks, buses, and cars. A major crisis like a war greatly speeds up the application ofPr knowledge as was seen in the rapid development of radar, jet propulsion, rockets, penicillin and nuclear fusion during world war two. The risks of failure are high in inventions based on new knowledge. Inventions rarely go to the market on the basis of being an invention alone. New inventions should be potentially useful to consumers and society. Do consumers see benefits and value in the new invention? Does it create a better way of doing something? There must be a market in which inventions become opportunity innovations with complementary supporting factors, i.e., resources, networks, and skills, etc. The new invention should also be complete.
The Sources of Opportunity 31 Figure 9.10. IP/market scenarios with competitive advantage in slow and fast technology emerging industries a. Slow Emerging Technology Market Air Fresheners Branding Primary Used IP Protection Relative Competitive Advantage Registered Designs Liquid Air Fresheners y Patents Car Air fresheners Failure to advance IP nl and convert into new products results in competition in a price sensitive market where Gel Air Fresheners brands don’t attract 1960s O1970s consumer recognition 1990s b. Fast Emerging Technology Market Electronic Media Storage Time fs Primary Used IP Protection Relative Competitive Advantage Patents Penoo Drives Compact Rapid decline of media Disks use after introduction of new media until product ceases to be used anymore, Companies mustPr cease operations or switch Floppy Disks to new technology 1960s 1970s 1990s Time Figure 1.13. IP/Market Scenario with Competitive Advantage in Slow and Fast technology Emerging Industries.
32 Murray Hunter Knowing how to create a concept and put it into mass production are two separate issues. Not being able to exploit the technology in mass production holds back many inventions from reaching their potential. Penicillin was developed by the British, but it was Pfizer the U.S. pharmaceutical company that developed the ability to produce penicillin through mass fermentation that made Pfizer successful. Finally, does the firm have the necessary resources, skills and competencies to develop and exploit the invention? Incremental Improvement y The technological evolution of an industry is usually characterized with a breakthrough product, followed by periods of incremental product change. The initial breakthrough product or radical innovation that commences the cycle of innovation is usually a form of product that nl utilizes a substantially different core technology to what is already in the market. The product also provides substantially higher customer benefits relative to established products within the industry (Chandry & Tellis 1998). During the subsequent evolutionary cycle of product improvement, firms alter the attributes and benefits the products they sell (Abernathy & Utterback 1978, Anderson & Tushman 1990) while maintaining a specific core technology O and form (Dosi 1982, Georghiou et. al. 1986, Henderson & Clark 1990) until another breakthrough of radial innovation disrupts the market (see Figure 5.13. b.). A sustained period of incremental product innovation begins when one or two product forms are accepted by consumers within the market place as standards (Sahal 1986, Tushman & Anderson 1986). To some degree products at this point can be considered to be relative substitutes for each other (Shanklin & Ryans 1984). In demand based markets (Maney 1999), firms attempt to differential through engaging in incremental product innovations. Through fs incremental innovation firms vary functional or ascetic attributes of a product to articulate the needs of customers and gain advantage over competitive products (Hunter 2009, P. 572). The product is enhanced through incremental changes of features, benefits, and signal attributes, sometimes combined with channel modifications or changes9. Although technical innovationoo may be behind the changes, these are translated into consumer understood features, signal attributes, and benefits in an attempt to capture higher market share. See the depiction of a product/strategy attribute profile in Figure 1.14. An innovation by a firm must be perceived as something positive and desirable by consumers for it to be deemed successful, and even an innovation at all. What a firm may perceive as a breakthrough may not be perceived as such by consumers. For example, 3D television has been around in inferior forms to the upcoming generation of 3D televisions forPr a number of decades. 3D television to date has not been enthusiastically embraced by consumers over the years. Although technically the new generation of 3D televisions may be considered a breakthrough, consumers may just see 3D television as just another offering in the television market. Firms must also be weary of introducing incremental innovations without fully understanding what consumers actually desire and aspire to. The Coca Cola 9 Sometimes product innovations may not be accepted by the firms existing consumer base and need to be marketed towards new groups of consumers. For example domestic water purifiers developed in Australia where tap water quality is not considered a problem may fail to generate large sales and be considered a failure. However the same product may sell extremely well in many developing markets because tap water quality is considered a major problem.
The Sources of Opportunity 33 Company learnt this costly lesson with the launch of New Coke with what Coca Cola management considered was an improved taste in the 1980s, receiving a massive consumer backlash to the point where the product was withdrawn from the market and the original product returned. Incremental innovation can also be based on achieving cost reductions through better economies of scale and advancement along the learning curve (Mohr et. al. 2005). Low cost production is another source of competitive advantage. Innovations may take the form of process changes which lower cost, enabling a firm to be more competitive within the market place. One of the most probable causes of industry incumbents losing their dominant position in y the marketplace are the effects of incremental innovation undertaken successfully by competitors. Other firms may decide to hold back on following an incumbent to study the success of the incumbent’s product/strategy profile before developing their own product. The nl incumbent’s competitors will try and determine what features, signal attributes and benefits work with consumers before launching their own product versions. A list of pioneering companies that lost their market dominance to later entrants is shown in table 1.4. Features O Benefits Product/Strategy Attributes Signal Attributes Channels fs General Impression Tangible Intangible Local Benefits Benefits Strength Spiritual International Performance impression Consumeroo Efficacy Romance Variant Tactile and Demographics sensory Efficacy Health & Indicator of Use Mainstream or impression according to Well-Being Specialised theme Life Status Impact Caring Form of Pleasant & Freshness Odour profile Promotion & lasting Security Association apt fragrance Association Substantively to product LifestylePr theme Association Ingredients (according to Concern theme) Figure 1.14. A Product/Strategy Attribute Profile.
34 Murray Hunter Table 1.4. A list of pioneering companies that lost their market dominance to later entrants Product Invention Pioneering Company Year of Commercialization Instant Camera Dubroni 1864 Mechanical typewriter Sholes/Densmore 1872 Phonograph Edison Speaking Phonograph Co. 1878 Electric Fan Crocker & Curtis Co. 1882 Combustion Driven Automobile Carl Benz 1888 y Black & White Film Camera Eastman Dry Plate & Film 1889 Company AM radio Wireless telegraph and Signal Co. 1897 nl Mechanical vacuum Cleaner Vacuum Cleaning Co. 1901 Electric typewriter Blickensderfer Co. 1902 Air conditioner Buffalo Forge Company 1903 Answering machine American Telagraphone Co. 1903 Safety Razor American Safety Razor Company 1903 Facsimile Machine (scanning) Electric Washing machine Electric Toaster Electric Dishwasher Mechanical Black & White Television O Arthur Korn Hurley Machine Co. General Electric Willard and Forest Walker Television Ltd. 1907 1908 1908 1913 1930 Electric Shaver Schick Inc. 1931 fs Tape Recorder/Player AEG 1934 Electric Blanket General Electric 1936 FM Radio General Electric 1937 Fluorescent lamp General electric 1938 Black & white television Allen B. Dumont Laboratories 1939oo Ballpoint Pen Eterpen Co. 1943 Commercial Airliner de Havilland 1948 Dry Ink Copier Haloid Co. 1951 Dot-Matrix Printer Remington Rand 1953 Microwave Oven Raytheon 1953 Colour Television RCA 1954 Video Cassette recorder Ampex Corp. 1956Pr Electronic Watch Bulova 1960 Cassette Tape Player Philips 1964 Electric calculator Sharp 1964 Quartz Watch Seiko 1969 Pocket Calculator Bowmar 1971 Single Player Video game Nutting Associates 1971 Digital Quartz Watch Hamilton Co. 1972 Desktop Computer MITS 1975 Disposable Shaver Bic Corp. 1975
The Sources of Opportunity 35 Product Invention Pioneering Company Year of Commercialization Laser printer IBM 1976 Telephone Bell Telephone Co. 1976 Autofocus Colour Film Camera Konishiroku Photo Industry 1977 Laser Disk Player Philips 1978 Compact disk player Philips & Sony 1979 Portable Computer Osborne Computer 1981 Camcorder Sony 1983 Cellular Telephone Motorola 1983 y Digital Camera Sony 1983 Notebook Computer Tandy Corp. 1983 Digital Answering Machine Sharp 1988 nl Palm Computer Amstrad 1993 DVD Player Toshiba 1997 Digital High Definition Panasonic 1998 Television O Bhide (1999, P. 58) found from a survey based on the “500 lists” that 71% of fast growing companies had replicated or modified an idea the founders encountered during previous employment. Examples of companies founded in this way include Intel, Advanced Micro Devices and National semiconductor formed by ex-employees of Fairchild Semiconductor and 3Com and Adobe formed by ex-employees of Xerox. This phenomenon probably occurs because early employment helps to prepare people for to become entrepreneurs through social contagion and exposure to entrepreneurial processes and fs networks. Secondly, employees often leave their place of employment to start their own business because they feel the place of their employment is too bureaucratic and hindered their efforts to commercialize new ideas (Gompers et. al. 2005). Incumbent companies competing within an established market may develop inertia within their existing technological paradigm because of their huge investments in the existing market (Ghemawatoo 1991, P. 161). New entrants appear to make more of a contribution in revolutionary innovation in new industrial products and processes (Sherer 1980, P. 438). Periods of incremental innovation vary between industry, from a few months within the electronics based industries (e.g. hand held and home based computer game industries), to a few years within chemical and engineering type industries. Product refinement plays a key role in established industries (Cohen et. al. 1984). Incremental innovation sometimes results in major price improvements and/or functionality from the consumer point of view (Nelson &Pr Winter 1977). The importance of incremental innovation varies according to product, market and timing. The success of any incremental innovation can only really be measured once it is accepted in the market, i.e., changing from manual to automatic transmission may be more important than adding a spoiler to the back of the automobile. Some incremental innovations fail, although the actual product succeeds within a class of goods. In order to gain any form of competitive advantage through introducing incremental innovation, the innovation must be accepted in the market. Incumbents that actively introduce incremental innovations tend to maintain and improve their market positions (Freeman 1982, Foster 1986). Industry incumbents are best at introducing incremental innovations because
36 Murray Hunter they have stable market segments, have some idea about how to address the needs of current consumes (Von Hippel 1976, Mitchell 1989), possess developed production and marketing systems that support incremental product innovations and their subsequent launch into the market place (Abernathy & Clark 1985). Incumbents that don’t introduce any incremental innovations tend to suffer and face declining market share10. Firms may decide to follow or not follow the market leader in replicating any incremental innovations according to their technical capacity (Nelson & Winter 1982), the level of Intellectual protection the incumbent has managed to develop for any incremental product improvement (Gilbert & Newbury 1982), or decide to wait and see if the new innovation is accepted by the market (Banbury & Mitchell 1995). y In industries marked by continuous incremental technical change, following a competitor may not provide any advantage to the follower. Therefore a firm may choose not to follow every incremental innovation and decide to ‘leapfrog’ their competitor with new incremental nl innovations. This may occur with a market where there is demand for new innovations but also remaining demand for older versions for extended periods of time (Freeman 1982). An example of this would be the digital camera and mobile phone markets. However firms that are market leaders tend to gain market share if they continue to innovate rather than their followers (Bond & Lean 1977, Biggadike 1979, Robinson & Fornell 1985, Lieberman & Montgomery 1991). O Effective incremental innovation in product development and rapid product introduction are critically important to business performance. This strongly influences an industry incumbent’s business market share. In high technology industries being the first to make incremental innovations provides substantial market advantages, as there is great value in having the ability to speedily introduce products to the market. However in very competitive markets incremental innovation does not always provide the innovator with the advantages fs they expect. Firms, particularly incumbent firms have customer knowledge, customer franchise and some market power (Chandy and Tallis 1998). However many misunderstand the power that this provides a skilful innovative firm that delays incremental technology advances until maximum revenue has been gained from existing technologies. If a firm canoo control the product innovation cycle introducing incremental innovations at the right times to maximize product lifecycles, the firm can develop very strong market leadership over its rivals11. Incremental innovation unlike radical innovation is much easier to ideate as the same core technology is being utilized and only product features and attributes are being changed. In contrast radical innovation requires completely new ideas, most often utilizing completely new technology paradigms. Some studies have shown that radical innovation tends to comePr 10 Incumbents may be unwilling to radically innovate because they see smaller returns and thus incentive as existing products already provide them with a strong revenue source. An incumbent may thus feel that any innovation may render their existing products redundant and lower revenue streams. Cognitive blocks may act to screen out information that allows management to see potential alternatives to what they are already doing in the market. Over confident biases may prevent open mindedness to change. Finally organizational routines put time pressures upon management and tend to shape people into routines that are not questioned, thus preventing any new thinking or ideas. New ideas that require new routines may develop reluctance on the part of management to explore these types of avenues. 11 Firms may hold back on introducing incremental innovations until they believe they have gained as much revenue as they can from the existing model. Firms may also launch multiple models each having different features, thus trying to develop market leadership through maximizing market segmentation. These types of strategies can clearly be seen in the mobile phone and digital camera markets.
The Sources of Opportunity 37 from firms that have an aggressive technological outlook towards the industry, while firms interested in fulfilling consumer wants and needs tend incrementally innovate (Ettlie et. al. 1984). Market orientated firms focus on responding to customers and likely to miss opportunities for developing new products that consumers cannot describe (Christensen & Bower 1996). These opportunities tend to be left for entrepreneurial orientated organizations that take a proactive approach to the market (Atuahene-Gima & Ko 2001). Therefore for firms to be most effective within an industry a balance must be struck between a market and entrepreneurial orientation towards the market and new product development (Prahalad & Bettis 1986, Slater & Narver, 1994). Narver and Slater (1990) contend that a market orientation resembles the adaptive y learning process whereby a firm identifies environmental changes and responds to them in accordance with their deeply held assumptions about the competitive paradigm. Firms that take this closed approach to collecting, disseminating and responding to market information nl will find difficulty in changing market paradigms (Jaworski & kohli 1993). An entrepreneurial approach to product development will look at creating new resource combinations that may require new competencies not available within the existing firm, thus perceived as involving higher risk and uncertainty than incremental innovation. Consequently an entrepreneurial orientation resembles a more generative and exploratory approach to O learning, which doesn’t remain set upon existing customer, competitive and environmental assumptions, leading to paradigm breaking activities (Lumpkin & Dess 1996), e.g. the expansion of Air Asia into budget hotels and mobile phone credit in Malaysia. If a market orientation is an adaptive process of looking for opportunity which tends to create reactive responses to market conditions and an entrepreneurial orientation is a generative process for looking for opportunity, tending to be proactive in taking market initiatives, then these typologies can help to explain different firm orientation towards the fs types of innovation pursued. Figure 1.15. shows four potential firm opportunity seeking typologies with low/high combinations of market and entrepreneurial orientation and their expected corresponding characteristics. Figure 1.15. depicts that firms have different choices about how they structureoo themselves, conduct operations and develop strategy. Primarily a highly market orientated firm with low entrepreneurial orientation will react and respond to consumer needs and the market environment with incremental technology innovation aimed at developing new product features and attributes around the same core technology. Market needs dictate the technology the firm acquires and applies. These firms prefer to operate within a stable market environment where adaptability to the market is “safe” (Foxall 1984). Many firms involved in the manufacturing of FMCG products tend to adopt this typology12. In contrast, firms with aPr high entrepreneurial orientation will tend to look for and embark on proactive and aggressive strategies that are aimed at changing the marketplace to their advantage (Atuhene-Gima & Ko 2001). These firms are likely to develop radical innovative disruptions to the market place. They have a future rather than a present orientation. The weakness of an entrepreneurial orientation is the risk of having a low level commitment to the market environment and missing a lot of incoming information. Yet entrepreneurial orientated forms tend to be more adaptive to the environment than market orientated forms, even with this disadvantage. Entrepreneurial orientated firms often disregard market information and competitive analysis, 12 Fast Moving Consumer Goods.
38 Murray Hunter looking to future consumer needs. In contrast the market orientated firm looks at present market needs rather than future needs. Apple Computer has many characteristics of the entrepreneurial orientated firm. Within the continuum of highly market and entrepreneurial orientated firms, there are also firms that have a low market and entrepreneurial orientation and firms that have both a high market and entrepreneurial orientation. Firms with a low market and entrepreneurial orientation tend to be very conservative and focused internally. Therefore they are less aware of consumer needs, the market environment and new technologies than any of the other typologies. These firms undertake little product innovation. Many utility companies may be representatives of this typology. Firms that are both highly market and entrepreneurially y orientated are likely to develop products that are both pioneering technologically and offer new market advantages. These firms tend to be both market and technology focused and their performance is expected to be superior to firms within other typologies (Covin & Slevin nl 1988, Hart 1992, Venkataraman 1989). These companies are capable of creating breakthroughs targeted at present consumer needs. The U.S. company Proctor & Gamble shows many attributes of this typology in the way it develops new concept products that enter the market and attempt to disrupt the market. Examples of this strategy include products that underwent long R&D lead times before being launched, e.g. Tide Laundry Liquid, Pringles Potato Chips, and Pert/Rejoice 2in1 shampoo. O Market Orientated Both Market & Firms Entrepreneurially fs Orientated Firms High adaptability to the High Market Orientation environment but low High adaptive and idea generative idea & strategy generative & strategy ability development ability oo Conservative Firms Entrepreneurial Low Firms Pr Very low adaptability to High generative idea & the environment strategy capability Low High Entrepreneurial Orientation Figure 1.15. Four potential firm opportunity seeking typologies.
The Sources of Opportunity 39 Adaptation Opportunities may be created by adapting some form of technology from one domain and applying it to another in new ways that create or enhance a product, service or process. The key aspect of adaptation is the ability to see other potential applications for existing technology and create or modify products, services or processes. Adaptation may utilize either fundamental or applied technology for the development of other unrelated purposes13, or simply analogize an existing technology into another use. Some very good examples of adapting technology into other applications are the spin-offs of NASA technology developed during the space program. For almost 50 years NASA y developed partnerships with industry to apply ‘space technology’ into other commercial applications. Some of these spin-offs are listed in table 1.5. below. Some other examples of the adaptation of technology to new applications include the use nl of laser for various types of barcode reading, metal cutting, laser pointers, imaging, spectroscopy, eye, tissue and cosmetic surgery, dentistry, laser engraving and marking, photochemistry, laser cooling, microscopy and a host of military applications for target designation and antimissile technology. Microprocessors that made desktop and notebook computers possible have found numerous applications in all kinds of applications including sorts of electronic devices. O printers, automation control, automobile engine control systems, scientific instruments, cellular telephones, digital cameras, domestic appliances, thermostats, and almost any other Going back to the invention taxonomy of the automobile in Figure 1.10., a commercially viable automobile relied on a number of inventions to make it possible. Just like the gasoline fuelled car, the development of an efficient electric car will depend upon the development of other technologies, an efficient power generator or battery technology that can provide the car fs with enough power to achieve the range necessary to satisfy consumers’ requirements from such a car. Thus it will be the adaptation of other inventions or technology that will make the development of a really efficient electric car possible. Technology adaptation can also improve processes. Scanning technology used to undertake fingerprint scanning to protectoo computers is now being adapted to police patrol cars so that can check suspect fingerprints within the national fingerprint database from the squad car without the need to go to the police station. The analogy of a technology utilized in one application to another is also a way of seeing a new source of opportunity. As we saw in chapter four of volume one, an analogy is a way of seeing new connections and new patterns based on familiarity with something else. For example, Malcolm McLean was a trucker who for twenty years saw the slowness andPr difficulties of loading and unloading freight from ships. Prior to 1956 all sea freight was packed in irregular sizes of wooden crates, loaded and unloaded by cranes. On the contrary, a semi-trailer offers a secure and modular environment for transported goods and can be coupled and decoupled from the truck at both the manufacturer’s and receiver’s premises for loading and unloading. If these modular containers could be used on ships the whole concept 13 For example combustion is a fundamental technology that serves little purpose on its own. When combustion is utilized in a petrol engine, it deemed to be an applied technology. Another example would be magnetism, which on its own is a fundamental form of technology. However when it is the product of an electric charge within a ceiling fan, the magnetism is applied as a force to move a rotor with blades attach to increase the air circulation in a room.
40 Murray Hunter of sea cargo transport could be transformed thereby massively reducing the costs of loading and unloading with the extra security of freight consignments locked within containers. Malcolm McLean developed this concept with Keith Tantlinger which ended up with the creation of ISO containerized shipping. Table 1.5. Some NASA Claimed technology Spin-Offs14 Technology Space & Spin-Off Application Aircraft anti-icing NASA’s electrical air conditioning technology was applied to aircraft icing systems problems with the development of a DC powered air conditioning y thermoelectric de-icing system (Thermawing). Artificial limbs Artificial muscle systems used in NASAs space robotic and extravehicular activities was adapted to create more functional and manoeuvrable artificial limbs. nl Chemical detection NASA’s sensor technology has been utilized to develop moisture and pH sensitive sensors to warn of corrosive conditions in aircraft. Cordless portable NASA commissioned Black & Decker to develop a small portable drill for vacuum cleaner extracting core samples on the moon with minimal power consumption. The design was optimized using computer aided design which was also used to create the motor for the cordless portable vacuum cleaner called the Enriched baby food Fore resistant reinforcement Dustbuster. O Many commercially available baby infant formulas now contain a nutritional enrichment ingredient that originates from NASA research on algae as a recycling agent for long-duration space travel. The technology behind material that coated the Apollo command module heat shield has been applied to fire-retardant foams and paints for aircraft. This technology has also been used in the development of an epoxy material fs which expands when it is exposed to heat or flames to act as insulation. Infrared ear The temperature of the stars and planets are measured using infrared thermometers technology and this principal was applied to measure the amount of energy emitted by the eardrum for rapid temperature measurement of newborn or incapacitated patients. Light-emitting diodes Light emitting diodes were used by NASA in space shuttle plant growthoo (LEDs) experiments which led to the development of a hand held high intensity LED unit to relieve minor muscle pain, stiffness, and increase blood circulation. Powdered lubricants A solid lubricant coating developed by NASA for advanced aero-propulsion systems, refrigeration compressors, turbochargers and hybrid electrical turbo-generators has found numerous industrial applications. Solar Panels The high performance single crystal silicon solar power cell which is 50% more efficient than conventional solar cells was developed by a NASA sponsored 28 member coalition forming the Environmental ResearchPr Aircraft and Sensor Technology Alliance (ERAST). 14 Based on National Aeronautics and Space Administration, Spinoff 1976, at http://www. sti.nasa.gov/tto/back_issues_archives/1976.pdf, Spinoff 1981, http://www.sti.nasa.gov/tto/back_issues_ archives/1981.pdf, Spinoff 1996, at http://www.sti.nasa.gov/tto/back_issues_archives/1995.pdf, Spinoff 1996, at http://www.sti.nasa.gov/tto/spinoff1996/spin96.pdf, Spinoff 2001 Special Millennium Edition, at http://www.sti.nasa.gov/tto/spinoff2001/spin01.pdf, Spinoff, Fortieth Anniversary Technology Utilization Program, 2002, at http://www.sti.nasa.gov/tto/spinoff2002/spin02.pdf, Spinoff 2004, at http://www. sti.nasa.gov/tto/Spinoff2004/PDF/access.pdf, Spinoff 2005, at http://www.sti.nasa.gov/tto/Spinoff 2005/PDF/accessible.pdf, Spinoff 2006, at http://www.sti.nasa.gov/tto/Spinoff2006/PDF/accessible.pdf, Spinoff 2009 at http://www.sti.nasa.gov/tto/Spinoff2009/pdf/Brochure_09_web.pdf
The Sources of Opportunity 41 Technology Space & Spin-Off Application Tempur foam A memory or tempur foam developed by the AMES Research Center to improve crash protection in aircraft has been used in mattresses, pillows, aircraft, automobiles, motorcycles, sports safety equipment, amusement park rides, sports arenas, furniture and human prostheses. Ventricular assist Through the use of NASA technology a ventricular heart device (VAD) was device developed as a heart pump for patients awaiting heart transplants. Video enhancing and Video image stabilization and registration technology (VISAR) developed by analysis systems NASA is used to video enhancement of camcorders, video stabilization and conversion of analogue to digital storage formats, etc. VISAR is also used by FBI and military for surveillance and reconnaissance tape enhancement. y New Processes nl Where opportunities are based on new technical processes, many people within that domain will know that a need exists for process improvement, but are not sure of how to do this. New process improvement is usually sharply focused. There is a specific objective and a disciplined undertaking in trying to develop a better way of doing something. Opportunities O for new process development are usually found systematically, often the result and follow on from the discovery of a new material, discussed in the next section. New processes often intertwine and overlap with new business process change discussed under the section of structural change. A new technical process often brings about a new business process. The improvement of a technology process sometimes has wide and dramatic implications for an industry which is often not perceived at the time of its introduction. For example automatic teller machines (ATMs) initially could only dispense cash to credit card holders, fs and accept cash and cheques for deposits and bill paying in the 1960s. With the computerization of the banking industry and the further development of the ATM, the process of undertaking electronic bank transactions has revolutionized the way people undertake their banking practices. Technical process improvements within the telephone industry have developed fromoo manual exchanges where it may have taken up to 30 minutes to connect a call, to the present where international calls can be made directly and instantaneously from almost any phone system via international direct dialling (IDD). Once written messages had to be sent by letter and sent by sea across the world. Air transport shortened the time for a letter to go across the world from months to weeks. Telegram technology shortened the time to a day, with limited length. The telex made a breakthrough in time to a few minutes but with the need to type the message onto a paperPr ribbon through hold punches. Then came the bureau facsimile which could send pictures across the world within a few hours. Compact facsimiles machines made this technology available in a much more assessable and advanced form to small businesses and homes. However now with personal computers, the internet, electronic mail, telephony software and the internet people can directly contact each other via a host of methods in real time.
42 Murray Hunter The creation of digital photography and high graphics resolution home printers has enabled consumers to change their photography habits15, select and print their own pictures without the need to send a film to a photo shop to develop and print photos. Each process change has been an improvement upon the last and changes the types of companies that come to be associated and involved with each new process. This changes the balance of strategic importance within an industry. Post offices once dominated the routes of world communication with the shipping companies when mail was the only way to communicate across the world. Then the telephony companies took over through the days of the telegraph and telex. International cable companies dominated the bureau facsimile business until the technology was replaced with office and home facsimiles, which gave a y large number of facsimile manufacturers, new to the communications industry a share of the market through the hardware. Today it is the computer hardware, software, and search engine providers that are associated with the communications industry. Table 1.6. shows some of the nl companies involved with each stage of the evolution of international communications. Likewise the photo industry was once dominated by Kodak for film and camera companies. Now the industry is becoming dominated by companies manufacturing digital cameras, software, printers, paper and inks. Film photo developing shops have been a casualty of these changing processes, but new business models based on digital technology and self selection, O have developed in discount stores and supermarket chains. Table 1.7. shows some of the companies involved in each stage of evolution of the photo industry. Table 1.6. Some of the companies involved in each stage of the development of international communication Sea Mail Post Office, Shipping Companies fs Air mail Post Office, Airlines and air freight companies Telegraph Railway companies (early U.S.), Eastern telegraph Company (submarine cabling mid to late 1800s), Western Union telegraphoo Company, RCA, Post Office (in most other countries) Telex Western Union, Siemens and ITT (equipment) Telecommunications providers - AT&T, RCA Bureau Facsimile Western Union, ITT, AT&T, etc. Office Facsimile Panasonic, Brother, Ricoh, Sharp, OKI, Hp, Canon, Samsung, Toshiba, Philips Internet Gmail (Google), Hotmail (Microsoft), Yahoo mail (Yahoo), SkypePr Communications (eBay), Cisco Systems, AOL, etc., Apple, Dell, Acer, IBM, Compaq, Toshiba, Hp, Sony, etc. 15 Digital photography offers so many benefits over analogue film photography such as the ability to delete unwanted pictures, ability to take hundreds of photos without the need to change film, the ability to touch up and adjust pictures using photo software, and the ability to undertake panoramic photography through stitching together photos.
The Sources of Opportunity 43 Table 1.7. Some of the companies involved in each stage of the development of the photo industry Film Digital Film Manufacturers Camera Manufacturers Eastman Kodak Sony Agfa-Gevaert Canon Fuji Photo Products Kodak Ilford Photo Products Olympus Konica Photo Imaging Nikon y Polaroid Corporation (instant film) Ricoh Samsung Camera Manufacturers Lumix Eastman Kodak BenQ nl Agfa Pentax Minolta Casio Fujifilm Mamiya Polaroid Holga Printer Manufacturers Canon Nikon Pentax Olympus Film Developers O Canon Samsung Lexmark Epson Hp Primarily independent photoshops Software Manufacturers fs Adobe Photoshop Corel Paintshop Xara Xtreme Serif Photplus Photo Studiooo New processes need to be reliable to work as a source of opportunity. If banks now dependent upon computerized records lose their computer network too much, this downtime where transactions cannot be undertaken may act as a deterrent to customers16. The big question with a new process change is whether the change actually makes an improvement to the process in terms of productivity and creating benefits all stakeholders.Pr New Materials New materials are usually the product of a disciplined development process, or sometimes occur by accident. New material development may also be motivated by regulatory change that bans or restricts the use of an existing substance or material. New materials exploit incongruities where a better product, if available would be appreciated and 16 A solution this is to have a dependable back up off-line or manual systems that allow customer service to continue, which should be built into the business model.
44 Murray Hunter desired by users and consumers. New materials can bring a breakthrough or incremental innovation to an industry. An example of the influence of new materials on society can be seen through the development of industrial rubber. Rubber made a big impact on the manufacture of many products in a wide number of fields. Rubber only needed some refinement in the process of curing for the material to have important commercial application. Natural latex from Hevea tree species tended to perish and disintegrate until Charles Goodyear found a way (some say by accident) to stabilize and improve the resilience and elasticity. Through a process called vulcanization, the latex is heated with sulphur, peroxide or bisphenol is added during heating. Rubber with carbon black added to create tires and tubes enabled the development of the y automobile industry at the turn of the Twentieth Century. A synthetic version of rubber was also developed during the Nineteenth Century based on various petroleum by-products. These processes were refined and further developed during nl the Second World War as the United States lost access to sources of natural rubber desperately needed for the war effort. Rubber is important in the manufacture of automobile and aircraft tires and tubes, bicycle tires, aircraft manufacture, civil construction, window and door frames, sporting equipment, gloves, carpets, adhesives and textiles. The plastics industry is a very good example of how continuous development and • O invention of new materials allowed the development of new applications over the last 150 years. The following is a timeline of some of the most important discoveries and applications: 1862: Alexander Parkes publicly demonstrates the first man-made plastic – Parkesine at the Great International exhibition in London. Parkesine was an organic material derived from cellulose when heated could be moulded and shaped. • fs 1868: John Wesley Hyatt invented celluloid (cellulose nitrate) from cellulose and alcoholised camphor after spilling collodion and finding it developed into a hard and flexible film upon drying. Cellulose nitrate replaces horn and ivory as a material for making combs. • 1872: The Hyatt brothers patented the first plastics injection moulding machine.oo • 1885: George Eastman Kodak patents a machine for producing continuous photographic film based on cellulose nitrate. • 1897: The development of formaldehyde resins by mixing milk protein with formaldehyde to form casein plastics. • 1899: Arthur Smith improved upon formaldehyde resins. Used in electrical insulation. • 1907: Leo Hendrik Baekeland improved upon phenol-formaldehyde reactionPr techniques to create the commercially successful Bakelite. Bakelite dominated plastics for the next 50 years and was used as a material in furniture, radios, ornaments, and telephones, etc. • 1908: Jaques E Brandenberger after seeing a glass of wine spill on a table cloth looked for a way to make a flexible film that would waterproof the tablecloth. Brandenberger experimented with a liquid viscose (cellulose rayon). However after finding it too stiff for the cloth and peeling off in a transparent film, he looked for alternative uses. The material he called cellophane derived from the French words
The Sources of Opportunity 45 cellulose and diaphane (transparent) was used as candy and other food wraps after further extensive development by DuPont. • 1916: Rolls Royce begins to use phenol formaldehyde in the interior of its cars. • 1924: Rossiter, an employee at British Cyanide develops urea thiourea formaldehyde resins, the first water white thermosetting moulding powder. • 1926: Harrods displays the first coloured thermosetting plastic tableware produced by Brookes and Adams, The Streetly Manufacturing Company and Thomas De La Rue and Co. Eckert and Ziegler patent first commercial modern plastics moulding machine. Also in 1926, Waldo Lonsbury Semon and employee of the B. F. Goodrich Company, was looking for a way to bond rubber to metal. He tried to y dehydrohalogenate polyvinyl chloride in a high boiling solvent and developed vinyl. This material was used to manufacture shower curtains, raincoats, wires, appliances, floor tiles, paints and other surface coatings. nl • 1935: Wallace Carothers, an employee of DuPont after many years of researching polymers developed the material nylon. Nylon was used for fishing line, toothbrush bristles, surgical sutures and pantyhose. • 1936: The first use of Perspex for aircraft canopies and automobile windshields. • 1945: The production of LDPE bottles by Monsanto rapidly expanded the plastics • • O industry with glass bottles used for shampoos and liquid soaps replaced with plastics. 1948: Formica melamine sealed decorated laminates introduced. The introduction of 12” long playing records made from polyvinyl chloride (PVC). 1949: The first “Airfix” self-assembly model produced from polystyrene. The launch of Tupperware made from low density polyethylene. • 1950s: First appearance of polyethylene bags. fs • 1953: Commercialization of polyester fibres introducing the concept of “drip dry’ and ‘non-iron’. • 1958: First production of polycarbonates. These were later used in the production of industrial products like pipes, sheets, and films, compact disks, DVDs, drinking bottles, drinking glasses, lenses, eyeglasses, automotive headlamps, electricaloo appliance and computer cases, and toys, etc. Lego patents based on cellulose acetate, and Acrylonitrile-butadiene-styrene polymer lodged. Mattel launches the Barbie doll. • 1960s: The introduction of water based acrylic paints. Polyimide films and varnishes launched by DuPont. Silicone breast implants pioneered. • 1982: First artificial heart made primarily of polyurethane implanted in a human. • 1983: Swatch is made of primarily plastic components. • 1990: ICI launches Biopol, the first biodegradable plastic commercially available.Pr • 2005: The Airbus 380 is comprised of 22% carbon fibre reinforced plastics. • 2007: Boeing 787 skin is composed of 100% plastic composites, with plastic making 50% of all materials in the plane17. The above chronology shows that the plastics industry developed through a numerous number of developmental breakthroughs, of which many were accidental. Each new 17 Sources: http://www.bpf.co.uk/Plastipedia/Plastics_History/Default.aspx, http://www.americanchemistry. com/s_plastics/doc.asp?CID=1102&DID=4665, http://inventors.about.com/od/pstartinventions/a/plastics.htm
46 Murray Hunter breakthrough also needed a new process to be developed to commercially produce the new material. These breakthroughs spurred the development other industries, which depended upon some form of plastic material to develop further, like celluloid for the film industry, plastics for tableware and carbon composites for the automobile and aircraft industries. New plastic materials allow other industries to be created. Further developments within the plastic industry also allow other industries to improve their products. New materials allow for the creation of thousands of new opportunities through providing an element which makes another idea or invention technically feasible to create. Any technology infusion may be anchored to more than one technological source of opportunity. For example a single technology infusion may be a new material which also needs a new y process to be manufactured commercially, which has adapted another technology for this application and is a either a breakthrough or incremental innovation. nl STRUCTURAL CHANGES Structural changes are important sources of opportunities and can occur through changing external factors or through the firm constructing them through strategy. These are discussed in the next three sections. Changes in Industry Structure O An industry structure determines the basic level of competition, profitability and rate of fs firm formation within it. The industry structure also governs the way a firm behaves and rules that it will follow. There are a number of ways of looking at the industry structure but Shane (2003, P. 138) suggests that the industry structure is the product of the interrelationship between, 1. Industry profitability, 2. The cost of inputs, 3. Capital intensity, 4. Advertising concentration, 5. Industry concentration, and 6. The average firm size. Consequently, anyoo change within the industry structure will bring a change in the competitive dynamics of the industry and may require new types of strategies to align a firm to new arising opportunities emerging within the industry. Industry structure will usually change when shifts in costs, relationships alter, potential profits and emerging customer needs from economic, sociological, regulatory, or technological forces are detected and exploited. This presents itself in the conceptual elevation of a new product or service that may emerge to the level of being a potential andPr viable opportunity (Porter 1980, P. 215). This is often very difficult to see from within the industry as existing firms accept the tacit rules of the industry, have developed their capabilities and competencies according to the existing structure of the industry and become complacent. This was seen in the U.S. automobile and retail industry in the 1960s and the airline industry in the 1970s, where many incumbent firms did not detect industry changes (or ignored them) and made no changes to their strategy. New entrants came into these industries without much resistance from the incumbents and eventually took over market leadership18. 18 The U.S. automobile industry initially did little to retaliate against the entry of Japanese cars into the market and did not see that many customers wanted more efficient cars. Likewise the established retailers were slow in
The Sources of Opportunity 47 Industry structures are likely to change during infancy and in times of rapid growth. The emergence of mass production and new distribution channels through department stores allowed U.S. watch brands like Timex and Bulova to overtake the Swiss brands which maintained their traditional craft production and select distribution strategies. Likewise the post office lost its dominant position as the major means of sending letters and parcels to the airfreight and courier companies like Emery Air Freight and Federal Express. Back in the mid 1990s companies were trying to work out how to make money from the internet. David Filo and Jerry Yang while studying at Stanford University created a guide of topics of interest on the internet. They found that large numbers of people were accessing their lists to find useful websites. Filo and Yang knowing that they had a potential business y concept met with numerous venture capitalists at Silicon Valley, eventually teaming up with Sequoia Capital to form Yahoo in 1995. Together they developed the concept of selling space on the search engine web pages to interested advertisers, thereby developing one of the first nl early successful search engine business models on the internet, thus defining the industry structure. In 1993 six under-graduates of Stanford University met to begin a project to use statistical analysis of word relationships to provide efficient searches on the internet. Excite was one of the early programmed search engines, at the time and in 1995 developed the business model of selling advertising banners on the search engine web pages like Yahoo. O Larry Page and Sergey Brin, also students at Stanford developed a search engine that would rank web sites according to how popular they were with users as a measure of importance. The Google search engine was considered technically superior to Yahoo, Excite, Lycos, Netcenter, AOL.Com and MSN.Com. The founders after seeking ideas from the Silicon Valley Community saw the value of search statistics for assisting market research. Google also did not follow the graphic banner advertisements on other search engines and listed advertisements as text listings on the side of search results, similar to another site fs Goto.com. Yahoo, Excite and Google were the major pioneering companies that created and sequentially enhanced the commercial structure of the internet we know today. Industry structures will change during times where there is technology uncertainty. For example Pulsar, Fairchild and Texas Instruments invested heavily on light emitting diodeoo (LED) technology for the ranges of watches they introduced into the market. However LED technology appeared to be only suitable for low cost watches and Seiko, Citizen and Casio invested in the liquid crystal display (LCD) technology and combined the technology into the higher priced traditional analogue quartz watches, thereby gaining market leadership. Another two factors that change industry structures are changing cost structures and consumers wants and desires. While conventional airlines found it very difficult to operate with higher fuel prices and operational costs during 2008-09, the ‘low cost’ airline model hasPr been able to grow rapidly. This is in part due to the lower cost structures they operate within, due to not being burdened by existing employee agreements about work conditions and remunerations, etc. But the biggest contribution to ‘low cost’ airline success is the changing desires of consumers to trade off services for fare savings when travelling. ‘Low cost’ airlines in South and South-East Asia have also been able to attract large numbers of new customers, hence the slogan of one rapidly growing airline Air Asia “Now everyone can afford to fly”. reacting to the entry of discount retailers in the United States. Established airlines did not take seriously ‘low cost’ airlines for many years.
48 Murray Hunter Defined by Income Defined by social Defined by age background demographics y Market Defined by Defined by family Segment aspirations demographics nl Defined by Defined by leisure O interests activities fs Figure 1.16. Different perspectives that consumer market segments can be perceived from. Two converging technologies can lead to industry structural change. Satellites and television combined to provide satellite television broadcasting, mobile phones and the internet were combined to provide mobile internet services, and laser printing and publishingoo were combined to provide on demand publishing. All these convergences changed the structures of their respective industries. Likewise two business models can be combined to create new businesses appealing to new groups of customers. Book shops and coffee lounges were combined to create a relaxed atmosphere for customers to drink coffee while they browse through books and hardware stores developed snack bars and children’s playgrounds so parents could shop uninterrupted. These types of changes move industries forever. The innovations may be copied by later aspirants, but usually competitive advantage stays withPr the original innovator if they have successfully developed any possible economies of scale, benefitted from cumulative learning, have established loyalty to their brand and developed customer relationships, etc. Industries can undergo structural change through a potential new entrant redefining consumer and market segments. Existing consumer and market segments are an old snapshot of consumer will and represent what the market was historically, particularly if there is flux and change occurring in the market due to changing consumer aspirations and demographics. A potential entrant may be able to see a consumer and market segment that is large and remains unnoticed by others. They may perceive the market through a different perspective, or may possess expertise and resources that the older established firms don’t have. This
The Sources of Opportunity 49 provides different views and perspectives so the industry is seen from different angles. This can unlock potential new target market opportunities to exploit that may require competing in new ways. Figure 1.16. shows the different perspectives that new consumer or market segments can be viewed from. When a new buyer/market segment is identified through redefining the consumer group, a new product/service package and business model can be perceived which will be different from the existing one where competitors currently exist. This brings in a new market segment and shifts the rules and means of competition in the industry, for example a move from segment A1 to D2, as depicted in Figure 1.17. y nl O fs Figure 1.17. A shift in the competitive market segment due to redefining the buyer segment. Innovators that exploit structural change are particularly effective if the industry is dominated by one or a few large companies, especially when they have been unchallenged foroo years. Newcomers to the industry can take large market-share very quickly in these circumstances. This will always occur where there are fast growing market segments or latent market segments where incongruities exist and are set to grow if invigorated strategies are put into place. These hidden potential market segments are neglected by incumbents as they cling to practices that are based on obsolete and historical perceptions of the market. Within an evolving environment, demographics, incomes, technologies, regulations and aspirations continue to move on and change traditional market segments. Constructing ideas upon thesePr incongruities can quickly lead to revolutionary changes in the industry structure. International cricket is controlled by the International Cricket Council (ICC) and various national bodies in the world, with the Board of Control of Cricket (BCCI) controlling cricket in India. In 2000 Subhash Chandra owner of Zee Telefilms of India made several bids for the Telecast rights of various cricket test match series and although putting in the highest bid each time, was unsuccessful in securing the rights. Chandra decided to create an independent league, the Indian Cricket League (ICL) in 2007. The competition in a new viewer friendly format became very successful with six initial teams, similar to Packer Corp’s World Series Cricket in the late 1970s. Mature and semi-retired international players were attracted to the
50 Murray Hunter series against warnings from various national cricket boards that threatened life bans. The BCCI started its own league, the Indian Premier League (IPL) in retaliation during 2008 in a similar structure to the American Major league Baseball, following the Twenty 20 game format. The ICL collapsed after most of the players were enticed back to the BCCI. Although pioneered in India by the ICL, the IPL is now one of the most popular sports events watched by viewers in India, Pakistan, Bangladesh, South Africa, Malaysia, Singapore, UK, Australia and New Zealand. The Twenty 20 format, business model and way cricket is presented to the fan is revolutionary compared to how traditional international and national cricket was played around the world. Whether incumbents can survive structural industry changes depends upon how far the y change affects their existing competitive advantage. Channel domination and strong brand loyalty can withstand incremental change for long periods of time, and this is the basis of survival for many international brands like Colgate, Unilever, Nestlé, Del Monte, Coca Cola nl and Pepsi Brands, etc. Different industry structures are more stable than others. However even the most stable and conservative industries can change quickly if there is a trigger to ignite the forces of change. Potential entrants may know of opportunities for innovative entries into the industry, particularly if there is rapid growth. O Firms in the industry may have problems perceiving the meaning of information coming in, or just be ignoring it completely as it does not fit their view of the market. They are influenced heavily by their investment in R&D, focused on existing buyer/market segments where their capacities and skills have been developed to serve the existing rather than emerging market. This is why innovating companies are often those from outside the industry, and more importantly in the social sense. They are not part of the existing establishment of firms that have been guided by the industry rules, nor will they be accepted fs as such in the industry (Porter 1990, P. 49). Firms that resist change risk becoming obsolete and even going into demise. This was the case of Bethlehem Steel that built over 1,000 ships during World War two and supplied the steel to build every bridge between New Jersey and Manhattan. Bethlehem Steel was once regularly in the top 10 Fortune 500 companies in theoo United States, but through rising costs, competition from mini mills and its own arrogance, went into bankruptcy at the end of 2003 (Loomis 2004). New Processes Another source of opportunity that alters structure are new processes. A new processPr within a business/or industry improves efficiency, enhances a service or product delivery and provides extra features and benefits to users and consumers, thus giving the innovative firm some form of competitive advantage over its rivals. New processes take advantage of incongruities, changing demographics, new target consumer groups, or regulatory changes, etc. New processes create business that didn’t exist before, either through creating new customers or winning over customers from rivals. A process change usually occurs through either the development of new technology or curiosity that creates the following types of questions: How can this be done better? How can this process be changed to solve our existing problems? How can the process change to meet the needs of consumers better? How
The Sources of Opportunity 51 can this process be simplified? How can this process create extra benefits to consumers? A process change strengthens something that is operating less than optimal. New process innovation is more about application rather than the technology itself, although there maybe some element of new technology as the basis of the new process in some cases. What made factories efficient during the mid-Nineteenth Century was organization rather than the machinery itself. It was the textile factories in the North-Eastern United States that utilized mechanical looms in an assembly line fashion where humans fed in inputs, gathered outputs, and made sure nothing went wrong, that brought the leap forward in the concept of mass production. Before the Nineteenth Century labour had been organized along craft lines with intense specialization. Anything produced in this way was expensive y relative to products produced through assembly line concepts. Further innovations led to the opening of tooling shops and smaller factories producing intermediate products like specialized dyes to supply the emerging and growing textile industry. nl The concept of assembly line production spread from the textile industry to just about all others at the time, based on numerous new inventions at the time including the light globe, the zipper, the sewing machine, and eventually the automobile19. Mass production contributed to the working class being able to purchase consumer goods, through incomes gained from their labour supplied to the factories. In turn a rising working class with income helped drive modern economy as we know it today. O domestic demand for goods within the local economies, leading to economic growth. Mass production also helped develop the investment-production-consumptions aspects of the The development of computerization for business after the Second World War enabled many businesses to radically change business procedures and make distinct improvements upon their business models. Real time flight reservations and booking systems enabled airlines and travel agents to take immediate bookings on flights from customers. Before the fs mid 1950s, customers trying to book trans-Atlantic flights would have to wait 18-24 hours for seat confirmation. Real time accounting systems also helped the banking industry move from operating a customer’s account on a daily basis within a single branch office to enabling customers to operate their accounts on a real time basis across the bank’s whole businessoo network. As the cost of real technology was very expensive during the 50s, 60’s, 70’s and into the 80’s, companies that invested in real time systems could develop real competitive advantages over those that didn’t (Smith 2002, P. 27). The advent of real time computer systems and automatic information collection methods through scanning, etc., has allowed companies to cut back on large staffs of operators, clerks and accountants within company structures. New processes are not just restricted to business processes to create opportunities. ThePr Suzuki method of music appreciation and teaching has, according to many, revolutionized the way children learn to play a musical instrument. The Suzuki method to a certain degree has changed the way music is taught and given many children the opportunity to get some music appreciation where they may have otherwise not received. 19 Many commentators have credited Henry Ford as the creator of the concept of mass production. Although Henry Ford brought mass production to new heights by improving upon already established concepts, mass production had originated in a number of industries before the Ford Motor Company existed. Ford uniquely combined and synthesized many different methods of mass production together, utilizing heavy machinery along a long production line that can still be seen in most automobile plants today.
52 Murray Hunter New processes affect and change the way we do things in our lives. The availability of academic journals online has enabled the greater dissemination of intellectual knowledge around the world, new online vote counting systems enable quicker counting and tabulating election results, direct debit and on line bill paying at convenience stores and post offices has made utility bill paying easier, and the computerization of international telephone exchanges has made international phone dialling much more convenient than before. New processes will take on an even larger role in the creation of new opportunities as new methods of environmental management are developed over the next few years. y Adaptation, Combination and Integration A firm’s success and also its survival is dependent upon the ability to adapt to the nl changing environment. Failure to do so will leave the market open to other competitors that have more relevant strategies and capabilities to exploit standing opportunities. The optimal position of the firm in relation to presenting opportunities is when its strategies, resources, capabilities, skills and networks are aligned to the target opportunity. However as we have seen in the section on reengineering in chapter four of volume one, this alignment is not a O permanent position as opportunity is continually shifting. Therefore a firm must be able to adapt its strategy structure, deployment of resources and relevant capabilities to the shifting opportunity. Alignment must match opportunity and the firm must adapt to it’s continually shift to maintain alignment. When a firm’s capabilities are well aligned with industry success factors, those capabilities represent strategic assets to the firm and resources that lead to competitive success within the industry context (Amit & Schoemaker 1993). These strategic assets fs contribute to a state of adaptation where the firm has the capacity to survive the changing environment it is immersed within. However firms tend to become accustomed to their immediate environment and become blind to events over their horizons and fail to see what is not directly in front of them. A local bakery serving the immediate community radius has aoo more limited environment to appreciate than a bakery serving a national market (Watts et. al. 1998). Singer & Company was established in 1851 and manufactures sewing machines up to the present day. Singer developed an extensive network of retail stores selling a wide range of household electrical appliances in a number of developing markets. This created extensive new marketing channels in some important emerging markets and shows a successful adaptation to emerging opportunities. In contrast most of the old colonial companies in thePr ex-colonies of South-East Asia failed to adapt to the changing environments they faced20. The colonial companies had generally developed deep rooted preferences to short term trading activities and adverse to the manufacturing opportunities after colonial independence (Drabble and Drake 1981). Those colonial companies that are still independent today have tended to focus on service and trading activities21. The colonial companies’ attempts to 20 This was not totally within the colonial companies control as they never really re-established their dominance after the Japanese occupation and were the target of new nationalist government discrimination after independence. 21 Inchcape which incorporates the old Borneo Company is primarily a retail agent for various automobile manufacturers around the world, Diethelm took over Harpers and the East Asiatic Company to form DKSH
The Sources of Opportunity 53 diversify to other countries were partially unsuccessful due to limited knowledge of markets outside their traditional operating territories and difficulty of transferring their reputations to new markets (Reich 1991). Consequently the majority of these companies do not hold anywhere near the same domineering positions that they had over the old colonial economies a century before. Opportunistic adaptation is very common in entrepreneurial start ups where entrepreneurs do not undertake formal market research and act upon hunches and intuition (Bhide 2003, P. 18). Start ups are usually undercapitalized and the entrepreneur with minimal experience upon coming up against difficulties and problems will try to adapt what he or she is doing according to the changing circumstances until he or she gets a good strategy-opportunity fit. y Once established and following a growth pattern, maintaining a state of adaptation equilibrium requires continual strategy and capability development. Failing to do so, on a continual basis will erode long term abilities to exploit its opportunity mission and maintain nl relevance. Making specific combinations between say a product and an idea, a product and an aspiration, a service and a product, a product and a product, a product and a channel, a business model and a product or a service and a business model are powerful sources of opportunities. Through creating combinations between two different things, completely novel systematic scanning of the environment. O concepts and new ideas can be constructed and exploited as opportunities. Combining two or more components together into ideas is an intuitive creative process rather than the result of a According to Frans Johansson (2004) when a person steps between fields, domains, and cultures, with insight existing concepts can be developed into new ideas, in what he calls the Medici Effect. Sir Saint-John Harmworth combined mineral water with the concept of ‘chic’ and sophistication when he purchased the Perrier spring in Vergèze France in the late 1890s. fs Nestlé in Thailand developed their own branded drinking water product within an extremely crowded market but opened up a new and unique marketing channel, road side stalls and restaurants. Even though roadside food stalls and restaurants already served their own boiled drinking water to customers, Nestlé offered the consumer a safety guarantee of purity and anoo extra source of profit to the vendor. Proctor and Gamble combined two products together, a shampoo and conditioner when they launched Rejoice/Pert Shampoo in the early 1990s. Air Asia and many other airlines combined direct internet flight booking with low cost air services. Many car accident insurance companies have taken the trouble of getting three quotations for accident repairs by creating hubs where customers deliver their cars to the insurance company for repair, thus providing convenience to the driver and cut down on fraud and quote fixing within the smash repair industry. An invention and service was combinedPr when ATMs were introduced into the banking industry. Many farms develop other sources of income through developing agro-tourism facilities on their properties, thus combining farming with tourism and specialized feed preparations can increase omega-3 fats in egg yolks creating low cholesterol eggs which associate good health with a product (anon. 1982). which still undertakes product distribution within the region, and Getz Bros. & Co. under ownership of the Marmon Group Inc. is still involved in distribution in China and a number of other markets representing autonomous manufacturing companies within the group. Sime Darby was taken over in the infamous raid on the British stock exchange by the Malaysian Government in 1982 and combined with Golden Hope Plantations and the Guthrie Group on 30th November 2007 to become the largest capitalized company in Malaysia.
54 Murray Hunter Through combining various concepts new and novel ideas can be constructed. Combination is a major source of entrepreneurial ideas that tend to create new sources of demand rather than discover incongruities or latent pockets of demand to exploit. Vertical integration discussed next has some elements of combination associated it supply chain construction, but the processes of vertical integration are much more systematic. Vertical integration is a strategy utilized to gain access to resources and markets, and develop linkages through the supply chain that lead to cost savings. Vertical integration occurs when a firm develops or owns its upstream suppliers and downstream buyers, thus controlling the product throughout the whole value chain. For example, a car manufacturer in the US may manufacture many of the car part components, assemble vehicles, and transport y them to their own showrooms. The extent to which forward integration can be practiced depends upon the types of industries, where it may be most suitable for business to business operations but poorly suitable for FMCG (fast moving consumer goods) products. Vertical nl integration became very popular in the 1960s and is still a common business model in the oil and mining industries, the chemical industry, some food industries and by the US car makers Ford and GM during the 1960s to 1990s, as a means of controlling costs with suppliers22. The major objective behind vertical integration is to lower transaction costs. However administrative models developed to coordinate the value chain may impinge upon this O objective by creating high overheads23. Designated cost and profit centres determined across the value chain may lead to hidden subsidies to different business units. Vertical integration is best suited for stable technologies. Integrated supply chains in stable environments can be an enormous barrier to entry for potential competitors. However in times of rapidly changing technology within a dynamic industry vertical integration can make a supply chain inflexible. This hinders the firm competing against other within the industry with more flexible supply chain arrangements. The costs involved in R&D to fs maintain a competitive position across a whole supply chain may be more than the potential benefits. Vertical integration is a way to reconfigure firms within and industry that can become the source of opportunities and/or create new sources of competitive advantage. A firm can;oo a) Create new distribution channels or selling approaches, b) Takeover buyer functions or eliminate the channels, or c) Adopt completely new process technologies that change the value chain (Porter 1985, P. 158). Changing value chain linkages can create uniqueness in the way a product or service isPr offered and delivered to the consumer, thereby changing their experiences, creating new benefits and forming new sources of opportunity and/or competitive advantage. For example dramatically different value chains presenting new opportunities can evolve from reconfiguring the value chain. Many low-cost airlines enable ticket booking online through 22 Ford and General Motors used to manufacture some of their own parts for car assembly as a deterrent to suppliers and a means of understanding the cost structures of the parts they purchased. 23 This can be considered an example of Parkinson’s Law which states that work expands so as to fill the time available for its completion. Expanded value chains will tend to develop support hierarchies of clerks and managers to process work that “coordinates” the new vertical integrations through reports and plans, etc. This will entail the allocation of extra resources needed to cope with the extra data requirements.
The Sources of Opportunity 55 the internet for convenience. Domino Pizza incorporated home delivery into the business model thus making it easier for consumers to purchase the product. FedEX utilized their own aircraft and created hubs rather than rely on scheduled airline flights and/or long distance trucks to improve service. Value chain reconfigurations can occur without the need to acquire other entities within the chain. For example the Japanese auto industry cultivated their suppliers in the value chain and developed just in time (JIT) supply and kanban inventory systems to reduce stock levels and capital outlays. Many airlines form strategic alliances with smaller feeder airlines to increase their network service spreads to passengers, as well as offering accommodation and rent a car packages. Through innovative value chain configuration firms can develop new y sources of opportunity and create huge barriers to entry that prevent new entrants into the industry. Horizontal integration or diversification is commonly utilized by firms to expand nl operations within the same level of the value chain. Horizontal integration involves expanding the number and/or types of products a firm sells within a market or merging or acquiring a similar company operating within the same market. The rationale behind horizontal integration is to develop synergies through combining or adding on products or product portfolios that share common buyers, common channels, utilize common knowhow O or knowledge or utilize common materials or production processes. This may create larger economies of scale, a wider product/market scope, increased market power, access to another market, or a reduction of costs per product sale due to higher volume of sales flowing through the firm’s market channels. Horizontal integration also occurs in grouping together similar products or services like media, where similar content and expertise is required. For example, a company within the television industry may buy up television stations within different locations to develop syndication and network synergies. Media companies may also set up or fs acquire cross media companies like print, radio or internet media. Although horizontal diversification appears to have many advantages and widen sources of opportunities for a firm, there are a number of risks and dangers involved. Firstly, even though products may share the same raw materials, packaging form, knowhow, expertise,oo customers, consumers and marketing channels, they may not necessarily be compatible. For example, the well known consumer product manufacturer S.C. Johnson had to divest the Agree hair care range as it was not compatible with its traditional household and insecticide products and was perceived as diverting market focus from the core ranges. FMCG product companies often find after mergers that they don’t necessarily obtain the mass they expect because trade customers tend to rationalize the two companies product ranges once combined. For example where a combined company has 5 or 6 biscuit or detergent brands, tradePr customers may eliminate the weakest ones leaving 3 or 4 brands remaining in their stores, rather than the original 5 or 6. Ries and Trout (2000) postulate that the power of a company comes from the power of their brands and not the other way around. They cited the examples of IBM’s failure to compete against the incumbent Xerox in the paper copier market and the Coca Cola Company’s failure of Mr Pibbs in competing again Dr. Pepper.
56 Murray Hunter RESOURCE MONOPOLY Very few industries actually operate according to perfect competition. Firms develop and exercise some form of insulation from other firms by means of real or fancied product differences from their rivals (Stigler 1968, P. 308). There are numerous products in the market but demand for them is far from being a random action. This applies to housing, automobiles, electrical appliances, travel and holidays, utilities (electricity, water and gas), food, and toothpaste. Products in each category do not necessarily compete directly, yet there is rivalry (Stigler 1968, P. 310). Every firm has some degree of latitude in setting prices before customers will start looking for substitutes. In this way firms have some degree of y monopoly. A resource monopoly is a general term referring to a situation where a firm controls all the resources necessary to produce a product, perform a service, or generally undertake nl business in a defined area. It is an economic term but also describes a source of opportunity when a firm has a monopoly advantage over a specific resource. In general the less competition from other goods and services and availability of substitutes, the stronger will be the monopoly position. Monopolies occur for different reasons, physical location, access to a particular raw material, control over a capability, a legal concession and restriction on other O firms to compete, or a form of monopoly through powerful branding. These forms of monopoly will be examined in more detail in this section. The desired effect of a monopoly situation in an industry is the ability of a firm to produce above average profits or resource rents. To test whether a monopoly situation exists, simply requires looking to see if a firm is making above average profits and how easy it is to set up another company to compete against the incumbent firm (i.e., what are the barriers to fs entry?). If it is difficult to set up another company to compete for some reason then the firm is said to be operating under some form of monopolistic opportunity. If it is easy to set up a company to compete against the firm, then the firm is exercising some other form of power. Monopolies are diverse in form as is the power they can exercise.oo Physical Resource A unique barrier to entry to other firms in a market is the procession of some form of unique physical resource. The mining industry is a good example of firms that can exercise market power over the exclusive access to a particular precious material or mineral. MMC Norilsk Nickel of Russia controls over 90% of the world’s nickel and the world’s leadingPr producer of palladium. The De Beers group of companies controlled almost all diamond mining and trading in Southern Africa and Canada until the late 1990s through various methods of restricting the market (Kretschmer 1998). Companies that hold strategic claims for minerals that have, or are likely to have strong demand in the future will be in a position to make massive profits. For example, a mineral like lithium may have a large future as a material needed in batteries for hybrid cars. Mining companies that hold these resources will be in a good position to grow exponentially in the near future, if battery technologies require the use of lithium.
The Sources of Opportunity 57 Similarly, the petroleum industry is in the hands of a few. OPEC was formed to act as a monopoly by taking some oil out of the market by restricting production to maintain high prices. This worked in 1973 causing an economic crisis when the price of crude oil rose dramatically with no immediate alternatives available. However when cartels like OPEC cannot force all members to follow like the breaking ranks by Saudi Arabia in 1986, they are not effective. According to Thomas Friedman (2008, P. 248) one of the problems of energy monopolies, be they petroleum or electricity, etc, is that there is little incentive for energy companies to develop new sources of energy. Only 2.0% of utility company revenue in the United States went back into R&D compared to 8.0% for the medical profession. Other physical monopolies are attached to a physical asset or location. These can be y roads, airports, shipping terminals, waterways, canals, harbours, lighthouses and aircraft navigation facilities, bridges, ferries, and utilities like water and electricity production and distribution systems. Some require a monopoly situation to develop the costly infrastructure nl where two separate distribution networks may not be practical as in electricity distribution, but others may just be concessions granted by governments for the purpose of raising revenues. These types of monopolies are very effective, especially if consumers have little or no practical alternatives available to them. Capacity Resource O A capacity resource is an exclusive capability of an individual or firm to carry out a particular activity. This can usually be achieved in three ways; the need of specified qualifications or licensing to carry out a function, through specific skills and capabilities a person or firms have at their disposal, or through shear dominance and strength. fs Professional occupations like doctors, lawyers, architects, engineers, pilots, veterinarians and psychologists, etc., require a formal degree recognisable by a governing association of the profession and license to practice. Likewise other professions like hairstyling, meat processors, electricians, plumbers and alternative health practitioners need to satisfyoo governing authorities of the right to practice a profession. Taxi drivers must also have a license for the transport vehicle and personal license to enter the profession. Through these restrictions only suitability qualified people with the capacity to carry out these professions are able to do so. This represents a form of monopoly power regulated by professional bodies which govern the means to enter and stay within the profession. The second source of capacity resource is a firm’s special ability to operate within a market. This could mean the firm has a special production capability, a capacity to sourcePr certain materials needed in the production of a product, a proprietary method of performing a service, or a specialised market supply chain capacity that is generally not available to others. For example, FedEx through its hub development and own aircraft have special capabilities to perform in the courier industry that only a few other companies can match. The third source of capability resource is economies of scale gained through size or other special geographic conditions. Utilities like electricity, telephone and cable television firms through their own networks of cables are able to develop an economy of scale that other firms will find very difficult to emulate. Two suppliers of cable for electricity, telephone and cable television would mean cable duplication which may not be practical. This situation tends to make certain industries dominated by a single provider. For a competitor to enter the market it
58 Murray Hunter would have to either lease network lines from the current provider (regulated for in some markets) or find an alternative means of service delivery, i.e., using satellite instead of cable for television services. Legal Resource Governments usually grant a restricted number of operating licenses to firms in the banking, finance, petrol distribution, communications and broadcasting industries. This creates an oligopoly situation where firms have some degree of pricing power, especially if y they can combine another source of monopoly like branding and product differentiation. Governments may also limit the granting of licenses to gambling concessions and casinos forming legal monopolies where revenue above costs are shared between the government and nl concessionaire as taxes and profits respectively. Non-government organizations like sports federations also restrict membership of sports clubs like football which have some of the characteristics of a monopoly. Another way governments can create monopoly competition and sources of opportunity is through tariff and non-tariff trade barriers. Tariffs, non-tariff barriers and subsidies have the O effect of giving protection to domestic operators. This can form artificially positive business conditions. Governments take these protective actions to promote the development of a new industry that promotes economic growth and employment as well as escaping the necessity of importing items that can be manufactured domestically. Governments hope that these infant industries one day become efficient and even export, but this is rarely the case and the majority of industries built by tariffs and subsidies, etc., fail to be sustainable. Another source of monopoly and market power is intellectual property. Intellectual fs property is a legal exclusivity to novel inventions, some forms of industrial processes, plant breeding rights, designs, trademarks and copyright. The purpose of intellectual property rights is to encourage research and development of new products and technologies. This exclusive right may give a firm a source of exclusivity and market power as a result of its exclusiveoo right to sell the product or monopoly. This can be clearly seen with pharmaceutical patents, copyright protection in publishing and computer software and brands expressed as logos and trademarks. The value of patents varies from industry to industry and the technologies involved. Patents are generally used in the electronics industry through cross licensing as a means to create revenue to support R&D. Patents in the chemical industry however are used to protect the exclusivity of a manufacturer with regards to the production of patented chemicals. ThePr prices of goods tend to reflect the scarcity of technology protected by patents. For example plasma and LED television sets are much more expensive than cathode ray television sets reflecting the power that manufacturers of plasma and LED screens have through patents. Brand Resource Products and services produced by companies differ in terms of quality, reputation, location convenience, and so on. These factors influence the desirability of a product to various buyers. Each product or service has some form of uniqueness (monopoly power), and
The Sources of Opportunity 59 yet has many rivals24. Porter (1980) defined two forms of competitive strategy that can build some degree of product uniqueness through product differentiation and focus upon specific niche markets. Porter postulated that through differentiation and focus a firm can develop some form of competitive advantage over its rivals. As we have seen earlier in this chapter De Bono (1993) outlined the criteria through which a firm can develop a value monopoly, listing physical uniqueness, technological uniqueness, name recognition, dominance, cost of entry, brand image, and segmentation, as factors that contribute to creating a brand name that is desired by consumers over other brands. Chan Kim and Mauborgne (2005) took the concept of differentiation and creating product uniqueness further in their book Blue Ocean Strategy. A brand resource used correctly may be a power source of opportunity for firms that have y built up brand recognition and image. A well known brand can assist greatly in the international distribution of a product, i.e., Gucci, Pierre Cardin, Sony, LG, etc. Owners of new shopping malls would be usually more interested in securing McDonalds, Burger King, nl KFC and Pizza Hut as tenants than a clone. A recognisable brand resource gives clear images about what a product or firm represents, i.e., Shell, Exxon, British Airways, Virgin Airlines, McDonalds, etc. A brand resource is the fundamental basis of franchising where a franchisee seeks to legally use a brand name as it is known and has some degree of consumer loyalty, i.e., 7-Eleven, KFC, Pizza Hut, and Coca Cola, etc. In these ways a brand resource empowers O the owner to implement expansion strategy much more easily than an owner of an unknown brand. A brand and a trademark can be a source of enormous profits. However a brand resource can only in a limited way provide a platform and opportunity for product and service line extensions, although this has many limits. Using branding as a basis for line extensions can be very successful within the same market category. For example S.C. Johnsons brand Glade is strongly associated with air fresheners, as is Sara Lee’s Ambi Pur. However use of a brand for line extensions in other categories, even close ones, does not fs appear to be a very successful form of strategy. The Lifesavers brand well known for the candy with a hole through the centre was used in the launch of a new bubble gum unsuccessfully. Knowing branding limitations, Toyota developed a new brand Lexus for their up market luxury cars to compete against Mercedes and BMW rather than utilizing the welloo known brand Toyota. Scarcity Power Certain types of businesses like retail providers located within a tourist, historical or sports precinct, entertainment, food and beverage in shopping malls and food vending inPr restricted places like airports, train stations, and the aircraft and trains themselves, etc, can exercise some degree of scarcity power. Scarcity power is a term used by Time Hardford (2006) in his book The Undercover Economist to describe a situation where a business can charge a price above the standard or going price in a particular location because of the unique location of the business away from other potential competitors at a crowd drawing location. 24 These different can be functional, service differential based, market positioning based, aspiration based, branded based, etc. Also products like wood, steel and aluminum are unique to each other, but also substitutes to each other in the functions they are used for, e.g., building a structure.
60 Murray Hunter This is why a cup of coffee is relatively expensive in many tourist locations, airports, and historical sites around the world. Scarcity power is primarily based on the laziness or the inconvenience to the customer in seeking out an alternative cheaper source of the product they are purchasing. To go to a cheaper location to order a coffee while at an airport may be inconvenient or even impractical. This source of opportunity is used by many types of retail businesses in shopping malls, public high traffic locations, tourist precincts, sporting events and city centres, etc. The extent of each business’s power to exercise scarcity power differs. Low cost airlines can exercise ‘no outside food policies’, thereby exercising virtual monopoly power within flight times. Customers have the choice to eat before the flight or buy food during the flight from y the airline. Supermarket chains also practice scarcity power by using different pricing structures in various areas according to social-economic groups living within the area and the effective competition. One will see that convenience stores sell their goods at higher prices nl due to the fact that they may be very convenient to drop into and operate at odd hours during the day where other competitors are closed. In unique tourist and historical areas many attractions practice two-tier pricing for local and foreign tourists. This occurs around many tourist attractions around the world; including Disneyworld which offers local residents half price (Hardford 2006, P. 38). In this way firms can obtain the maximum prices possible from O the infrequent visitors while servicing local regular customers at prices they are willing to pay. No company has scarcity power unless it can obtain the conditions of scarcity. Every retail outlet has some degree of scarcity power due to the fact that a customer must leave the store and go to another one to purchase or consume a product (Hardford 2006, P. 42). How much scarcity power a firm can exercise depends upon how sensitive people are to price. As mentioned this source of opportunity is most effective in the entertainment, tourist, sporting, fs retail and travel related industries. Changes in the Cost or Value of Resourcesoo Changing resource costs or values create new opportunities by changing industry and product cost structures. A change in the cost of a resource will make it either more or less attractive to consumers of that resource. For example the rise in the cost of petroleum makes the use of petroleum as an energy source less attractive. Due to short term inelastic demand, consumption will not necessarily decline, but will encourage serious consideration of alternative energy sources. From the demand perspective, an increased interest in ‘greenPr technologies’ will increase the value of renewable resources, perhaps making them viable alternatives to conventional energy sources. This is the rationale behind the development of alternative energies and their relative economic feasibility to conventional fuels. As petroleum prices increase the viability of alternative fuels increase.
The Sources of Opportunity 61 REGULATION Regulation determines who is able to enter a market/industry, how many, how firms must behave, and what other legal requirements they must satisfy. Regulation in some form covers most aspects of our society and influences the opportunities available to the population within it, be it the general population at large or a small select qualified group within it, with the barriers to entry it creates. Regulation determines what is legitimate and legal in society and what is illegitimate and illegal. Regulation determines what customers should expect, how protected they are in the decisions they make, and institutionalizes these expectations and protections. Regulation can define the product cost and pricing structures of an industry, y determining its attractiveness to investors. Regulation influences the general opportunity environment. The terms of entry into an industry, standards and competition are defined by regulation, which regulate/control, nl support/facilitate and encourage/discourage firms pursuing opportunity. Product/market regulation raises barriers to entry and contributes to higher mark-ups and profits, which is likely to slow the rate of potential opportunities in the product/market. Likewise where regulatory institutions are inefficient, burdensome and distorted through poor enforcement, the country is likely to be undemocratic and the general environment for opportunity will be P. 664, Djankov 2002). O poor and advantage only a few privileged groups, as there are great barriers of entry to others. This leads to unofficial economies and lower levels of wealth in general society (Porter 1990, Regulatory factors that support/facilitate opportunity include intellectual property laws, the general buoyancy of the legal system, property laws and capital raising regulations. Likewise positive labour laws, business formation procedures, low trade barriers and fs protection, sound contract enforcement, positive fiscal, monetary and taxation policies, the availability of education and training, good policing of corruption and a positive research and development policy, encourages opportunity exploitation. Anti-trust laws, environmental laws, licensing and permits, specific regulatory bodies, product and safety standards and relevant boards of investment act to control and regulate the opportunity environment. This isoo shown in Figure 1.18. In all the government attempts to create an opportunity rich environment through; 1. Lowering barriers to start-ups which should have strong impact on nascent firms exploiting potential opportunities. This can be achieved through lowering the cost of licenses and permits, reduce labour obligations25, taxation, enhance intellectual property and contract enforcement policies, and increase education and trainingPr (Koedijk & Kremers 1996), and 2. Lowering barriers to expansion where existing firms can expand with new opportunities, through enabling firms’ capital raising ability. The higher the costs of labour, raising of capital, and taxation, and the more rigid regulations are, the more negative will be the influence on opportunity. The more embedded and stable are property rights, intellectual property and the legal system, the more positive are 25 This is a complex issue as the government also has obligations to protect workers’ rights, so employees are provided with some forms of security favouring the worker over the employer in most legal jurisdictions.
62 Murray Hunter the environmental conditions for the exploitation of opportunities, particularly those involving intellectual property. Specific opportunities usually arise out of the chance of specific regulation, which will be discussed in the next two sections. Support/Facilitate Intellectual Property Laws Capital Raising Legal System Institutions y Property Laws Labour Laws Business Formation Anti‐trust Laws nl Procedures Environmental Taxation Laws Trade barriers & Opportunity Licensing & Protection Permits Fiscal & Monetary Specific Regulatory Bodies Policy Encourage/Discourage O Contract Enforcement Education & Training R&D Policy Policing of Corruption i.e., Pesticides Board Product Standards & safety Board of Investment Regulate/Control fs Figure 1.18. Factors that Support/Facilitate, Encourage/Discourage and Regulate/Control opportunities. Effect on Processoo Regulation concerning process determines which firms can enter a market through licensing, the ‘rules of the game’, how easy or difficult it is to start up a firm, environmental compliance, occupational health and safety, ethics, corporate governance and social responsibility, consumer protection and the raising of capital. Studies have shown that increased regulation concerning the number of steps for start-up does affect the rate of firm formation (Dana 1990), especially young nascent entrepreneursPr (Stel, et. al. 2007). One would expect that there will be higher rates of opportunity start-ups in countries where there are less start-up procedures, a fewer number of days required to establish and start-up business and advice, support and funds available to nascent entrepreneurs (Dennis 2004). Getting funds is an insurmountable obstacle for many nascent entrepreneurs, where the more difficult it is to get funds, the more difficult it is to exploit potential opportunities. Occupational health and safety and labour laws seem to have less influence on the propensity of start-ups (Stel et. al. 2007). It is generally argued that countries with lower environmental compliance costs have a competitive advantage in the production of pollution intensive products and therefore greater
The Sources of Opportunity 63 opportunities for export exist from these countries. However some studies have shown that only anecdotal evidence exists for this assertion (Levinson 1996), although some later studies have shown some causal affects of the laxity of environmental regulation being an attracting factor to FDI investment (Low & Yeats 1992, Xing & Kolstead 2002). Leonard (1984) asserts that specific types of industry have pushed their investments overseas due to stringent U.S. (and European) environmental laws. These include; 1. Manufacturers of very toxic products such as asbestos, arsenic, trioxide, benzidine based dyes, and some pesticides, 2. Some metal processing industries such as copper, zinc and lead (although these shifts y maybe based upon the availability of minerals and country’s requirement they be processed locally), and 3. Manufacturers of organic products that serve industry as intermediate products. nl With changes in government policy, for example the changes in government environmental policy covering clean energy, stimulus bills and taxation incentives for renewable fuel, renewable electricity and fuel standards has the effect of creating new opportunities for new bio-fuels and natural ways of generating electricity. In the United O States, the passing of the California AB32, Global Warming Solutions Act, will reduce carbon emissions to 1990 levels by the year 2020, a nearly 30% reduction. This along with 31 other regulations affecting the environment will force companies to look at new processes and products that will comply with the regulations. This creates new product opportunities. Increasing environmental regulation will enhance market opportunities for companies manufacturing pollution control equipment. Changes in regulation normally lead to changes in industry structure, i.e., deregulation of fs the airline and banking industry, led to new opportunities as regulations which block entrants into an industry were removed. This encourages competition, innovation, resulting in the shedding of unproductive practices (Holmes & Schmitz 2001). After deregulation of the airline industry, many new airlines and business models were created (Kelly & Amburgeyoo 1991). Likewise, deregulation in the securities industry increased the revenue opportunities and scope for new brokerage business models that could be utilized in the industry. For example many banks in Australia could offer electronic transactions through the internet for a large discount on full service transactions. However regulation can also deter opportunities. For example building standards may deter new methods and practices of building (Sweeting et. al. 2003). Porter (1990, P. 648) believes that product regulation can act to increase innovation andPr product quality which may provide a manufacturer with competitive advantage in markets with lower levels of regulation. This occurs because the high standard product may be more desirable to customers than the lower quality products available in the market with lower regulatory standards. Therefore the concept of industry protection may be a deterrent on innovation, particularly if low product standards exist.
64 Murray Hunter Effect on Product Regulation concerning product specifies standards, what products are forbidden, and specific restrictions on the use of certain materials in the manufacture of nominated products. Changing regulation brings disequilibrium to the economy, where resources take on new values. Regulation alters the relative rewards to entrepreneurs producing new products that regulations create new demand for. This creates a new source of opportunity as it provides for an increase of demand for a product (Baum 1996). For example, regulations making it compulsory to place infants in baby seats in cars dramatically increased baby seat demand. The compulsory installation of smoke alarms in new homes in many jurisdictions created new y demand for smoke alarms. This effect can also occur indirectly where tax incentives for items like solar heating and solar power increase demand for solar heating systems and solar panels. The structure and philosophies of chemical regulatory systems around the world are nl changing dramatically, led by the European Union (EU). Although the EU represents only 30% of the global market, many countries including the US, Japan and Australia are taking regulatory leads from EU changes. In 2006, the European Council of Ministers adopted new regulations forming the framework for the registration, Evaluation, authorization and Registration of Chemicals (REACH). This accompanies the Biocidal Products directive, O various sub-committees on consumer products and the EU General Food Laws. Together these pieces of legislation, directives and committees regulate chemicals and foods more stringently than ever before, which has resulted in firms being required to adopt new processes, methods of manufacture, storage and transport and reformulate many products that are found not to comply with the new regulations. The effects of these moves by European authorities is wide and has hit many third world producers of natural products, where previously pronounced safe items are now deemed potentially unsafe for human consumption. fs These regulations and committees have drastically affected various opportunities for natural products, particularly to the food, cosmetics, alternative medicine, and flavor and fragrance industries. Voluntary certification programs like organic, fair-trade and various environmental labelling schemes have assisted in creating and sustaining opportunities in the production ofoo products that are ethical, sustainable and environmentally responsible. Some firms cope better than others in reacting to the change that the regulatory environment creates and see the opportunities involved, while others fail to see them. As previously discussed in this chapter, firms that have invested large funds and resources into existing technologies may find it more difficult to adjust than new entrants into the industry that have created their technology anchor around the new technologies required to comply with new regulations. Regulatory uncertainty and the potential change in government and anyPr possibilities of changes in policy thereafter lead to a decline in innovation. Regulation can strengthen or weaken certain procedures or products through what processes and products they support and do not support. This can be clearly seen through Medicare health insurance schemes which increase the popularity of certain surgical procedures and drugs they cover in their schedules, and discourage the prescribing of items that are not covered.
The Sources of Opportunity 65 NON-INNOVATIVE Non-innovative opportunities are those which are not based on breakthroughs, incremental improvements in technology, or in utilizing novel business models to gain competitive advantage. Non-innovative opportunities include personal services and consulting, duplication of other businesses, extension of other business concepts, or copy and imitation of other products. Non-innovative businesses are risky, and usually rely on hard and continuous work to succeed and survive. For example, restaurants are one of the most risky businesses to open and require not only culinary abilities, but a strong business sense as well to be able to carry the business over y fluctuations in trade. Restaurants although having good profit margins on the food served have high overheads to cover, where breakeven points are high. Independent direct sales, working from home selling products like cosmetics, utensils, and cleaning products, etc to nl earn sales commission usually depend more on signing up other distributors than selling products. Boutique type retailing like a day-spa, massage centre, or clothing boutique are very risky when consumer discretionary spending is low, and therefore subject to great fluctuation in turnover. Traffic driven web businesses generate revenue off site advertising, which is often very hard to achieve. The traffic needed to build up a successful website is extremely Personal Service and Consultancy O high requiring huge investments in gaining any presence on the web. Personal services and consultancy includes a wide range of activities including fs investment advising, personnel recruitment, real estate sales, tax advising, legal services, house conveyance, managerial consultancy, interior decorating, fortune telling, and any other personal service or consultancy that requires the provision of personal advice or any other service to clients. This type of business depends upon an individual having personal knowledge and experience in a discipline that people are willing to pay for, good personaloo reputations, personal selling skills, and contacts and deal making skills (Bhide 1999). These businesses are totally orientated towards exploiting short term consulting opportunities and success depends upon the ability to design and develop a good product (service) and the ability to deliver it well to solve the client’s problems. The industries that these businesses operate within are usually fragmented and sometimes localized. Little innovation can be utilized in developing products in this industry as it will be duplicated almost immediately by competitors. Flexibility is the key in being able to tailorPr solutions directly to the client’s needs. Customer loyalty can only be created by solving client’s direct problems with an excellent level of personal service and that he or she is satisfied in the value for money of the service. Developing a business plan to start up these types of businesses is of not much use because it is hard to gauge what business will come from where and for how long it will last. Emphasis in any start up would be on finding potential customers, putting pitches to them and taking any work that is given. The proprietor will have an eye out for further jobs and clients so the business can continue. Thus income during the early stages may be very irregular.
66 Murray Hunter Making the new business sustainable in the early stages depends upon being able to survive financially between jobs. Building a professional organization requires a great amount of relevant expertise, developing a good reputation, plenty of contacts and being able to employ and maintain staff, who share the same values, and are willing to work hard. The credibility of staff when the firm is growing will strongly influence the firm’s reputation. There is very little ability to gain any long term competitive advantage over competitors in these types of industries due to homogeneity of product and the regular defection of staff to other companies. However service industries can grow through hard work and reliance on networking. At best the firm can become strongly competitive within a selected discipline and geographical area. y Duplication nl The concept of duplication is about a firm replicating its business model within a different business location, whether locally, regionally, nationally, or internationally. Duplication is a widely utilized source of opportunity (even by the most innovative forms) by many types of businesses involved in retailing, distribution, manufacturing, and service O industries as a basis of their growth strategies. The aim of duplication is to replicate something successful in one place into another place. Where factors are similar, e.g. location variables, market size, demographics, consumer profiles, and the like, this process is relatively straight forward. Duplication is the central concept behind the opening of a new Wal-Mart, Costco or Carrefour store, a McDonald’s or KFC outlet, the Body Shop, a 7- Eleven, a Starbucks or Gloria Jean’s coffee shop, or a Kinokuniya bookstore. The duplicated businesses are controlled and coordinated through various forms of organization and control, fs including centralized management, centralized accounting and data capturing systems, decentralized management with highly formal procedural systems, or franchise agreements, etc. Within homogenous local environments, duplication for food and retail businesses mayoo be a straight forward proposition without any need to modify the business model. However most franchise operators now have different store models for urban shop type outlets, rural outlets and kiosk type outlets more suited to train stations, airports, and other high traffic congested areas. Product ranges may be altered when these types of businesses are duplicated internationally. For example McDonalds serves no pork in Middle Eastern Countries, Turkey, Indonesia and Malaysia, and no beef, relying mainly on chicken and vegetarian choices in India. McDonalds also varies its marketing strategies by country, where it targets the middlePr upper classes in many Asian countries and working classes in Australia, New Zealand and the United States. McDonalds have also entered the coffee shop market with their low cost McCafé concept in many stores. Retail super and hypermarket businesses may carry very similar ranges within national markets, but adapt their styles, ranges and layouts according to local country tastes in foreign markets. The primary advantages of duplication in the retail trade are the application of a successful product/strategy in other localities and markets and the development of bargaining power over suppliers to lower costs. With the increase of chain retailer concentration, the balance of power has tipped in favour of many dominant domestic supermarket and international hypermarket chains which now exercise a great deal of bargaining power over manufacturers (Hunter 2006). International hypermarket chains have
The Sources of Opportunity 67 also started to go some way in centrally sourcing common items for their whole international store groups, particularly in private label brands, hardware, furniture, and some outdoor goods lines. Duplication is not always successful in the retail and supermarket trade. Many multinational companies have failed in certain markets due to cultural reasons and poor business model fits26. The duplication issues for manufacturing and distribution firms entering international markets are similarly complex. Coca Cola and PepsiCo have successfully franchised their carbonated cola drinks in many countries without dramatically modifying their product or marketing and distribution strategies. This is quite rare as most other FMCG manufacturing companies have to make decisions about whether they will utilize global brands, develop and y support local brand variations, or a mixture of the two. Many international companies that duplicate their business in other markets usually have to adapt their local marketing and distribution practices to fit in with the local cultural business modes. Gaining strength in local nl market channels and market share with little known foreign brands sometimes prompts international companies to acquire strong local companies and integrate them into the original duplicated operation to create stronger growth momentum that is difficult to achieve with straight duplication. Duplication is not limited to multinational firms. Entrepreneurial and SME firms utilize O duplication as a means to deliver their product to the market. Hot bread shops and bakery franchises are very common in developed western markets where a brand is supported in local shopping areas by consistent product and sales service. In Thailand, individuals can become franchised noodle vendors where the franchisor trains and supplies all the equipment and food ingredients necessary to commence a micro-business along the street. Franchisors collect some form of up front and/or continuous fees and supply to their franchisees raw materials and products. Franchises are available for coffee shops, sandwich bars, sushi bars, fast food, fs bookshops, and services like lawn mowing, babysitting and home repair services, etc. Extensionoo Extension covers a number of sources of opportunity that resemble three of Ansoff’s strategy typologies, being pursuing growth through launching existing products into new markets or market development, launching new products into existing markets or product development, and in some cases launching new (modified) products into existing markets or diversification. Through such a gamut, extension is one of the most commonly utilized sources of opportunity exploited.Pr Launching existing products into new markets extends the boundaries of a firm’s existing scope of business and is thus termed market development. This is where a firm opens up a new market for its existing product or range of products. In order to succeed, the firm must extend its ability to market, promote, sell and distribute its products in the new market. The firm may simply duplicate what it is already doing in its existing markets into the new market scenario. If environmental or market variables are different then the firm may have to adapt 26 Examples of supermarket chains failing in foreign markets include Tops in Malaysia due to misunderstanding customer diversity in the country. Likewise Makro in the same country probably because of a poor business model fit. Franklins (part of Hong Kong Dairy Farm) in Australia and New Zealand closed their operations due to intense competition from domestic competitors Coles and Woolworths.
68 Murray Hunter its strategies to the different environment. The firm may choose to develop a new market with its own resources or seek some form of strategic alliance through a joint venture, distribution, or franchise agreement with other parties that have expertise with the conditions within the new market. Examples of market development as an extension would be the entry of a company into a foreign market such as the entry of Wal-Mart, Carrefour and Tesco into the China market a few years ago. Another example of extension is the formation of IDP Education by a group of Australian universities to recruit new students and offer English language education (part owner of IELTS) to students in the Asian region. This organization cuts the high costs of recruiting international students to their individual universities, has drastically increased Australian universities’ ability to recruit and has assisted in making y higher education the third largest export industry in Australia27. New markets may not necessarily have a geographical definition. Companies may be able to tap new markets through utilizing new channels of distribution. For example FMCG nl companies may decide to develop new types of retail distribution (as against the supermarket trade), such as pharmacies, discount and bulk stores and single and multi level direct marketing methods. Firms may partly diversify their product ranges to enable them to tap new market segments. Many sports shoe firms diversified into street wear apparel to increase their sales to O new customers. When evidence emerged that aspirin could develop stomach ulcers and substitutes like Tylenol came onto the market with little side effects destroying aspirin’s place in the market as a painkiller and anti-inflammatory, aspirin was repositioned as a medicine to help prevent heart attacks, strokes and blood clots for high risk people. Lucozade was repositioned as a drink for people recovering from illness to a sports nutrition supplement where a much larger potential market exists. Wine coolers, a mix of wine (or alcohol) and a fruit juice or flavour were developed to lower the cost of alcoholic beverages and target the fs younger generation of drinkers. One of the most common applications of extension as a source of opportunity is the launch of new products into existing markets, with an emphasis on product development. This opportunity has two forms, 1. The launch of unrelated new products into an existing market tooo take advantage of the distribution infrastructure the firm possesses, and 2. The launch of new products related to existing products by common branding to take advantage of existing brand images and loyalties consumers may have towards a specific brand. A firm’s established distribution channels take an enormous amount of time, energy and investment to develop and maintain. A distribution channel is an important factor in the success or failure of a firm’s sales (Link 1987) and in a well developed form plays some role in keeping out potential competitors, especially imitators (Teece 1986, P. 292). Thus aPr distribution channel as a strategic asset can be exploited by introducing new products into the market to increase sales volumes. This source of opportunity is the basis of existence for wholesalers and distribution companies who represent multiple principles in the market place and distribute products on their behalf. The limit on the number of different products a firm can distribute is the time, effort and focus required to do justice to each product. When time, effort and focus are spread too thinly, product sales will suffer. The second issue is product compatibility. If products are 27 Education services rank as the third largest export category for the year 2007-08 (AUD 14, 164 M) behind coal (AUD 24,866 M) and iron ore (AUD 21,302 M) (Access Economics Pty. Ltd 2009).
The Sources of Opportunity 69 similar and compatible, i.e., in the same product categories or similar categories where buyers are the same and warehousing and transportation is undertaken in the same way, then it is easier to market, sell, and distribute these products together. If however products are in different categories, requiring different sales knowledge, purchased by different buyers, and need to be warehoused and transported differently, these goods are likely to be incompatible with each other, requiring added resources, efforts and costs to market, sell and distribute them effectively. Examples of this sort of extension opportunity are the central warehousing facilities of major super and hypermarket groups like Tops, Wal-Mart, Coles and Woolworths in Australia and Park N’ Shop and Dairy Farm in Hong Kong. These central warehouses take in y deliveries from suppliers and redistribute consolidated loads to their respective individual stores, acting as a wholesaler. From the retailer’s point of view this is a backward extension in the supply chain. Other examples include FMCG companies like Nestlé that manufacture a nl number of food products in different categories, marketing most of these through a single marketing and sales network. This concept of extension works well in some industries, but doesn’t appear to work as well in the consulting industry (Bhide 1999). The accounting firm KPMG found it difficult to develop its compensation consultancy practice as a spin-off of its core audit, taxation, and consultancy service, and consequently sold it off to the human O relations consulting firm William M. Mercer, Inc. in 1998. Brand and product extension strategies are primarily used to increase the lifecycle of a product (or closely related products within a common category). This strategy is usually executed by either making small changes to products or finding new products that are compatible with the brand. Brands can be used successfully to support product extensions of the parent product and increase the varieties offered like Coca Cola, Diet Coke (Light Coke) and Coke Zero, etc. Within the toilet cleaner and air freshener categories, Reckitt Benckiser fs and S.C. Johnsons respectively use their Harpic and Glade brands as umbrella brands to support the launch of different products within these categories. Companies can extend their product ranges by utilizing their existing brands to support a new product. According to Keller (1998) 81% of companies utilize brand extension as a strategy to increase sales. Ifoo done successfully can utilize existing brand loyalty and awareness and increase the overall brand value. This branding extension strategy reduces financial risk of launching a new product by using a parent brand name to carry over an image of the new product to the consumer (Martinez & Pina 2003). However brand extensions tend to fail more than they succeed. Brand extension should be used only to closely associated types of products where the brand values are congruent to succeed. However there are very few ‘hard and fast’ rules andPr research in this area is not conclusive. Some successful examples of seemingly unrelated brand extension include Ralph Lauren’s extension of the Polo brand from clothing to bed linen and fragrances, Arm & Hammer’s extension of the brand from baking soda to oral care and laundry products, and Sir Richard Branson’s extension of the Virgin brand from records and Megastore retail outlets to an airline and rail service. Arm & Hammer’s success in brand extension may have been possible because the “Arm & Hammer” concept embraces cleanliness and deodorizing into the line extensions28. The success of brand extension seems 28 One might suppose in the case of Polo, luxurious was the key and in the case of Virgin, the brand is an extension of Sir Richard Branson’s own extrovert and adventurous personality.
70 Murray Hunter to be dependent upon how strong consumers’ associations are with the brand’s values and goals. Poor choices in brand extension may destroy brand equity (Aker 1990, Loken & Roedder-John 1993, Roedder-John et. al. 1998), although this is also disputed (Romeo 1991). Copy/Imitation The majority of businesses in the world are copies of other businesses somewhere else. They are basically a copy of a business or the proprietor has copied some of the elements of other businesses and incorporated them into his or her own. This is unavoidable as there is y demand for products and services almost everywhere. Therefore there is a need for convenience stores, supermarkets, newspaper vendors, shoe stores, shoe repair stalls, coffee lounges and kiosks, fast and take-away food vendors, sandwich bars, boutiques, discount nl stores, second-hand stores, electrical stores, computer stores, accounting services, lawn mowing services, home repair services, mobile phone stores, etc. in more than one location, and consequently there is always an opportunity to copy a successful business model and place it somewhere else. Likewise most manufacturing firms are followers rather than innovators (Golder & Tellis O 1993). One can see within the shelves of supermarkets numerous brands of shampoo, laundry detergent, pet food, confectionary, canned food, carbonated soft drink and insecticides, etc. The pioneers in each category have somehow inspired the followers who fill the market place with very similar and slightly differentiated products. Competitors are a valuable source of new ideas and although the intention is not to directly copy the competitor, the copier perceives that there is less risk in following rather than innovating. Where the innovator must spend heavily of research and development, gaining regulatory fs approvals, achieving code compliance, educating buyers, setting standards, and developing needed inputs and raw materials (Porter 1985, P. 189), an imitator can obtain a ‘free ride’ from the pioneer’s efforts by monitoring the market, patent applications and product usage, etc (Schnaars 1994). This enables an imitator to operate at a much lower cost overhead thanoo the innovator, enabling the imitator to use price discounting as a major strategy, forcing innovators to match imitators offers if they are unable to establish any barrier to entry through either economies of scale, differentiation, channel loyalty, unique features like sales and service networks and/or proprietary technology (Porter 1985, P. 269). Within early developing markets there is much uncertainty and innovation can be risky (Shanker et. al. 1998) as customer demand and new forms of technology can easily change and new forms of technology appear, potentially rendering any investment in technologyPr quickly redundant. Through imitation firms can take quick advantage of new technologies to catch up with innovators because they have not made the investment in redundant technology. Therefore a high rate of technological change offers imitators a variety of ways to copy existing products and make improvements (Kerin et. al. 1992), thereby switching from an imitation strategy to an innovator strategy based on incremental innovation. Imitators can take different degrees, from a pure clone or ‘copycat’ to creative imitation which takes an existing product in the market and improves upon it (Schnaars 1994, Shankar et. al. 1998). Product developers can take a mix between the two extremes from brand new innovator to pure imitator. However it is most likely pure imitations stand a very poor chance of succeeding within the market place (Cooper 2001, P. 174). Non-innovative late entrant
The Sources of Opportunity 71 ‘Copycat’ products rely almost singularly on price, probably with an inferior quality to the pioneer as the only market weapon to fight with and will usually only pick up a marginal share of the market. In developing countries imitation is a means to acquire technology, tacit knowhow, an understanding of the market and eventual confidence to become innovators themselves. After World War two countries like Japan initially imitated western market leaders without necessarily outlaying the capital needed to undertake research and development. For example Seiko imitated the styling and features of Rolex and Cannon copied the features of Xerox for many decades gaining strong market shares. We are now seeing the same within the China market where innovators are emerging in a y number of industries (Zhou 2006). Haier began in Qingdao as a small refrigerator manufacturer in the 1920s, taken over after 1949 and turned into a state owned enterprise that became heavy in debt with antiquated technology and manufacturing facilities. The company nl appointed a young assistant city-manager Zhang Ruimin as CEO who consolidated the company, then took-over other ailing domestic appliance manufacturing companies and entered into Joint ventures with foreign companies for production within the local market. The company created the Haier brand in 1991 and soon established itself as the largest white goods and appliance manufacturing company in China with the acquisition of companies O manufacturing air conditioners, microwave ovens and television sets. In the late 1990s Haier entered the international market, first Indonesia, Malaysia and the Philippines and then later into some small niche markets which showed promising growth in the United States. By 2000 Haier had opened its first manufacturing plant producing refrigerators in the United States. Haier continued international expansion into the Middle East, North Africa and then Europe. In 2008 Haier surpassed Whirlpool as the world’s largest refrigerator manufacturer and is now the 4th largest white goods manufacturer in the world. fs Today companies in East Asia are able to accumulate capital and technology much easier than their Western counterparts did during their years of early growth. Capital markets have become much more open over the last few decades and technology in the form of proprietary knowledge is being diffused much quicker than before through physical inspection ofoo products, technical information from various sources like suppliers, universities and technical conferences, embodied within capital goods sold by suppliers, purchasable from competitors through licensing and from former competitor personnel acting as consultants or becoming employees (Porter 1980, P. 172). The rate of diffusion differs according to industry, but the process has eroded much intellectual property as patents and lowered barriers built upon proprietary knowledge. Late entrant companies in both the low and high technology sectors are able to manufacture products such as personal computers, digital cameras, food products,Pr ballpoint pens, and light beer and are able to overtake the pioneers in these industries (Schnaars 1994). Firms beginning through imitation once understanding the technology and market are able to overtake their competitors through ‘leapfrogging’ with improved products (Shanker et. al. 1998, Zhang & Markman 1998). Imitation should not be confused with copying products and infringing upon patents, trademarks, copyright, registered designs and other intellectual property rights. A counterfeit product is an imitation, usually made with the intent of passing it off as the original product or for the purchaser to pass it off to others as something original. Counterfeit products tap into the desire of some consumers to buy into branded products at a reduced cost. Product counterfeiting is an illegal activity within just about all jurisdictions. Counterfeit products
72 Murray Hunter include just about every type of consumer goods. Fakes include direct ‘knock-offs’ of major branded products in apparel, cosmetics, shoes, watches, and accessories, etc. Sometimes fake products use misspelt brand names and logos to pass off a product like ‘Nuke’, ‘Avom’, ‘Anway’, and ‘Lakoste’, etc. Products like software, motion picture DVDs and music CDs are sold as pirate copies. Counterfeit products also include pharmaceuticals medical test kits, baby formula and other edible items that may contain potentially unsafe ingredients to humans. Counterfeit products are estimated to be approximately 2.0% of world trade29. However in China it is estimated at 8.0% of GDP (Pei 2005). Some of these counterfeit products are produced in the same factories that produce the genuine product. This is done by factory y owners undertaking production overruns unknown to the trademark owners. Many counterfeit goods are sold through legitimate distribution channels. nl THE UTILIZATION OF MULTIPLE SOURCES AND MAGNITUDE OF THE OPPORTUNITY After identifying and explaining each source of opportunity individually, it must be said O that a firm rarely utilizes only one source of opportunity within its working business model. The lines between each source of opportunity are also blurred and entrepreneurial ventures may utilize two or even three different sources of opportunity within their working business models. This can be pictorially shown on a hexagon where each point represents a source of opportunity. Inside Figure 1.19. are pictorial representations of some of the examples discussed in this chapter. fs The cellular telephone network has incorporated a number of relatively new technologies and continues to incorporate technology updates allowing cellular phone companies to offer new services like high speed internet to customers. The cellular phone business model also is based upon a number of structural changes to the industry. The industry has evolved from a primarily credit driven user pays system to a prepaid usage system in many countries.oo Cellular phone companies now offer customers, voice and high speed internet connection, combining two types of business into a single service, thus allowing internet connection almost anywhere. To some degree cellular phone network providers have a form of legal resource monopoly because of the limited number of licenses to operate governments issue to operators. There is also a high cost of setting up a network of towers and a need to upgrade them with new technology on a regular basis which is an enormous barrier to entry for most new entrants to the industry.Pr Low cost airlines have developed and flourished out of the deregulation of the airline industry. Thus deregulation is the first source of opportunity in this case. In addition, the creation of a low cost airline is hugely expensive and outside the ability of most firms to enter the market. There are also physical resource monopolies in existence where there is extremely limited terminal space in most airports, and thus difficult to obtain by new entrants. 29 See Executive Summary, The Economic Impact of Counterfeiting and Piracy, OECD, 2007, http:// www.oecd.org/dataoecd/13/12/38707619.pdf
The Sources of Opportunity 73 Market Void Technology Infusion Car Organic accident Herbicides insurance Nestlé Drinking Water in Non‐Innovative Thailand Distributed to Structural Changes y Food Stalls Cellular Phones nl Networks Low Cost Airlines Resource Regulation O Monopoly Figure 1.19. Firms utilize one than one source of opportunity within their business. The car accident insurance industry faced two problems. The first was that customers after having an accident had to look for a number of quotations to repair the car before submitting them into the insurance company for approval. Also, within the smash repair industry there was also a number of unethical people who found ways of abusing the system fs and profiting from it dishonestly. Car insurance companies found two opportunities from these problems, one to improve customer service and the other to reduce potential dishonesty. By developing repair hubs where customers could bring their cars for repair saved a lot of running around for them. The insurance company was then able to obtain their own quotes for repair thus eliminating most of the abuse that was going on within the industry.oo Commercially available organic herbicides are a recent re-invention that has two primary sources of opportunity. In recent years government agricultural regulatory authorities have created much more stringent regulation concerning the formulation and use of herbicides. This has led many manufacturers to look for alternatives and reformulate their products so they are much less toxic and safer. The second source of opportunity is the growing market for organic food and products, where organic production excludes the use of syntheticallyPr compounded fertilizers, pesticides, growth regulators, and livestock food additives (Hunter 2009, P. 461). These sources of opportunities have allowed companies like EcoSMART and Biomor to grow exponentially over the last few years. Finally, Nestlé drinking water was launched in Thailand in 2007 as part of the company’s global strategy of obtaining higher market shares in developing countries to compensate for the possible losses and stagnation in developed economies (Rosemann 2005, P. 20). Reverse osmosis technology for filtering water is widely available and affordable for potential manufactures, where there are few barriers to entry, and more than 200 manufacturers in the Thai market. However Nestlé developed a new channel of distribution to food stalls and
74 Murray Hunter roadside restaurants for this non-innovative product and successfully took over a large market share through channels that other companies ignored. Amar Bhide (2003) postulated that there are five basic types of business opportunities. This can also be seen as taxonomy of the magnitude of sources of opportunity. These are; 1. Marginal businesses which include hair salons, lawn mowing services, sundry stores, and other businesses that are simple and small scale. Most often the owners are the managers and have limited business experience. The majority of these would be non- innovative types of businesses, basically copying other existing business models, although some may utilize some form of innovative strategies. y 2. Promising businesses are usually more complex, starting out small scale within dynamic and turbulent environments where there are high levels of uncertainty. These businesses enter markets that most people do not yet see. Founders are careful nl but don’t necessarily invest in much formal up front research and adapt to uncertain circumstances and the opportunity as they grow (Bhide 2003, P. 18). Examples of promising businesses might be the start up of Microsoft, Virgin Airlines, the internet businesses Amazon, eBay, and Alibaba, and Wal Mart. 3. Venture capital funded businesses are on a larger scale to promising businesses and O needed much more capital and formal organization. They may be technology based in very dynamic and uncertain environmental conditions. An example of a VC funded start up is Compaq and Lotus Development Corporation. This can also occur when promising businesses embark upon new projects early in their growth such as Apple’s development of the Macintosh. 4. Revolutionary ventures require even larger amounts of funds than VC capital funded ventures and may involve breakthrough ideas or forms of technology and are thus fs risky but have potential to big large profits. 5. Large venture innovation situations occur when existing firms launch new products requiring large amounts of capital but with a high probability of success. This is usually undertaken to seek competitive advantage over their competitors in a definedoo market. Large established companies usually take a much more cautious approach to evaluating opportunities through formal means (strategic approach) than small initial start up firms that operate in much more uncertainty (entrepreneurial approach). They seek out larger general markets rather than the initial niche markets promising forms may establish themselves within. Examples of these types of ventures might be the launch by Microsoft of Windows 95 and Vista, and the entry of Carrefour into the China and South East Asian markets30.Pr Opportunities can originate externally from the environment or internally through innovation within the organization. Common to both sources of opportunity is that creativity constructed the strategy to exploit the discovered opportunity. Consequently there are various sources of opportunity available to exploit and make a profit. This includes the creation of tangible products like automobiles, aircraft, soap and processed foods, intangible products like computer games and software, the use of physical distribution channels like supermarkets and discount stores, or through the internet by creating or utilizing a high traffic website. 30 Carrefour have announced they are withdrawing from Malaysia and Thailand in 2011.
The Sources of Opportunity 75 Some new products emerge through discovery or by using materials for different applications than what they were designed for. Other opportunities are created through the development of new production processes, or the creation of new business models. Sources of opportunity are found through discovering new information that complements what a person already knows. New information that brings new perspectives changes a person’s meaning. This process of discovery may occur through a change in social demographics or attitudes, economic changes, technology changes, or regulatory changes. This could be a gradual process or be triggered by something drastic like a disaster of some kind, or an unexpected success or failure (Drucker 1986, P. 37). For example the development of strong anti-trust legislation in the United States created many opportunities in trucking, y railroads, banking, airlines, and natural gas (Winston 1998). As we have seen in chapter two of volume one, opportunities occur according to a time, place, and stage of economic development and as we will see in chapter five, opportunities are also the result of a particular nl competitive situation. In some situations chance plays a role in developing opportunities. Ventures may produce dis-continualties that allow shifts in competitive positions that may nullify the advantages of existing competitors and can result from the strategic decisions firms make. For example the apparel industry developed in Singapore during the 1980s as European countries placed quotas on apparel imports from Japan (Porter 1990, P. 124). Some O opportunities may require a prior domain research, while others may not (Klevorick et. al. 1995). The best conditions for opportunities to emerge are when a market grows faster than production capacity, thereby creating more opportunities to add more production capacity. Growing markets will eventually segment (Christenesen & Bower 1996), allowing firms to specialize in particular niches (Geroski 2001). Opportunity concepts either usually come from ideas generated when trying to solve some form of problem or from something one sees within their particular environment. Most fs opportunity concepts are some form of adaptation of something already existing. These ideas are based upon a number of sources which are summarized in Figure 1.20. Opportunity conditions tend to be more favourable for exploitation where there may be barriers of entry to prevent others from exploiting the same opportunity. For example inoo sources of opportunity based on technology infusion, the intellectual property framework provides for innovating firms to protect their inventions or innovations through patents. Methods of protection of innovations will vary from industry to industry, where company proprietary knowledge maybe a better way to protect information than through the formal intellectual property protection system (Levin et. al. 1987), particularly where technology changes rapidly or innovations are unable to be patented. Different sources of opportunities require different levels of creativity ranging from noPr originality to radical innovation. Peoples’ capacity for execution differs as well. Revolutionary creativity will throw a stagnant market into turmoil and may attract violent retaliation from competitors. On the other hand creative ways of adding to markets can develop enterprises without the need of new technology or independent innovation such as is seen in the computer and mobile phone accessories market. Where there is no innovation involved, it is very important t understand the needs of customers to be successful. Innovation is an unnatural process in firms as we build up roadblocks against it (Crawford & di Benedetto 2002, P.15).
76 Murray Hunter Present work environment & prior experience 46% Business & work associates 15% y A similar nl Improving on existing business solutions 8% 15% Hobbies & Trade publications & personal other interests 6% 7% O Figure 1.20. Sources of ideas for opportunity exploitation. INFLUENCE ON STRATEGY fs All new businesses have many factors in common; however an entrepreneurial business will have some form of intrinsic quality that will stand that business out from others. People with entrepreneurial and creative skills that try to do something different that result in the change of an industry are a minority in the population. Therefore most businesses start smalloo and don’t last long. A large proportion of these businesses remain small without any significant growth because they don’t have the ideas or products necessary to differentiate themselves from their competitors. They fail to use strategy to develop some form of competitive advantage over their competitors. Any strategy begins with identifying the sources of opportunity to exploit. These sources of opportunity should be relevant to the present scope of an existing firm or evoke a sense of purpose and passion from a person who is intending to engage upon a start-up venturePr (Dundon 2002, P. 147). A source of opportunity should be relevant to the firm and the market it will serve, the technology that the firm is accustomed to, and compatible with the people within the firm it interrelates with. The idea should be simple, must be able to be supported by an overall business strategy, must be distinctively new and better than what is already available, must be proven, profitable, implementable within the ability of the firm, and finally must be meaningful to consumers. It is impossible to accurately foretell whether an exploited opportunity will end up being large and successful. There are too many internal and external variables that may get in the way of success. What’s necessary is that strategy be implemented effectively and the strategy
The Sources of Opportunity 77 itself aims to create leadership over competitors. This requires hard work rather than the ability to discover opportunities and strategic brilliance. Focus, determination, flexibility and ingenuity are the important qualities in strategy implementation. For this to successfully occur, the entrepreneur’s ability must be aligned with the needs of the opportunity and strategy components to be effective. It is important to understand the abilities and disabilities of the firm in relation to any opportunities and the change needed in strategy to pursue them, i.e., which type of strategies is a firm able to cope with and which types of strategies is the firm unable to perform? Therefore the set of core organizational competencies will need to change as new opportunities are pursued. This also requires the firm’s values that influence what type of competencies are valued to change as well over time. Certain values reflect the y firm’s cost structures and control what an organization may or may not do. For example if a firm requires a margin of 40% on products, then any decisions will reflect that. Such a company would not be capable of going into low margin high volume businesses, even nl though that type of business may represent new channels and opportunities. Different companies exhibit different values and thus make different decisions on the situations they face. Whether a firm is successful in exploiting any opportunity partly depends upon the firm’s strengths, competencies, networks, and resources. Strong competencies like good distribution O networks lay down the infrastructure for a firm to launch successive products into a market. It is important that assets, competencies and capabilities the firm has at its disposal are suitable to support the strategy direction. In entrepreneurial start-ups where resources and competencies may be lacking, these must be compensated for through finding creative ways to cut corners or the use of charisma to assist in developing strategic relationships with potential customers, suppliers, and other resource providers. Continually solving customer’s problems creates new opportunities for differentiation fs and erects new barriers to entry, perpetuating competitive advantage (Calvin 2002). Differentiation can be created by developing excellence in sales, marketing, customer relationships, cost, pricing, niche marketing, and operational procedures and efficiencies, etc. Proper differentiation creates a perceived competitive advantage in the minds of customers.oo However competitors can easily copy an innovative product. What they will have trouble emulating is the systems that incorporate many distinct and complementary capabilities that build the product. A business with attractive product lines, integrated manufacturing systems and logistics, close relationships with customers and suppliers, a culture of customer responsiveness, and the capabilities to continue producing a stream of innovative products is hard to copy (Bhide 2000, P. 15). Strategy must try to build up barriers to competitors and be executed well so it is difficult to copy.Pr Exploring new ideas in new and changing industries is much easier than making waves in mature industries. Product standards and the rules of competition have not yet been defined. Products that are too revolutionary may be difficult to educate consumers and not worth the investment. Companies in fast growth industries usually require a revolutionary idea with a leader that has an evangelistic ability in the implementation stage, i.e., Bill Gates, Steve Jobs and Richard Branson, to lure investors, customers, financiers, employees, suppliers, and build an organization. Founders who spend a long time in research, reflection and planning are no more likely to survive in their first three years than people who just seized the opportunity without any planning (Bhide 2000, P. 57). Entrepreneurs recognise their mistakes when they
78 Murray Hunter implement strategy and adjust it as they go along. However perseverance and tenacity can be both a strength and a weakness during the early days of a start-up firm. Most firm strategy is about manipulating current position rather than seeking wide differentiation and outright competitive advantage. Much strategy is reactionary, out of fear, rather than vision and thus tends to be short term and focused on risk minimization. Therefore most strategy follows primarily generic patterns which can be commonly seen in many types of product and service markets. One of the most common strategies used by firms is to directly copy the competitor’s product or service just utilizing their own brand name or trademark. Other competitors may modify the product superficially in terms of colour, pack size, fragrance, taste, etc, within y their own quality and branding paradigms, i.e., an economy version or a bonus size pack, etc. A third option is through creative imitation where the competitor adopts some common product configurations as the incumbent product (the imitation aspect), and develop their own nl twists or variations upon the product (the creative aspect). A successful product or service is usually expanded in a number of ways. Firstly, a product can be launched in a new geographic market. Secondly, a product’s distribution can be expanded through new distribution channels. Thirdly, a product or service can be franchised or licensed to other companies in other markets, e.g. McDonalds, KFC, Pizza Hut, O or Coca Cola, or a different type of product licensed with a well known brand name, e.g. Disney, Gucci. Finally, a spin-off firm can be developed utilizing the same brand and technology into another industry, e.g. consumer detergent and cleaning product manufacturers enter the institutional, industrial and commercial cleaning markets. Firms will have to decide whether they should become early pioneers in a new market or make a delayed entry. Early market pioneers tend to be technically focused, proponents of radical change, visionary within the market context, project orientated, willing to take risks, fs willing to experiment, self-sufficient, and tend to communicate horizontally across disciplines (Geoghegan 1994). Although earlier entry may give the firm incumbency advantage, later entrants have time to look for product and strategy defects, pick up the incumbent’s blind spots, or launch a product with a superior form of technology, thereby outflanking theoo incumbent. CONCLUSION Opportunity models developed by strategy and marketing researchers may not fully apply to start-up venture opportunities. On more than one occasion, strongly embedded competitorsPr like IBM have asked themselves how young upstarts have been so successful in pursuing opportunities that were not even on their radar screens. Table 1.7. shows the ages of many successful company founders over the last few decades. The nature of opportunity pursued will define the strategies required and the type and shape of organization needed to support those selected strategies. The important question that needs to be answered is can the vision derived from the discovered or constructed opportunity be developed into a working strategy? (Walters 2002). The organization must be configured with the correct assets, structure, processes, values, leadership, resources, competencies, and networks to be able to creatively develop the capacity to execute strategies developed to
The Sources of Opportunity 79 exploit the identified opportunity, in order to be successful31. Although this is very intangible, one must as Peters and Waterman (1981) put it “stick to the knitting” to enable an exceptional capacity for execution in order to tip the competitive balance into the firm’s favour. Many firms have struggled to exceptionally execute strategy in products closely aligned, but different from their core business. For example, as previously mentioned S.C. Johnsons sold off their personal care product arm to focus back on their core household products business and more recently Foster’s the Australian Brewer sold off their wine division to focus back on their core beer business (Fenner 2010). The next three chapters look at resources, skills, competencies, capabilities, and the networks required to develop opportunities in potential exploitation strategies. y Table 1.7. Some success company founders and their age at start-up nl Year Founder Company Country Age at Start- up 1939 William Hewlett Hewlett-Packard USA 27 1962 Sam Walton Walmart USA 44 1970 Richard Branson Virgin records UK 20 1972 1976 1976 1976 1980 1984 Hasso Plattner Muhammed Yunus William (Bill) gates Steve Jobs Ted Turner Michael Dell OSAP Grameen Bank Microsoft Apple Computer CNN Dell Computer Germany Bangladesh USA USA USA USA 28 36 20 21 42 19 1984 Sandra Lerner Cisco USA 29 fs 1988 Koji Sasaki Adln Research Japan 43 1991 Anita Roddick Body Shop UK 49 1993 Gil Shwed Check Point Israel 25 1995 Tulsi Tanti Suzlon Energy India 37 1995 Jeff Bezos Amazon USA 31oo 1997 Linda Rottenberg Endeavor Chile 28 1998 Ben Sergey Google USA 27 1998 Diane Greene WMWare USA 42 1998 Mo Ibrahim Celtel East Africa 42 1999 Jack Ma Alibaba.com China 35 2000 Robin Li Baidu China 33 2004 Mark Zuckerberg Facebook USA 20Pr 31 Different opportunities will require different firm configurations to exploit identified opportunities. Consumer goods companies will rely on IP such as trademarks, physical distribution and logistical facilities, financial and geographic assets, where even exceptional management cannot overcome these requirements. Developing services may be required in the sale of computer hardware and software to corporate customers and play a large bearing on buying decisions. Good strategy and relevant capacities are to no avail if the firm is not is not focused, purposeful, diligent, persistent, and committed to the outcome.
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Chapter 2 y RESOURCES: THE BEDROCK OF OPPORTUNITY EXPLOITATION nl INTRODUCTION Resources are one of the most written about subjects in entrepreneurship and O management literature and form the basis of disciplines like finance and accounting, procurement and supply, manufacturing, marketing, and human resource management. From the opportunity point of view there are perhaps three major issues; 1. How to acquire resources, 2. How to deploy resources, and 3. How resources assist an enterprise exploit the identified opportunity. Resource based theories most probably have their basis from economics with the resource fs based view emerging through the work of Edith Penrose (1959). Penrose saw resources as a major regulating factor upon the growth rate of firms. Resources are scarce and cannot easily be acquired (Conner 1991, Rumelt 1987, Wernerfert 1984). Resources contribute to the growth and performance of the firm in tandem with capabilities that are built upon them and have developed over a firm’s history that have partly shaped the firm’s ‘view of the world’oo and ‘ways of doing things’ (Barney 1992, Reed & DeFillippi 1900, Wright & McMahan 1992). Most new ventures lack established products, technology, customer relationships, experienced management, sufficient capital, and strong reputations which must be built up through acquiring and developing a resource base (Zhao & Aram 1995). With their acquired and developed resource base that capabilities are built upon, firms generate business undertakings with the objective of attaining and retaining customers and making profitsPr (Sheth & Sisodia 1995). When resources have been combined in unique combinations, a firm through the implementation of strategy may develop a position of competitive advantage within the competitive field (Amit & Schoemaker 1993, Barney 1991, 1992). Founding new ventures is about acquiring resources. Most new venture start ups are starved of resources and entrepreneurs are forced to use what they have to produce results. This requires entrepreneurs to acquire resources in any way possible, such as working from home, borrowing or leasing equipment, and using credit cards for funding. These limited resources are used in creative ways to overcome their limitations (Spinelli et. al. 2007). Further, an entrepreneur may start a venture without having all necessary resources in hand
90 Murray Hunter (Stevensen 1999), with a confident assumption that they can locate and acquire resources when they are needed. WHAT COMPRISES RESOURCES Very simply a resource is anything of use to an entrepreneur. An entrepreneur’s or firm’s resources include all tangible items like assets and cash, intangible like knowledge and branding, employees skills and tacit knowhow, and technology and reputation, either owned or controlled by the entrepreneur or firm, which aids in the production of goods and services y the firm provides the market (Amit & Schoemaker 1993). nl Resources Business model Tangible Resources O Intangible Resources Time Intellectual property People Product Designs fs Research & Plant & Equipment Development Knowledge Property & Location oo Brands Creativity Cash & Other Finance Reputation Team Specific Experience Technology Relationships Pr Organizational Organizational Routines Culture Access to inputs Passion Figure 2.1. The Hierarchy of Firm Resources.
Resources: The Bedrock of Opportunity Exploitation 91 It is not the resources themselves that assist the operation of the business. Penrose emphasized the difference between the resources and the functions and services they play in the firm (Penrose 1959, P. 25). This implies it is not the actual resources that are important but what they can provide the firm thus highlighting the point that different firms can possess the same array of resources but perform differently. This also distinguishes resources from capabilities where resources are inputs into the generating the production processes of a firm. Resources support capabilities which provide the capacity to perform some task or activity (Grant 1991), that enable firms to develop and implement strategies (Hitt & Ireland 1986, Thompson & Strickland 1987). y TYPES OF RESOURCES nl The exploitation of opportunities requires the acquisition of resources, their development and recombination into a workable configuration that complements the firm’s routines, processes, capabilities, and business model. The resource configuration adopted in the early stages of the firm start up usually sets the firm on a well defined strategy trajectory. Resources have traditionally been classified into physical, human, and financial resources O (Ansoff 1965). These classifications were further refined as physical capital resources including technology used in the firm, plant and equipment, and properties and location (Williamson 1975), human capital resources which include training, experience, judgment, intelligence, relationships, and insight of managers (Becker 1964), and organizational capital resources which include the firms formal structure, formal and informal planning, coordination and control mechanisms, and informal relationships within groups (Tomer fs 1987). However many factors influence the robustness of a firm’s capabilities and abilities to implement strategy that are not recorded on any balance sheet. Although these are not recorded, these resources are perhaps the most strategically important to a firm (Itami 1986). The heterogeneity and difficulty in transferring these resources makes them almostoo impossible to value. Some reflection of their value can be seen in the difference between the market and replacement value of a firm’s tangible assets, i.e., the goodwill (Cockburn & Griliches 1988). Thus classifying resources as tangible and intangible will make those distinctions. Tangible resources will include people, plant and equipment, property and location, cash and other finance, technology, and the business model which is also a resource which can be argued as being something tangible. Intangible resources would include product designs, knowledge, brands, reputation, relationships, organizational culture, and access toPr inputs. These are supported by another group of intangibilities which include intellectual property, research and development, team specific experience, organizational routines, and passion. Finally time can be considered another intangible resource for a firm. Some resources will be more important than others and make different contributions to developing a firm’s capabilities and implementing a firm’s strategy (Barney 1986). These are depicted in Figure 2.1. and discussed in turn thereafter.
92 Murray Hunter Business Model A business model is the way a firm organizes its inputs of resources to create capabilities, routines, and strategies within a firm or venture to offer specific products and/or services to consumers in a way that creates value. A business model defines how an entrepreneur sees a customer problem and solution, explains how the firm’s value chain is configured, how revenue is generated, the firms position within the competitive environment, and describes the strategies employed by the firm to achieve all of the above. The business model is a higher order resource as it is composed of all the firm’s resources, generates capabilities, and defines strategies. The business model reflects the entrepreneur’s thinking about what customers y want, how they want it, and how the firm is organized to serve those needs, and generate profitable revenue (Teece 2010). This is depicted in Figure 2.2. A new business model is a source of opportunity as it reflects how an entrepreneur nl combines resources to create new value. A new model may attempt to standardize procedures and replicate them in new markets, combine resources, utilize new distribution channels, create new leaner supply chains, or create and develop new market segments. Examples of successfully disruptive new business models include KFC, McDonalds, Wal-Mart, FedEx, Holiday Inn, Dell Computer, Southwest Airlines, Amazon, and Blockbuster Entertainment. Inputs People O The Venture D istribution Channels Outputs Product/Service Plant & Equipment fs Property & Location Cash & Other Finance Perceived Inputs are combined, Technology problem Strategies Product Designs transformed and converted observed Knowledge into capabilities. and value Brands Organizational capabilities proposition oo Reputation are used to support proposed Relationships strategies. The objective is through a Organization Culture to create value in line with product Access to inputs the value proposition Intellectual Property and/or through defined distribution Research & Development service channels to generate a Creativity revenue stream. Team Specific Experience Organizational Routines Pr Passion Revenue Stream Feedback influences inputs such as reputation, R&D direction, available inputs, level of technology, etc Figure 2.2. The depiction of a business model.
Resources: The Bedrock of Opportunity Exploitation 93 TANGIBLE RESOURCES People Without people nothing can happen within any organization and any entrepreneur would be left to implement his or her vision on their own. People produce goods and services, source the materials and negotiate for what is needed for production, sell the final product or service to customers, conduct after sales service, administrate the venture, make all the judgments and decisions necessary for the company to operate successfully. The calibre of people attracted to the venture depends upon the entrepreneur’s ability to y attract suitable employees. Peoples’ performance will depend upon work experience, training, attitudes, motivation, values, energy and passion for achieving the mission of the enterprise. Much has been written about how to integrate people into an organization in ways that will nl create better performance and encourage greater commitment to the firm (Deal & Kennedy 1982, Peters & Waterman1982, Crosby 1980, Legge 1995). The quality of people is a major area of management thinking today proposing many ways to create enlightened and fulfilled employees with a high quality of work life, motivation, and opportunities to grow and learn (Covey 2004, Senge 1995). On the contrary, people who begin to feel powerless, become O isolated, alienated, and become estranged within an organization lose their creativity and often hinder innovation through covert or overt resistance (O’Brien 1986). The employment of people is subject to many laws, regulations and in some countries union agreements. A firm needs to find, screen, recruit, train, pay, and appraise the performance of employees, which adds costs to a business. Labour laws often create a paradox in many small businesses where relationships and work is informal but laws require fs formality in a firm’s interactions with employees (Harris 2000). However research has shown within the United Kingdom that in practice many small firms bypass many rules and regulations (Brown et. al. 2000, Atkinson & Curtis 2001).oo Plant and Equipment Plant and equipment includes any items or machinery that facilitates production, processing, and logistics of the products or services produced by a firm. This would include manufacturing, assembly, moving and storage equipment, necessary support equipment and other fixtures and fittings involved in the operation of the firm. Plant and equipment acquired must be at a scale to provide the necessary processingPr capacity to satisfy the required volume of product or service processing. A venture may have a single product at the initial stages of start-up which may be increased at a later stage as the firm grows. This may include simple product extensions where pack volumes and packaging is changed that involve a modification to an existing production line or involve the production of completely new products that require new production lines. Where possible these various processes should be integrated as much as possible to take advantage of any potential economies of scale or efficiencies that can be gained. Within most industries small plants can be built initially with larger capacity plants built at a later stage when larger sales volumes
94 Murray Hunter occur. A number of considerations that should be reviewed during the development of plant and equipment are listed in Table 2.1. (Hunter 2009, P. 591). Property and Location Venture property and location is a major consideration, especially in a start-up phase with high uncertainty about the future. Site and facility selection is critical to overhead costs when revenue in the early stages will be low. In many service ventures an entrepreneur maybe able to start from home or rent some very cheap office space somewhere on a temporary basis. y Manufacturing ventures are much more demanding as plant and equipment must be located within the property chosen for operations. Manufacturing facilities should be located near a source of adequately skilled labour, with proximity to suppliers and customers, have available nl transport, and have room for expansion if possible, with favourable lease conditions. One should try and plan how long the present location can be utilized before it is outgrown and try to arrange leases accordingly. In the retail sector, one of the prime considerations is the general location and specific site of the venture. Factors necessary to consider include competitors, complementary retail O businesses, locality to drawing attractions such as theme parks, transportation access, vehicle or pedestrian traffic, parking convenience, population density, and access to suppliers, etc. However location may not be a prime consideration as other fundamentals may be important (Ander & Stern 2004, P. 9). For example discount stores like Wal-Mart showed that people are willing to travel to make savings. Location may also depend upon the target customers where for example lunch time sandwich and coffee customers will value convenience, while those wanting a dinner with full service may prefer a secluded and quiet scenic location. fs Table 2.1. Considerations that should be reviewed during the development of plant and equipmentoo Materials Used Production Processes Products Produced Customers/Markets Served Physical Flexibility Number SKU’s Seasonality/cycles Properties Throughout Time Size and Shape Geographical Location Chemical Cost Structure Run Length Size of Firm Properties Scale Economics Annual Volumes Competitors Volume Learning Curves Setups Delivery Requirements Sources Automation Weight (Lead Times, OrderPr Specification Yield Quality Size, Order Frequency) variances Skills Required Components Field Service Needs Availability Equipment Types Materials To Order/To Stock Transportation Job Categories Features Purchase Decision Location Separable Standardization Price Sensitivity Handling Departments Product Life Cycles Life Cycle Stage Cost Value Added Distribution Channel Preprocessing Support Staff Product Function Lead Times
Resources: The Bedrock of Opportunity Exploitation 95 Finance Finance is required for two aspects of a business, the acquisition of assets and working capital for purchasing raw materials, paying wages and salaries, covering immediate overheads, and financing debtors. The amount of finance required varies from business to business, and according to the type and scale of the opportunity. There is no set formula or correct debt/equity ratio which primarily depends upon the ability of the firm to cover debt repayments as a rule of the thumb measure. Finance is particularly important in ventures with longer term paybacks like agriculture, the development of new technologies, and establishment of new web-based business models and enterprises that consume large sums of y cash before revenue is received like the construction industry. Business that has little perceived risk, supporting collateral and where the promoters are well known to the bank or financial institution appear to be able to raise finance fairly easily. More risky long term nl financing is covered by venture capitalists which focus on cashing out through a future initial public offering (IPO) of the company. Finance for SME start-ups tends to come from the entrepreneur’s own savings (Blanchflower & Oswald 1998). The uncertainty of the new venture and unproven idea with scant information often requires the entrepreneur to finance the enterprise him or herself in O 70% of cases in the United States (Aldrich 1999). Other alternatives may include a loan from a bank or financial institution, a grant, or the use of short term measures like credit cards. One of the great concerns of an entrepreneur contemplating a new venture is where to raise funds (Shane 2003, P. 168). A tight financial situation is a common characteristic in many SMEs where an immense amount of time and emotional energy is spent managing cash positions. This affects the approach that many entrepreneurs take towards exploiting opportunities where available fs finance makes the difference between what one can do and what one would like to do. Technologyoo Technology is made up of intangible concepts and ideas, forms, processes, routines, methods, and the application of this knowledge to solving practical problems. Explicit technology is expressed in the form of machinery, processes, products, formal processes and their related documentation. Tacit technologies refer to the ways of doing things that cannot easily be measured, explained or recorded down and tend to be passed on through workplace interaction and experience.Pr Some forms of technologies are freely available and come into the firm when new equipment is purchased and operated. Suppliers are also a source of technology, willing to transfer it so a firm will use their products or services in production. Other technologies can be obtained through licensing and outright purchase. Technology can also be created through purposeful research and development. Firms are often able to develop their own proprietary technologies in the product and manufacturing process areas through their own expertise and protect it through a patent or registered design or keep it secret as in-house as proprietary knowledge. Generally SMEs around the world tend to lack the necessary technologies to become leaders in their fields and obtaining new technologies becomes a major challenge for the
96 Murray Hunter enterprise1. Technology transfer from universities and research institutions to SMEs is also poor. SMEs generally conduct very little formal research and development as a means of acquiring new technologies, products, and processes. Technological change can make a firm’s products, market positions, and plant and equipment obsolete. Technological change alters the opportunity nexus where new firms will rise to dominant positions in new growing segments of industries at the cost of incumbents. INTANGIBLE RESOURCES y Time Time is a little understood resource but has important strategic consequences upon an nl organization. Everything happens in time, actions, events, and situations in the past become projected trends into the future. If the entrepreneur understands what happened in the past and what is happening in the present, then he or she can conceptualize the future by extrapolating social, economic, technological, regulatory, and demographic trends, which are always subject to surprising and disruptive events. The question here is what will the future O environment look like if these trends progress without adverse disruption? The entrepreneur can steer the trajectory of the venture towards these future expectations. Actions have different affects within the competitive environment according to the time they took place. A firm may be able to develop unique product and branding image that creates lucrative new market space that other firm’s will have difficulty emulating. For example, The Body Shop’s image is unique and other firms have great difficulty in taking this fs unique market space. Firms starting late may have certain advantages of not being tied to older technologies and industry overhead regimes, i.e., existing labour agreements, enabling them to be more cost competitive. Time has a great impact upon resource costs as the airline industry is seeing with the turbulent price of aviation fuel. The time an airline fixes long term pricing contracts will haveoo a great impact upon firm profitability. The value of resources is affected by time. Product Design Product designs incorporate the whole group of product attributes (shown in Figure 1.14. in Chapter one of vol. 2), that make up both the tangible and intangible aspects of the firm’sPr products. Product designs reflect the firm’s technical know-how, view of the competitive environment and of customer’s needs, wants, and aspirations. The objective of product designs is to meet the needs, wants, and aspirations of consumers (Trott 2002, P. 147). All product designs have three common aspects; 1. A concept that expresses benefits to the consumer, 2. A package of component items that provides these benefits, and 3. The process which defines the relationship between the physical product and other attributes which fulfils the designated concept (Stack et. al. 2001). The actual physical products may be 1 For good country summaries see: Small Industries Development Bank of India, (2001). Technology for Small Scale Industries: Current Status and Emerging Trends, New Delhi, Tata McGraw-Hill Publishing Company.
Resources: The Bedrock of Opportunity Exploitation 97 relatively easy to duplicate but the attributes that position the product within the competitive environment are much more complex to duplicate. Many product designs are built upon a product platform that a venture has developed overtime with products sharing the same structures, attributes, and processes. This can be clearly seen in the automobile industry where different models share the same basic frames, suspension, and transmissions (Meyer & Utterback 1993), or The Body Shop where products share the same themes. The product platform is primarily engineering based but also incorporates the firm’s concepts, ideas, themes, beliefs, and values about their customers which tends to have some uniqueness from one company to another because of differing evolutionary histories. This platform tends to change incrementally rather than radically and y as a consequence anchors the firm to its own evolution. This may hinder a firm’s growth when entirely new platforms are required where steep changes in technology or customer needs are occurring. nl Knowledge Knowledge can be seen as a person’s or a group’s justified true beliefs, defined by O experience, learning, and shared history. Knowledge can be explicit as codified and documented information that can be transmitted to other people through formal learning (Shultz 2001). Tacit knowledge comprises information that individual’s and group possess that is not easy to formally transfer to others (Nonaka 1994). Knowledge exists at many levels. At the individual level both explicit and tacit knowledge is possessed by the individual, acquired by formal learning, experience and social interactions with others, which is expressed in thoughts, ideas, and behaviour. Group knowledge is basically information at fs an individual level that is shared and understood by a group or team who share tasks and carry out functions together. Group knowledge is not the commutation of individual knowledge but a synthesis of individual interpretations which leads to a shared knowledge (Büchel & Raub 2000). Group knowledge is disseminated to individuals through socializationoo processes and through the norms, beliefs and values shared by the group. Organizational knowledge is the combined knowledge of all the sub-groups within it. This knowledge is expressed in organizational routines and processes that guide behaviour (Shultz 2001). BrandPr A brand is a name, term, diagram, symbol, design, or combination of these that identifies a product or service to consumers. A brand is an important part of a product because it provides identity, creates expectations, and has some accumulated loyalty on the part of consumers, where the brand adds specific value to the product. A firm’s brands are usually developed over a period of time and vary in the influence they have over consumers in the marketplace. High brand equity is a very important resource for a firm as it creates barriers to entry for other firms in the market space they inhabit. Brands are a very valuable resource that can be quantified as goodwill on a balance sheet, unlike any other intangible resource. In certain situations a brand can be extended into other products the firm produces. A brand extension gives a new product instant recognition and faster acceptance, saving on
98 Murray Hunter advertising costs. This can be successful in the same product category like laundry detergent where “Fab” or “Tide” can be used on a number of different laundry detergents, but has limitations and risks in other product categories. Some brand extensions may appear confusing or contradictory to the image of the original product and new products bearing the original brand may not be successful like “Bic Pantyhose”, Heinz Pet Food”, “Life Savers Gum”, or “Clorox laundry Detergent”. However many media celebrities and motion picture characters have been very successful in brand licensing across categories where for example Warner Brothers and Disney characters can be seen as brands on hundreds of products. y Reputation Reputation is regarded as the estimation made by others looking upon another person or nl the image that a person or organization has with the community. Reputation is therefore closely associated with a firms brand equity and legitimacy in the market place. The corporate world has come to realize that a firm’s reputation is extremely important to shoring up brand equity, creating barriers to entry to other firms wishing to invade the same market space (Shane 2003, P. 203), is extremely difficult to imitate, is a major factor contributing to the O market value of a company2, and can create a source of competitive advantage (Klewes & Wreschniok 2009). Previously, the reputation of the firm’s CEO and board of directors was sufficient to garner a good corporate reputation (Mace 1971, P. 195), but shifts in consumer expectations has widened the range of stakeholder relationships and responsibilities with Corporate Social Responsibility (CSR) (Hollender 2004). Following laws and regulation is now not enough. With the large number of corporate scandals, ethical guidelines concerning staff, society, and fs the environment are of major importance (Mourkogiannis 2006, P. 50). Reputation makes corporate organizations much more vulnerable today, especially with social media. Firms now face consumers empowered with social networking with blogs, Twitter, You Tube, and Facebook, etc to air their comments and opinions about companiesoo and create campaigns and petitions (Gaines-Ross 2010). The US armed Forces are now cautiously appraised on a real-time basis with 24 hour news channels covering all military independently actions on the spot. Accusations and complaints needed to be handled immediately to avoid damage as Nike found out when the company was accused of using slave labour to manufacture their products, forcing the company to intervene with sub- contractors. New ventures with fewer resources and lack of history in an industry will have issues of legitimacy to overcome (Aldrich & Fiol 1994). The better the firm does at buildingPr and protecting its reputation the more successful it will be at maintaining competitive advantage (Esty & Winston 2009, P. 135). 2 See: “What Price Reputation, Bloomberg Businessweek, July 9th 2007, http://www. businessweek.com/magazine/content/07_28/b4042050.htm, (accessed 1st April 2011).
Resources: The Bedrock of Opportunity Exploitation 99 Relationships Relationships are extremely important both within the organization and with stakeholders outside the organization. The firm structure, level of formality, lines of communication, manner of promotion, and general workplace satisfaction will influence creativity and innovation within the organization in some way or another. Within small entrepreneurial ventures that have not yet developed structure and formality, the style of management exercised by the founder will influence the motivation and response of his or her employees. In terms of resource productivity, the objective is to create an environment within an organization that has optimum creativity, innovation, and productivity within the y organization. The importance of relationships and networking is vital in resource acquisition. The manner and demeanour of relationships with suppliers, customers, and finance providers has nl an important influence on how those relationships develop. External relationships through networking will be discussed in chapter 4. Organizational Culture O So much has been written about the influence of organizational culture upon the effectiveness, innovation, and performance of organizations. Some people describe organizations as having strong, weak, aggressive, passive, innovative, or bureaucratic type cultures, as if they are single dimensional entities. An organizational culture is a set of shared assumptions and beliefs that are manifested in values, rituals, symbols, routines, and the behaviour of people within it (Deal & Kennedy 1982). Contrary to what much of the literature fs on organizational culture says, organizational culture is not easy to manipulate, however the presence of organizational culture greatly affects a firm’s levels of motivation, creativity, energy, satisfaction, and productivity. The founding entrepreneur’s beliefs, values, and actions will profoundly influence the dimensions of the culture a firm (Schein 2006).oo Organizational culture may create a positive environment within the organization and assist in maintaining organizational capabilities through the socialization of new employees (Barney 1986). Access to InputsPr The access to inputs for any organization is paramount to its ability to carry out any functions. The ability to access inputs depends upon an entrepreneur’s networks, relationships, and reputation, etc. Consequently, not all entrepreneurs and ventures have equal access to inputs, where some may be stronger than others at gaining access to certain types of inputs over others, which may have strategic consequences and influence how opportunities are pursued. The existence and development of intangible resources is supported by a number of other factors. Part of the firm’s knowledge is made up of intellectual property the firm has either developed or acquired over time. This exists as formal patents and registered designs which can act as barriers to other firms imitating products. Trademarks and copyrights support
100 Murray Hunter brands and provide the company with exclusivity to the brands that have been developed. Firm research and development, through the new knowledge it creates, adds to a firm’s knowledge enabling better and new product designs. Creativity is an ingredient which through application can enhance the quality of any intangible resource and through new ideas and approaches lead to new and more efficient uses of the firm’s existing resource base. Creativity is a means by where small start-up firms can compensate for severe resource limitations in terms of finance, and management competencies and provide the potential for the firm to deviate from standard industry practices in areas like marketing (Rampley 1998). Team specific experience adds to domain knowledge and fuels creativity and strategic knowledge. How effective this is within the venture depends upon how the teams strengths y and weaknesses complement each other (Kor 2003, Penrose 1959) and the team’s attitudes towards working together and taking risks as a team and winning and losing together (Kor & Mahoney 2000). Each management team will have some uniqueness in this respect. nl Organizational routines as coordinated and repetitive sets of organizational activities that are undertaken unconsciously (Miner 1991, P. 773) and facilitate intangible resources. The quality of these routines will therefore be reflected in the quality and the effectiveness of the intangible resources they support. Finally, passion and the energy it generates motivates the action and routines that enable intangible resources to exist. O For resources to contribute to long term firm sustainability, they must have durability. Resource durability varies considerably according to the role of technology change, competitive evolution, and changing competitive environment conditions. Some resources like brand equity can be maintained through continual advertising. Research and development will improve knowledge and product design, etc. Resource durability also depends upon the speed by which other firms duplicate the incumbent’s resources, and thereby capabilities, and strategies. fs To imitate a firm’s strategy, a competitor must look at the firm’s capabilities and then determine what resources are required to replicate these capabilities (Grant 1991). This may not always be apparent due to the importance of intangible resources in supporting capabilities. For example Dominos ability to deliver pizza within a 30 minute time frameoo requires close organizational coordination. Competitors must have access to the resources necessary or be able to create them and the harder they are to create, the larger will be the potential competitive advantage of the incumbent firm. Some resources that support Dominos ability to deliver within a 30 minute time frame may rely on the whole team of people which may not be easy to duplicate. The organizational routines involve tacit knowledge and unconscious enactments of the procedures and steps related to the task. A competitor will have to invest time and effort to replicate the intangible resources that facilitate the desiredPr capabilities they want to imitate. American companies found it difficult to implement Japanese manufacturing techniques like Just in time (JIT) and Total Quality Management (TQM) in isolation without changing the total organizational culture. Firms that can develop resource heterogeneity begin to develop specialist resources that are difficult to imitate and enable the exploitation of opportunities with some form of competitive advantage (Barney 1991). As tangible resources are much easier to duplicate, it is the intangible resources that have greater influence over the firm’s ability to create competitive advantage. And given that intangible resources are facilitated and maintained by factors like creativity, management team experience, and passion, it is the entrepreneur him or herself that creates this resource heterogeneity through their different perceptions and beliefs
Resources: The Bedrock of Opportunity Exploitation 101 resulting in different deployments of capabilities (Penrose 1959). The contribution resources make towards competitive advantage is depicted in Figure 2.3. New ventures with fewer resources and lack of history in an industry will have issues of legitimacy to Patents overcome (Aldrich & Fiol 1994). Brands Barriers to Entry & Differentiation Advantage Channel Capacity Product Design y Market Share Competitive Bargaining Power Firm Size Advantage nl Financial resources Technology Size Cost Advantage Access to Inputs O Figure 2.3. The contribution resources make towards competitive advantage. Venture Growth fs Move to professional management Pre‐start‐up Start‐up Growth Maturity Paradox Period Evaluate Acquire & allocate Formal research & opportunity & resources Require more development imagine what Initial asset & working capital Entrepreneurial resources use and/or orientation and the oo acquisitions Forming pursuit of more needed organizational opportunities Create business Creation of culture model brands Cash & Finance Management Seek equity Develop intangible orientation and partner or Develop resources possible decline finance relationships & Select location reputation Employ people Develop Pr Identify Create product Acquire tangible organizational necessary designs resources routines technologies Time Figure 2.4. Resources required during the venture lifecycle.
102 Murray Hunter RESOURCES AND VENTURE LIFECYCLE A venture requires different types of resources during the various stages of its lifecycle (see Figure 2.4.). During the pre-start-up phase the entrepreneur evaluates opportunities and imagines what types of resources will be needed to create the business model required, as this process can be very ambiguous without any physical product as a guide (Baron & Brush 1999). The entrepreneur has their own endowment of personal resources and savings, but may consider the necessity to include a partner and/or finance for the venture. Necessary technologies will be considered during this stage. During the start-up phase the entrepreneur will make decisions about what resources and y when they are required within the venture. The entrepreneur will have his or her own beliefs about what is most and least important (Shane & Venkataraman 2000). He or she will usually have few choices about the resources he or she is able to assemble. The early venture will nl very much reflect the entrepreneur’s own strengths which will become venture strengths. Gaining finance without a track record added to the perceived high risk and high failure rates of start-up enterprises will not encourage banks to lend. A commercial bank will look at the entrepreneur’s history and character, the capacity of the entrepreneur to repay the loan, the capital the entrepreneur is risking him or herself, the collateral offered, and the specific O conditions of the venture (Allen 1999, P. 108). Usually finance will only be offered through an associated finance company that offers higher interest rates than the commercial banks. Other options for the entrepreneur would be to bring in an equity partner, which may be difficult due to the lack of protection from loss, a business angel, or venture capital firm. Usually most firms, especially those involved in services or importing will begin at home to avoid creating any unnecessary overheads. fs Early start-up situations usually require an entrepreneur to make maximum use of what he or she has available. He or she will utilize the long held relationships they have for assistance. Some cash or credit facilities are needed to purchase assets that are absolutely required. This early time is particularly difficult as in most cases there is no revenue coming into the firm. Passion is a vital resource at this time because high levels of motivation areoo needed to work in these conditions and cover the person in times of disappointment and despair. It is during the start-up phase that brand names begin to be developed, customers sought, supply relationships created, and technology applied to the firm’s specific needs. A high degree of social skills are required to develop connections and build relationships with customers and suppliers and recruit people into the venture when they can be afforded (Baron & Markman 2000).Pr Eventually the venture may gain momentum with revenue beginning to come in as sales levels increase with a group of regular customers. As increasing sales need to be financed, more working capital will be needed to maintain firm liquidity during the growth stage. Many firms run into trouble at this stage if their present level of funding cannot cater for the expansion. The entrepreneur must plan this expansion very carefully by either growing within the firm’s means or acquiring more working capital. As sales increase and the firm develops a market reputation, opportunities may arise for new products which require a certain level of research and development and new production capacity. Further capital investment may also be required. One of the paradoxes for small
Resources: The Bedrock of Opportunity Exploitation 103 business is if they don’t grow with the opportunities, other firms will; which may enable the other firms to take dominance in the market space. If opportunities are not exploited, the entrepreneur runs the risk that his or her firm may become irrelevant with a narrow range of products and decline. To grow with the forthcoming opportunities or remain a small enterprise is the dilemma facing many small businesses particularly in growing industries or when a firm has achieved a strong growth momentum. At a certain point in the growth stage, the entrepreneur finds difficulty running the business on an ad hoc basis anymore. The firm requires more structure, procedures, and formal decision making methods to accommodate employees who begin to focus on select tasks like account receivables and payments, cash flow management, procurement, despatch y and logistics, and the need to plan ahead for operations purposes. This is the beginning of professional management of the venture where formal decision making systems must give employees more control, operational tasks must be institutionalized, specialists to look after nl particular tasks employed, strategy formalized and re-evaluated, systems implemented to match these strategies, and a professional board of directors appointed (Hofer & Charan 1984). It is sometimes very difficult for many entrepreneurs to make this transition as they are used to micromanaging all aspects of the business. According to Drucker (1985) entrepreneurship is a stage that most companies go through and grow out of, transforming O into a managed business. Many entrepreneurs begin to get tired, become satisfied with what they have already achieved, become comfortable and complacent, not wanting to face the risks and uncertainties they once did and opt to maintain the business in a steady managed mode. The differences between an entrepreneurial and management orientation are shown in Table 2.2. fs RESOURCE IDENTIFICATION AND ALLOCATION The resources necessary for a new venture can be determined by undertaking some forms of comparative analysis like benchmarking where competitor resources, capabilities andoo processes can be examined, or value chain analysis where the difference between consumer price and functions can be examined to determine costs. However these competitive types of approaches may lead to imitation of other firm strategies and reduce the likelihood that the firm will experiment and do things differently (Day & Wensley 1988). The other approach is to look at the identified opportunity and look at what resources are needed to pursue the opportunity within the market place, i.e., to identify what resources are needed for a venture is to look at customer requirements and how the venture intends toPr satisfy them, and then what is needed to achieve this. In this way resource identification is opportunity based rather than competitor based which will allow for creativity in developing the solution. This is depicted in Figure 2.5. By looking at the opportunity and what resources are required to exploit it, the needs list can be compared with available resources which will highlight the extra resources needed or the resource gap involved. This provides a clear understanding of what is required. Potential resource providers can then be identified and actions taken to procure the necessary resources. This whole process requires an intimate knowledge of how the industry operates so that resources can be accurately and relevantly estimated. It is also a process that needs time to
104 Murray Hunter think about and make substitutions as the potential availability of various resources may not be possible. Table 2.2. The differences between an entrepreneurial and management orientation Entrepreneurial Orientation Management Orientation Primary objective The identification and pursuit of The formulation and opportunity implementation of formulated plans Perseverance Must persevere as have a lot According to the laid out firm y personally at stake business plan and strategy Approach to Attempt to acquire resources to Manage according to the resources enable the venture to operate resources available to operate nl Means of Through any means possible, Through presentation of formal appropriating borrowing, renting, converting, etc. proposals to lending institutions, resources investors, etc. Attitude towards Risk is something that is to be Risk should be avoided risk managed Operational structure Time frame Personal energy O A flat organization that tends to operate informally lead by the founder who makes most decisions It may take years to establish a business Endless work on call all the time if necessary A hierarchical organization structure based on authority with a chain of command Shareholders and superiors want quick results According to the work routine fs Creativity Any way possible According to rules and procedures Problem solving All problems must be solved Cannot solve all problems oo Resource Requirements Available Resources Resource Gap Opportunity Pr Figure 2.5. Looking at resources needed to exploit an opportunity and the resource gap.
Resources: The Bedrock of Opportunity Exploitation 105 Through creative processes entrepreneur conceptualizes a new New Business Model business model with resources available to him or her. Reconstruction of resource requirements to achieve the objective of exploiting New means to the identified opportunity. exploit an y opportunity Resource Requirements Available Resources Resource Gap nl Opportunity O Figure 2.6. Resources are conceptually reconfigured to create a new business model that can exploit an opportunity. As it not possible to acquire all the resources within the resource gap, the entrepreneur fs may have to consider how to get around the absence of some necessary resources that may be out of his or her reach. This may involve changing the approach to pursuing the opportunity, or finding some way to improvise without the resource through using alternative resources. The absence of certain resources may be able to be covered by utilizing other strengths, or the whole feasibility of the idea may come into question. This in many cases becomes a period ofoo intensive thought, consideration, and creativity on the part of the entrepreneur. The entrepreneur may delve into issues of compensation, substitution, borrowing, recombining, and reconfiguring concepts. This is occasionally a time where potential new business models are conceptualized by entrepreneurs, where available resources can be configured in different ways as to enable the entrepreneur to exploit the opportunity through other approaches (see Figure 2.6). For example, Dell computer could not have competed directly against Compaq’s dealerPr network or IBM’s direct sales force due to its limited financial resources, new brand and lack of reputation. So the company compensated for these weaknesses through developing a new business model where customers could purchase a custom configured computer through the mail. Resource allocation in a start-up venture is a matter of weighing up the options where limited resources need to be employed. This forces the entrepreneur to allocate resources according to what is needed rather than what is wanted, which creates a number of choices and dilemmas that have to be solved such as;
106 Murray Hunter What fixed expenses such as properties and other leases should be committed to? How is the issue of plant and equipment to be approached? Buy new? Second-hand? Build by oneself? Lease? Contract out? What systems for accounting and administration should be invested in? Own system? Outsource? Should one work from home initially? Rent some space? Or borrow some space? Which products should be developed first? How much time and effort should be put into Research and development? How should sales be approached? By our efforts? Use distributors? What forms of promotion should be used? Above the line? What types of media? Below the line? Where and with who? and What strategies should be utilized in the beginning? Go for large distribution? Choose a few select customers? These questions will create a tug of war in resource allocation decisions because many of y the above issues are extremely important and need to interact with each other. Operating within one’s limited resources is not easy involving many compromises on what the entrepreneur really wants. The scope of resource allocations that need to be made are depicted nl in Figure 2.7. Plant & Property & Production Equipment Location Time & Effort Research & Products O Storage Entrepreneur Other Fixed Costs Logistics Systems Administration fs Development Promotion Staff Staff Office Sales Strategies oo Training Marketing Vehicles Figure 2.7. The scope of resource allocations that need to be made. Many firms during a start-up phase invest too heavily in on aspect of the firm’s resourcePr base and leave other areas with inadequate allocation (or no allocations at all) which prevents the firm from operating effectively. For example, the firm has developed very adequate production facilities and administration systems but has neglected resources in the product and market development areas. In all likelihood, firms in this position will fail without even beginning to trade. Astute entrepreneurs will look at how to develop facilities without wasting resources. This may require the building of a production line from bits and pieces of equipment that have been acquired from other firms that have closed sown or have redundant equipment, second-hand dealers, or even scrap merchants. Through making these types of decisions an entrepreneur may be able to compete against firms with many times the amount
Resources: The Bedrock of Opportunity Exploitation 107 of resources. Another example is the publishing industry. An entrepreneur could set up his or her own printing press, set up office space and purchase equipment for editing, promotion, and type-setting, hiring editors, type setters, publicists, and sales people, amounting to what would be a multi-million dollar operation. Alternatively the entrepreneur could contract out editing, publicity, type-setting and printing, and employ distributors to sell the books for only the direct costs involved with each job. Admittedly individual jobs costs may be higher, but the entrepreneur has saved millions of dollars in acquiring resources, so with a low initial capital investment the return on investment (ROI) will be much higher in the second model. A comparison of the two business models are shown in Table 2.3. y Table 2.3. Comparison of two book publishing business models All Activities In-House Outsourcing Model nl Premises Require a printing and storage Require small office. facility for raw materials and finished products. Require large office space to house staff. Equipment Require printing presses and Require a single computer. Employees O computer equipment for editing, type-setting (or proof generation), publicity and administration. Production staff Editing staff Publicist staff Marketing & sales staff Administration staff Self and outsourcing for most jobs. Costs Very high capital cost with very Almost no capital costs with very low fs high monthly fixed costs. Low job fixed costs. Most cost can be costs but require many jobs to cover apportioned to individual jobs and overheads and make a profit. Return arise when needed. Unit costs may be on investment (ROI) unless have higher but the overall very low sales of many millions of dollars capital investment will mean a profitoo will be very low. Most probably can quickly be achieved and the ROI require high levels of finance. will be much higher. Flexibility The firm is looked into the state of The firm can outsource to other technology it has invested in. To companies with state of the art keep up with the industry, the firm technology and enjoy any potential will have to keep investing in new lower costs from technology technologies. The firm is also improvements (i.e., publish onPr locked into production in one demand technology). The firm can geographical location. also print books in any location in the world depending upon costs and needs. Resource Own and control resources. Has Use other peoples’ resources and Orientation created the full value chain, where specialize in undertaking the most some resources only generate value adding activities – i.e., marginal returns for investment. selecting manuscripts that have potential to sell.
108 Murray Hunter Enterprise Capabilities Business Model Organizational Culture Specialized Resources Reputation Knowledge Organizational Routines Creativity Team Ind. Experience Intellectual Property Brands Product designs Applied Resources y Proprietary Machinery Technology People Basic Plant & Equipment Office Space nl Generic Resources Property & Location Cash & Other Finance Fixed Costs Various Support Services Input Resources Raw Materials Consultancies Figure 2.8. The Resource Pyramid. O Resource can be allocated in numerous ways to create various results and levels of efficiency (Itami & Roehl 1987). The breakthroughs in finding efficiency is through breaking away from existing industry models, rather than making decisions within the same types of industry business model paradigms. fs THE RESOURCE BASEoo The building of a resource base is the product of resource allocation and is important in the building of organizational capabilities and strategies. The resource base should consist of; 1. Financial resources, 2. Access to inputs, 3. Technology and access to technology, including the capacity to undertake research and development,Pr 4. Land, infrastructure and location, 5. Plant and equipment, 6. Human resources and team industry experience, 7. Relationships, networks and reputation, 8. Product designs, intellectual property, and brands, 9. Research and development, 10. Organizational routines, and creativity, 11. Knowledge, and 12. Leadership and passion.
Resources: The Bedrock of Opportunity Exploitation 109 The resource base can metaphorically be stacked up a pyramid according to their function and degree of support they provide to building firm capabilities. At the base of the pyramid are input resources that go directly into the production of goods and services. Next are generic resources that include land and buildings, motor vehicles, basic plant and equipment, office space and financial resources. These resources are easy for other firms to duplicate. As generic resources are combined they form applied resources that directly support product and market activities. These include brands, product designs, intellectual property, and proprietary machinery, etc. These types of resources are easy for other firms to understand, but take time and effort to duplicate. The next level comprises specialized resources that are most difficult to imitate. They include research and development, organizational routines, organizational y culture, reputation, knowledge, team industry experience, and creativity, etc. These specialized resources become the base from where firm capabilities are built and developed. During the initial venture start-up resources will be primarily input and generic types. As nl time goes on these will be combined into applied resources and later developed into specialized resources. The resource pyramid is depicted in Figure 2.8. The firm wants the resource base to be relevant and contribute to firm capacities and strategies. In addition firm resources should be utilized effectively. This means that resources should be utilized at minimum cost, be selective in what parts of the market is served to avoid O sales with high marginal costs, and if possible, share a logistical chain, salesforce, or other capabilities (Ohmae 1982, pp. 121-124). Finally a firm with not enough resources will most probably be unable to mount effective strategies within the market space, while firms with an overabundance of resources may become inefficient, complacent, and develop blindness to the need to be efficient. fs RESOURCE STRATEGY Resources determine a firm’s basic strategic direction and provide the basis for the performance. This is especially so with the role that specialized resources play inoo differentiating companies. Firm’s have even more of a chance to differentiate themselves when the resources they possess are rare (i.e. patented technology, brands, reputation, etc.), not easily duplicated, and cannot be easily substituted. How long a firm can maintain any advantages it creates through resource combinations depends upon how long it takes other firms to imitate the resource mix, or industry structure changes rendering any advantages redundant. The possession of certain bundles of resources creates certain opportunity orientations forPr entrepreneurs and their firms. A firm that has invested heavily in cosmetic research and manufacturing plant will tend to see opportunities within the span of the industry that it sees itself relevant to. Likewise a firm that invests heavily in processed food research and manufacturing plant for canned food for example, will tend to see opportunities in this area. Very rarely will a cosmetic company jump directly into the food industry or vice versa. The possession of resources anchors a firm to a particular competitive environment with a domain perspective. Companies that have developed resources, capabilities and strategies to exploit clearly defined sets of customers and markets cannot easily change their perspectives (Grant 1991).
110 Murray Hunter However resource anchors can also provide different perspectives. For example, a railroad company may see itself narrowly in the railroad business, or it may see itself in the transportation business and develop trucking, airlines, and car rental businesses based on its view of transportation as an anchor. Alternatively with large land holding and long history of being involved in development (i.e., the US railroads developing the west), the firm may see that flowing into the real estate business is natural for the firm. The conceptualization of strategies by firms tends to be influenced by the portfolio of resources a firm has at its disposal. Firms that wish to focus on gaining market-share in competitive environments will tend to be resource rich in funds, brand equity, reputation, and access to distribution channels, etc. Firms that enter and compete in technology based y industries will tend to technology and intellectual property strengths. Firms that are weak in the above areas may leverage their strategy from the strong relationships the entrepreneur has and utilize guerrilla marketing strategies. nl A tightly resourced entrepreneur will be concerned in utilizing his or her resource base to maximum effectiveness. Therefore he or she will only gather those resources directly relevant to the desired capabilities and strategies intended to be implemented, focusing and converging on the mission objectives (Hamel & Prahalad 1993). There are too many temptations to become sidetracked on marginal customers, new strategies, and tactical issues that can take O away focus from the main objectives, trying to be all things to all customers and end up failing to satisfy any of them. This focus and convergence is also required in research and development towards creating the desired product that is needed rather than going on considering all sorts of curiosities that may lead nowhere in a time of fugal resource endowment. The desired capabilities and their corresponding resources should be prioritized in the order of importance and pursued this way to maximize firm strength in the start-up and growth phases of the firm lifecycle. fs The start-up and growth phases of a firm are a time of learning, experimentation, and gradual refinements to capabilities and strategies. Production, procurement, logistics, product, sales, administration and just about everything else can be improved and made more efficient without any extra costs. The entrepreneur must continually scan for better ways to serveoo customers and add quality to the products and services the company produces. This comes from customer contact, being on the production floor, working within the administration, procurement, and logistics, etc. Visibility, employee and customer contact is needed. There will always be better ways to do things that don’t cost, but save money and make resources more efficient. This can also be extended to learning from new firms about how they approach the same and similar types of problems. They don’t necessarily have to be competitors, but firms doingPr similar tasks. Other firms with longer experience at doing similar tasks may have in their wisdom found very efficient ways that can be learnt from and incorporated into the firm’s practices, processes, and routines. Resource allocation must be balanced. A spectacular new technology incorporated into a product where the firm may have very limited distribution networks and branding may fail. Firms with great distribution channels, a strong brand, but with poor research and development may struggle to stay relevant in the market after a few years when other companies launch much more sophisticated products. A company must have a balanced portfolio of resources in order to effective over the long term.
Resources: The Bedrock of Opportunity Exploitation 111 Firms can maximize the utility and return from their resources in a number of ways. The first is through banner branding, used by many companies successfully across their ranges. Mercedes, BMW, Ford, Seiko, Kraft, Sony, and Samsung, etc., all utilize banner branding in their promotional campaigns. Banner brands can save on advertising and bring almost instant recognition to a new product. However banner branding has its limitations and that is why Toyota set up its Lexus division when it entered the luxury car end of the market in the late 1980s. Secondly firms can utilize the same technology across a broad range of products to maximise the return on its development investment. For example, Sharp used its LCD technology in calculators, electronic pocket calendars, radios, mini-televisions, and computer notebooks when the technology was developed. Thirdly a company may utilize the y dominance it has over the distribution channels and put more products through it to gain more economies of scale. For example PepsiCo has acquired many brands in the soft drink and snack food areas which gives them strong category dominance in these product segments. nl Finally firms may take advantage of their location and devise new ways of creating revenue from positions they occupy. For example the oil companies have gone into convenience shops at their petrol pump stations around the world boosting revenue from their strategic locations and captive customers. Time to the market in new product development is a major issue today with much shorter O product lifecycles, the race to snatch new emerging market space before competitors do, and the speed at which new products can be imitated (Cooper 2001). Time and time again smaller companies have been able to move their resources quicker than larger incumbents because size and bureaucracy hinders momentum. Smaller firms appear to have an advantage, while large firms in capital intensive industries may have the advantage (Acs & Audretsch 1987). Speed to the market provides a firm with a first mover advantage and quicken the recovery tome from investment in research and development to incoming revenue. fs BARRIERS TO ENTRYoo When an entrepreneur first acts upon an opportunity he or she may be the only one but soon after other entrepreneurs will see the potential returns from exploiting the same opportunity and may be tempted to follow. The returns to an entrepreneur will decrease in exploiting any opportunity unless he or she has some form of barrier to entry or competitive advantage (Shane 2003, P. 195). An entrepreneur will try and prevent or discourage others from following by building some form of barriers. Some of these barriers to entry are discussed below.Pr Causal ambiguity: Causal ambiguity exists when the practices, processes, and systems a firm uses to exploit an opportunity are not really understood by outsiders and some additional knowledge, skills, or experience is necessary to understand them (Amit et. al. 1990). Monopoly over a resource: A firm may be able to develop a monopoly (or affective monopoly) through developing patents, registered technical designs, trademarks, branding or copyrights over works. A reputation may also form a partial monopoly is it creates immense customer loyalty through market channels. If the firm has a
112 Murray Hunter relatively high market share with relatively few substitutes around then the firm may be able to exercise some limited degree of monopolistic pricing. Some monopoly barriers could be legally based like a patent, or license to operate a certain type of business in a particular industry or area. Substitutability: Some resources do not have direct substitutes and cannot therefore be emulated. Firm leadership and team management may be very difficult to emulate (Barney & Tyler 1990). A firm may have a unique history (Barney 1991), or organizational culture that is substantially different to other firms (Barney 1991). Firms may have developed specialized assets which are only known to employees of the firm and difficult to duplicate (Teece 1987). Finally a firm may utilize sets of y tacit skills and actions that are not easy for others to emulate (Polanyi 1967). Scale: Firms that have developed a large scale and corresponding large market share make it very difficult for new firms to enter the market and build up their own nl economies of scale. Any other firm wishing to enter the market will have to undertake large capital expenditure and need to take a front on marketing strategy to develop market share. Looking at the history of firms attempting to do this in the FMCG area, very few companies have been successful in challenging dominant incumbents, i.e., Clorox, Coca cola and Pepsi, Wrigley’s, etc. O Need for high capital expenditure and complexity: Many industries are extremely complex and take years to develop, requiring high capital expenditure, which deter new entrants. For example the wine industry requires very specialized knowledge about viniculture, fermentation and wine making, marketing and distribution. Other industries like auto-lights or auto braking systems require intense specialization, capital expenditure and existing incumbents have long historical relationships with their customers, the auto manufacturers. fs Innovation: A firm can create a barrier to entry by continuing to advance the quality of the products they manufacture. A firm that continually innovates new improvements to products is difficult to compete with. This is the objective of many Japanese manufacturing methods like Total Quality management (TQM) where continuousoo improvement is one of the major objectives for the firm. Control over resources: Firms that can gain control over resources needed to exploit opportunities can develop barriers to entry. For example, a firm may enter into long term contracts with suppliers for custom made materials needed in a particular product, where few substitutes exist. Not having access to this material makes it difficult to exploit the opportunity. Firms may have access to a material that is not easily duplicated by others which add some uniqueness to the product like the CocaPr Cola concentrate and the KFC chicken batter. CONCLUSION The resources cycle is depicted in Figure 2.9. The important question about resources is whether they are relevant to take advantage of the opportunity the entrepreneur is pursuing? The extent to which a company’s resources match opportunities differs between firms and may provide some explanation about firm performance. This match also drifts over time as
Resources: The Bedrock of Opportunity Exploitation 113 the characteristics of an opportunity change, so what might be a good match in the beginning will weaken over time. For example, electric fan manufacturers found a greatly weakened opportunity when air conditioners were introduced and had to change their resource mix and strategy to realign with changing opportunities available. The firm’s most important resources are those which are most difficult to copy. In the case of Harley Davidson, image, brand, reputation, and product design are important, even though Harley Davidson’s production processes, quality, and costs are at a disadvantage to its Japanese rivals, the company manages to serve its targeted market space well. Firm performance is strongly correlated to the calibre of human resources, where factors like industry experience, strong commitment, and relevant sets of skills are important (Brush y & Chaganti 1999). This is why the entrepreneur/manager goes out of their way to attract the best talent possible to their venture. Also critical to success is the ability of the firm to access inputs. The price of resources nl for small firms may make the difference between the viability or the non-viability of an opportunity. One of the key tasks of entrepreneur/manager is to develop a network of suppliers for necessary inputs for the firm to pursue its objectives and strategies (Kotter 1982). Entrepreneurs tend to start their analysis of potential opportunities from a personal O perspective and not from an abstract theoretical framework, so view any potential opportunities from their own perceived constraints, which includes their array of resources (Gaglio & Taub 1992). As resources differ for each entrepreneur, each entrepreneur’s perception of opportunity will differ from others (Kor et. al. 2007). The attributes of an entrepreneur’s resource base, i.e., suppliers, customers, ability to source inputs, etc, will influence their beliefs about their abilities to successfully exploit the opportunity. An entrepreneur’s values will also influence opportunity viability. Certain values about what the fs firm should or should not do will influence decision making. For example, if management requires a margin of 40% on any product, then any decision will reflect this. Such a company would not be capable of going into low margin-high volume business. Opportunities are created through the shifting values of resources and the ability ofoo entrepreneurs to make up new configurations that create new business models. This was seen with Nucor’s mini steel mills in the 1990s that was part of the reason that US Steel and Bethlehem Steel collapsed due to competition from new models and changing resource values, i.e., cheaper Japanese steel imports, and their inability or unwillingness to change their resource configurations. Shifting resource costs continually changes industry structures and with it the creation of new opportunities. The shift from coal to gas energy generation will save the EU more than 450 bn Euros in the next two decades and dramatically cut carbon dioxide emissions, thus changing the nature of the whole industry with new opportunities3.Pr Achieving higher outputs while using lower quantities of inputs is now one of the major corporate drivers to improving efficiency (Esty & Winston 2009, pp. 106-7). Corning, a medium sized family company in the mid 19th century transformed itself from being a medium sized specialty glass manufacturer to a leading producer of television tubes after the Second World War, and re-transformed again to becoming a leading fibre optical cable manufacturers in the world, thus continually looking for higher outputs from the resources it 3 See: Madslien, J & Kahya, D. (2010). Coal-to-gas power shift ‘to cut energy costs’, BBC News Business, 10th December, http://www.bbc.co.uk/news/business-11961564, (accessed 12th December 2010).
114 Murray Hunter possesses (Graham & Shuldiner 2001). Commodity producers have also changed their business models where the Mauritius sugar industry and the Malaysian palm oil industries due to stakeholder and consumer pressures have developed zero waste models of production. Firms are finding that environmental improvement can benefit resource productivity through looking at new ways of processing that create less waste products, lower energy consumption, and increased yields, the conversion of waste into useful products, and elimination of the cost of activities involved with waste discharges and waste handling (Porter & van der Linde 2008). It is how resources are used rather than what resources you have that is important to strategy. The emergence of Apple in the 1970s showed that companies with much leaner y resources, focus, and convergence on a single idea or objective can achieve breakthroughs over companies with many times the resource endowment. There seems to be a complacency factor on the part of large dominant companies who believe they will never be challenged and nl a hungry desperation and passion on the part of resource starved firms that want to succeed. Thus the effectiveness of resource bundles is not as much about strength as it is about will and the ability to put resources exactly where is needed. Passion is a resource that greatly influences the frame of strategic ambitions. More and more we are seeing very small focused companies rapidly rising in industries with fewer resources than the incumbents. O Resources together with capabilities provide the scope firms can utilize to develop strategies, and also determine how well they will be able to implement them. The locus of the entrepreneur’s beliefs and values will influence what types of resources they will acquire and decision making will determine how to recombine resources and what can or cannot be done. fs Opportunities Strategies oo Sources finance & other resources Management & Inputs Organizational Routines SuppliersPr Develop Capabilities Figure 2.9. The Resources Cycle.
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118 Murray Hunter Shane, S. & Venkataraman, S. (2000). The promise of entrepreneurship as a field of research, Academy of Management review, Vol. 25, No. 1, pp. 217-227. Sheth, L.N. & Sisodia, R.S. (1995). Feeling the heat – part 1, Marketing Management, Vol. 4, No. 2, pp. 8-23. Slack, N, Chambers, S., Hartland, C., Harrison, A., & Johnson, R. (2001). Operations Management, 3rd Edition, London, Pitman. Spinelli, S., Neck, H.M., & Timmons, J.A. (2007). The Timmons Model of the Entrepreneurial Process, In: Zatharakis, A. & Spinelli, S. (Eds.), Entrepreneurship: The Engine of Growth, Westport, CN, Praeger. Stevensen, H. (1999). A Perspective on Entrepreneurship, In: The Entrepreneurial Venture, y 2nd Edition, Boston, Harvard Business School Press, pp. 7-22. Teece, D.J. (1987). The competitive challenge: Strategies for industrial innovation and renewal, Cambridge, MA, Ballinger. nl Teece, D. (2010). Technological Innovation and the Theory of the Firm: The role of enterprise-level knowledge, complementarities, and (dynamic) capabilities, In: Rosenberg, N. & Hall, B. (Eds.). Handbook of the Economics of Innovation, Volume 1, Amsterdam, North Holland. Thompson, A.A. & Strickland, A.J. (1983). Strategy Formulation and Implementation, Dellas, Business Publications. New York, Praeger. O Tomer, J.F. (1987). Organizational Capital: The path to higher productivity and well-being, Trott, P. (2002). Innovation management and new Product Development, 2nd Edition, Harlow, Prentice Hall Financial Times. Wernerfelt, B. (1984). A resource-based view of the firm, Strategic Management Journal, Vol. 5, pp. 171-180. fs Williamson, O. (1975). Developing corporate character, San Francisco, Jossey-Bass. Wright, P.M. & McMahan, G.C. (1992). Theoretical perspectives for strategic human resource management, Journal of Management, Vol. 18, pp. 295-320. Zhao, L.M., & Aram, J.D. (1995). Networking and growth of young technology-intensiveoo ventures in China, Journal of Business Venturing, Vol. 10, pp. 349-370.Pr
Chapter 3 y SKILLS, PERSONAL COMPETENCIES AND ENTERPRISE CAPABILITIES nl INTRODUCTION Over the last few decades of entrepreneurial research, various factors have been put up as O reasons that can explain performance. However the results of these studies have shown insignificant correlations with performance (Begley & Boyd 1985, Perry et. al. 1988) or been inconsistent (Chandler & Hanks 1994, Cooper 1993). The entrepreneur’s skills and competencies and their effect on firm capabilities and performance seem to take on more importance (Man et. al. 2002). Skills and competencies can be seen as being more behaviourally orientated than personality traits, intentions, or motivations (Bird 1995). A fs person’s skills and competencies will reflect more upon behaviour and the firm’s capabilities and effectiveness than other factors, laying the bedrock of strategy development. Success depends upon a firm maintaining not just a focus upon the external environment, but also focusing on the internal organization to ensure it has the resources and develops the capabilities to exploit, and to continue to exploit, the perceived opportunities in theoo environment (Lipparini and Sobrero 1994). Without skills and personal competencies a firm will have few capabilities. It is these capabilities that create firm effectiveness and underline the strategies that create competitive advantage form the firm. This chapter will examine the difference between basic abilities, skills, talents, and expertise, then look at the basic skills required to undertake the various tasks required in a firm, look at the development of personal competencies and how they relate to enterprise capabilities that form the anchors of strategy.Pr ABILITIES, SKILLS, TALENTS, AND EXPERTISE As was discussed back in chapter three of volume one, people are born with particular abilities or natural talents. A natural ability is an innate aptitude towards some kind of physical or mental tasks. Ability is natural skill or talent, a qualitative personal attribute that enables some exercise of personal capability. A natural ability is a person’s existing or raw
120 Murray Hunter capacity to perform various tasks with no or very little education, training, or experience1. These may include physical activities like running, swimming, gymnastics, or ball game coordination, i.e., selected bodily-kinaesthetic activities. They may also include mental tasks like mental arithmetic and picking up language vocabulary, i.e., selected cognitive activities. We may also inherit psychic abilities like empathy, intuition, spirituality, etc. (Eysenck 1995). However, although people may possess natural attributes, only hard work, learning, training and experience can develop these into an expertise (Renzulli 1978) (see Figure 3.1.). Therefore people with inherent abilities can only take them so far without developing proficiency through knowledge and practice. Abilities are only innate traits and dispositions that need to be developed before they can become skills. As skills are acquired behaviours, y they need a willingness, desire or conditioning2 to learn. Skills are therefore a learned capacity to translate knowledge into action that results in desired outcomes or results, with a minimum amount of predetermined thinking. Skills turn knowledge as theory into practice. nl For example, an MBA graduate may understand the theories of marketing, the product concept, market positioning, segmentation, strategy, advertising and promotion, and consumer behaviour, etc. All this is knowledge and it is translated into practice through skill, just as learning to drive a car or fly an aircraft. And to a certain degree, learning requires a time of trial and error to become proficient, which is experience. Therefore skills rely on both education and experience. O Skills rely on a great amount of intuition when being translated into action. Car mechanics, computer technicians, automobile and train drivers, pilots, and athletes rely greatly on intuition to get their jobs done. Good intuition based on skills and knowledge builds skills into expertise. Expertise requires a large amount of domain-specific knowledge. Simon and Gilmartin (1973) estimated that about 50,000 chunks are needed to become an expert in a particular fields and this accumulation of knowledge would take many years3. fs Sternberg (1998) argues that expertise is a combination of genetic endowment (abilities) and experience, and among its important characteristics are; • Rich schemas containing large amounts of declarative knowledge that is domainoo specific, • Spending time looking at problems and potential routes for solutions, • Being able to develop rich representations to compare structural similarities of problems, 1 This minimal education, training, or experience may be the activity that exposes a person to something they have an innate ability for, rather than provide knowledge on how to excel at the particular task.Pr 2 Early in the 20th century Ivan Pavlov commenced experiments on the conditional response of dogs. Pavlov presented a piece of meat to the dogs, ringing a bell each time. After a period of time, he rang the bell without presenting any meat and the dogs and found the dogs still salivated in anticipation of the meat. This experiment showed that conditioned response (salivation) could be achieved from a conditioned stimulus (the bell), hence the name conditional learning. By continually repeating the conditioned Stimulus, the conditioned response weakened, and then eventually to disappeared, which Pavlov termed extinction. Surprisingly though, a after a day or two, when the conditioned Stimulus (sound) was recommenced, the dog produced the Conditioned Response (salivation) again, which is called spontaneous recovery. This showed that conditioned behaviours can become very deeply embedded and well established. Pavlov’s work began the behaviourists school of psychology thinking, where many felt it was more advantageous to deal with observable behaviours rather than the elusive mind (Watson 1930). Pavlov’s classical conditioning experiment for this reason was probably the single most famous study ever conducted in the behavioural sciences (Luthans 1977, P. 283). 3 A chunk is a cluster of information that is stored in the long term memory.
Skills, Personal Competencies and Enterprise Capabilities 121 Performance Expert Performance y nl Learning, Training & Experience • O Figure 3.1. The effect of learning, training and experience on skills. • Having schemas that contain procedural knowledge about solving problems (intuition), Being able to automate sequences of steps in problem solving procedures, and • Being able to monitor problem solving strategies for effectiveness. fs Skills can be developed into skill-sets that contribute to a person’s competence. Personal competencies refer to underlying individual characteristics like knowledge, experience, and skills required in performing specific tasks (Baum 2001). For example, a person with a skill for football may have a complementary set of kinaesthetic skills for ball handling, athleticoo skills, coordination skills, etc., and cognitive skills that are spatial and strategic, etc. Any skill alone will not make a talented footballer, but combined these skills compose a person’s expertise. Skills fall along a continuum from very specific domain skills that can only be utilized in a specific job, to generalist skills that can be utilized in almost any job or situation. Various occupations can be placed along this continuum according to the types of skills required to undertake their jobs. For example, a design engineer working on designing very specific partsPr or products with well defined functions, materials, and other specifications. The knowledge and skills required to undertake this is very domain specific and skills, i.e., software skills, knowledge of material specifications, etc. Specialist surgeons, industrial chemists and pilots also carry a range of very specific occupational skills. However they also rely on some generalist skills to make decisions upon. Although their jobs are very specific, outside factors like the general condition of the patient, chemical properties, and weather conditions will influence specialist surgeons’, industrial chemists’, and pilots’ decisions respectively. Further along the continuum, a general practitioner can look at a patient’s symptoms, which may be common to many forms of disease. But it is usually the situational aspects of the patient, i.e.,
122 Murray Hunter lifestyle, stress levels, etc., that leads the general practitioner to early conclusions. Likewise an architect must take account of the topography, weather, and surrounding environment when designing a new dwelling or building. Next along the continuum are business people who utilize specific skills, but rely on their knowledge, experience, and general skills to make decisions. The political leader almost entirely relies upon generalist skills to integrate all the elements he or she must deal with when making decisions. At the left hand side of the continuum (see Figure 3.2.), specific domain knowledge, skills, and expertise contribute to domain specific insights. For example a car mechanic will usually know from the sound of an engine what might be wrong with a car. To achieve these insights only select knowledge and expertise is required. On the other side of the continuum, y insights are much broader and rely on multiple sources of information, wide areas of knowledge, experience, and a number of cognitive and interpersonal skills. For example a skilled business negotiator (salesperson) or political leader will be able to pick up the nl emotions from his or her listeners and modify his or her approach to the audience. Boyatzis (1982) found that there may be a relationship between personal competencies and organizational competencies (capabilities). Traits alone don’t make entrepreneurs (Naffziger 1995), passion and enthusiasm are also required (Herron & Robinson 1993), and competitive strategies reflect the choices of people, whether they are an entrepreneur or O manager (Child 1972). The choices will be based on what they are supposed to do, what they are motivated to do, and what they think they can do (Bandura 1986, Hollenbeck & Whitener 1988). People commit to strategies they think are achievable (Bandura 1986, Covin & Slevin 1997, Herron & Robinson 1993), but will only perform according to the limits of their own skills, abilities, talents and expertise (Bird 1989, Lock & Latham 1990). It should be also noted that different opportunities will require different sets of skills and competencies to exploit them. fs Task Domain Situational Domain (Occupational Specific) (Generalist Skills) oo Narrowing Abilities More General Abilities Engineer Specialist surgeon General Practitioner Business person Political leader Industrial chemist Architect Pilot Pr Domain Specific Insights Broad Integrative Insights Domain specific skills Broader cognitive & interpersonal The Skill Continuum Figure 3.2. The skill continuum.
Skills, Personal Competencies and Enterprise Capabilities 123 BASIC BUSINESS SKILLS Basic business skills are necessary to underpin the vision of a firm, expressed in strategies and operations. Skills are needed to discover or construct ideas, evaluate ideas as opportunities, commence a start-up firm, develop products and services, market and sell products, and manage the firm through the early growth and maturity stages. During the infancy of a firm, a person’s range of basic skills contributes to creating individual competencies which contribute to the firm’s range of capabilities. Different types of basic skills are required during the various stages of firm development. This is one of the challenges for an entrepreneur, as different problems require different skills y to solve them (Churchill & Lewis 1983). Different skills can be synergised to form competencies to get things done, as individual basic skills by themselves are of limited use. Combining the knowledge behind different skills creates a much greater depth of nl understanding of tasks that can provide the intuition and eventually the wisdom required to make the important decisions, necessary in start-up firms. Figure 3.3. shows the basic skills and higher competencies required throughout the stages of firm development. Creativity Competency O Strategic Competency Entrepreneurial Leadership Competency Organizational Competency Management fs Competency Competency Opportunity Relationship Competency Competency oo Idea Idea Start‐up Growth Stability Discovery Evaluation Specific technical skills (product) Basic administration skills General management skills Resource gathering skills Interpersonal skills Pr Various Cognitive Skills Interpersonal skills Accounting skills Research skills Business plan preparation skills Finance skills Evaluation skills Oral presentation skills Various cognitive skills Cash‐flow management skills Decision making Production engineering skills Research skills Marketing skills skills Organizational development skills Sales skills Networking skills Sales skills Human resource management skills Interpersonal & Promotional skills Logistics management skills communications Start‐up finance skills Manufacturing management skills skills Networking skills Decision making skills Figure 3.3. the basic skills and personal competencies required throughout the stages of firm development.
124 Murray Hunter According to Robert Katz (1974) different types of skills have different relevance across different aspects of management. Technical skills deal with functional and specific specialized tasks, which are usually developed through education, training and experience. These skills enable a person to use select methods and procedures to accomplish tasks, i.e., software and computer skills. Technical skills are the most on the job and vocational of the three types of skills. The second set of skills are human skills which enable a person to work with other people. They involve trust, enthusiasm, empathy, sensitivity, and the ability to communicate, which are central to many entrepreneurial activities and managing. These types of skills can be seen in the way a person works and behaves with others. These skills are used y continuously when working with others. When a person is highly skilled in this area, he or she will be aware of their own attitudes, assumptions, beliefs and feelings. These skills are harder to learn formally as they tend to be integrated within a person’s personality. However nl through some forms of training and self awareness human skills can be developed to some extent. Thirdly, conceptual skills involve the capacity to see things as a whole, to understand interrelationships, and see new concepts, analyze and solve complex problems, coordinate, and identify new opportunities. The quality of decision making depends upon the quality of O conceptual skills. Conceptual skills can also be looked at as a creative ability (Barnard 1948). More effort on the part of business educators has been put into teaching conceptual skills through experiential learning and simulations, etc4. Although these skills are much more abstract in nature, developing these types of skills have become the focus of leadership training, as it involves more about “ways of thinking”. Each type of skills can overlap with the other. For example marketing skills which are functional technical skills require creative decision making which are based upon conceptual fs tools. This synergy brings out expertise, intuition and wisdom. Any venture, event, journey, or project is the result of some form of idea that has been conceptually visualized and had the supporting motivation for a person to take action upon it. As we have seen, the creation of an idea partly comes from our prior knowledge fuelled byoo our life experiences which include employment experience (Basu & Goswami 1999), observation of the environment (Mitton 1989), social background (Basu & Goswami 1999, Murray 1996), hobbies and interests, networks, and personal histories (Murray 1996). These elements influence our emotions and what we think. We have also seen that opportunities created a number of ways through discovery or construction. We also know that the ability to generate ideas is not a uniform talent within the population and not all ideas are turned into actionable opportunities. Therefore generating ideas that are potential opportunities is a skill,Pr and a cognitive one at that. As we all have the same cognitive hardware, it is the cognitive tools (ways we think) that are important skills in conceptualizing ideas5. 4 Most business schools have missed the point that skills and competencies also require the directly relevant technical skills as well as business skills to fully round a person for entrepreneurial pursuits. 5 As we have seen back in chapter four, creativity is needed to develop ideas and there are a number of ways in which this can be assisted. Although certain innate traits like sensitivity, focus, attention, and attenuation, as well as prior knowledge and experience are required in the creativity process, specific cognitive tools (or ways of thinking) like imagination, whole brain thinking, brainstorming, metaphor or analogy generation, competitive imagination, visualization of the future, and reengineering, etc., are extremely important. These are some of the cognitive skills which can be developed and assist in the idea discovery process. Without them, there can be no vision for any future firm or enterprise to be modelled upon.
Skills, Personal Competencies and Enterprise Capabilities 125 In the ideas evaluation phase of firm development, ideas need to be evaluated to determine their potential as an opportunity. The danger of failing to evaluate an idea fully may result in a person setting up a firm to follow a “dream strategy” in pursuit of a “fantasy” rather than a real opportunity. Many firms are formed on this premise and quickly fail because of seriously underestimating the effort and resources required and failing to target specific customers, etc. To avoid this type of failure, research and evaluation of ideas are necessary. However, due to the wide differences in the types of opportunities, different types of customers, different types of products and industries involved, there is no standard method of opportunity evaluation that can be utilized. As each type of opportunity is unique in some y way, different methods of evaluation are required. In established markets the more traditional methods of evaluating opportunities can be used, i.e., calculating total market size and competitors market shares, identifying and analyzing segments, etc. Through such straight nl forward analysis, one through focus groups and other forms of consumer research evaluate a product idea against the existing competitive products in the market. Risks can be assessed and appreciated, strategies created, resources assessed, and skills and capabilities assessed, etc. A new to the world product, breakthrough technology, invention based new knowledge, a O unique business model, or product/service bundle is another matter. Only the potential of the new concept in solving an existing consumer problem can be evaluated, and only in a very subjective manner. Products, services, and concepts that are based on a constructed opportunity are even more difficult to evaluate and are very unlikely to gain any serious airing from potential financiers. These concepts can only rely on an intuitive evaluation that may only satisfy the entrepreneur him or herself. Until these concepts are proved in the field, they are “fuzzy concepts” which after their success will appear perfectly logical in hindsight6. fs The risk of trying to evaluate some products, services, or concepts by traditional means will just raise too many “red flags” and reasons why the idea should not be preceded with, killing the idea completely. Sometimes entrepreneurs need the courage to act upon their own intuitions, rather than be influenced by others who will put negatives in the way about why itoo won’t work. The skills and acumen needed to evaluate and make a decision upon any idea must be very flexible and mostly based upon intuition7 to answer the following types of questions; Do I have customers? Will they support me? Do I have the skills and expertise required?Pr How long will it take until I’m in a profitable situation? Is this viable? Am I committed? (Am I motivated enough?) What are the opportunity costs? 6 Some start-ups are created with incomplete ideas that are only fully formed during early business operations. It takes trial and error to refine many concepts and business models which can only be achieved through actual commercial activities. 7 As we have seen in chapter three of volume one most intuitions are based on our own biases and heuristics. Heuristics can simplify uncertainty, while biases can put irrelevancies into those judgments. For a summary outside of this book see Gilovich & Griffin (2002).
126 Murray Hunter What are the risks? Can I handle them? Finally in the idea evaluation stage networking skills are needed to communicate ideas and seek feedback from peers and people involved within the field the idea have relevance. There is a large range in networking skills ranging from those people who have strong interpersonal skills and relevant contacts within the field, to those who find it difficult to communicate with others and/or have poor contacts within the relevant field. These skills are also important in the gathering of resources, open potential channels of distribution, create new customers, and communicate with other potential stakeholders, etc. y The start-up phase of an enterprise requires mainly functional or technical skills in three main areas; 1.) Skills related to the setting up of the legal, resource, and logistical aspects of the firm, 2.) Skills related to developing a new product or service and developing the means nl to produce them on a commercial scale, and 3.) Skills required in the promotion and sales of the products/services produced by the firm. Skills related to the setting up of the legal, resource, and logistical side of the business involve the set up of the formal aspects of the legal vehicle for the firm. The complexity of this varies from country to country where a formal business entity is required to be formed, O registration made for tax purposes, and several licenses and/or permits may be required as well. This is where the first requirement for basic administrative skills is required. Resource gathering skills are required at this stage to facilitate the development and future growth of the firm. The way this would be undertaken very much depends upon the type of enterprise starting up. If it is a small entrepreneurial start-up firm, it may rely on its own internal funds, small personal loans, and finding small credit facilities where it can, i.e., family, friends, credit cards, superannuation, etc. Physical resources may be borrowed or purchased cheaply, fs i.e., second-hand equipment, etc. More resource endowed firms may set the enterprise up according to budgets they developed utilizing their own funds or from an arranged bank overdraft, if this has been successfully negotiated with a bank. However these activities will require the ability to develop a business plan and oral presentation skills. The setting up ofoo early logistical aspects of the firm may only require the identification of transport carriers, potential suppliers, support services and other necessities for future operational activities. There are numerous skills required to develop a new product or service and developing the means to produce them on a commercial scale are primarily technical and functional. New product development is a very complex task and requires numerous technical and conceptual skills to satisfactorily undertake this task. The specific skills required in each type of product will depend upon the actual physical characteristics and what the production processesPr involve. If the product is highly technical, then it would be very likely the founders involved in the enterprise would have most of the product knowledge required to produce the product, and be able to obtain what knowledge they require fairly easily. Likewise the founders involved in FMCG products would also be expected to have a sound working knowledge of how products are constructed and their respective production processes. The founders of a firm providing a service still need to develop it like a product as it has attributes and a supply chain just like any product. Presumably they will know how to develop the infrastructure and support networks that the service requires to satisfy customer needs. New product development is a firm capability which will be discussed later in this chapter.
Skills, Personal Competencies and Enterprise Capabilities 127 In most industries, the majority of time during the start-up phase will be devoted to sales and promotion. In the start up phase of an enterprise, sales and promotion will be the only reason for the firm’s existence, and the only reason that the firm will continue to exist in the future. The success of the firm depends almost entirely on sales and promotion. Early sales that the enterprise achieves will dictate the momentum of firm growth. Too little growth will create a situation where revenues don’t cover costs, which may inhibit the sustainability of the firm. Too fast a growth on the other hand will extend financial resources to the point that a firm may face cash flow deficiencies which will inhibit firm functioning. Skill is required to maintain sales growth within specific parameters that the firm can sustain without undergoing too much stress. To some degree the early sales path will influence the emotional disposition y of the firm’s founders and early employees greatly, especially in low resource based firms where founders are fully committed to their venture. Highly skilled and experienced practitioners in some industries may be able to launch a nl product within a field incurring minimum promotional and selling costs. They will know how to spend promotional monies wisely and gain product prominence without spending large amounts of money that other firms in the field will find necessary to spend if they don’t have the same experience. This advantage comes in part from a long exposure within the field with good relationships. Very experienced founders in some fields may be able to save up to 40% O on the initial enterprise expenditure required, which gives a small start-up firm some advantages in the early period. Most of the skills discussed above are still required in the early growth stages of the enterprise. The firm within the early years will most probably still be looking for new ideas that present viable opportunities. These ideas will be evaluated and decisions made on which way the enterprise will proceed in the future. This means the need to develop more new products/services and a further focus on sales and promotion. The founders will start to also fs focus on developing the formal organization, requiring organizational and management skills as revenues, cost and staff numbers increase. As a firm’s growth slows down, it begins to make a transition from the growth to the maturity stage; the momentum of the organization begins to change. The firm’s growth wasoo based upon the unique position it defined for itself based upon a source of opportunity. After a period of time new firms enter the competitive field, competing on the same or similar premise. The paradigm of competition changes towards competition and on finding some form of incremental differentiation and/or market segmentation to create competitive advantage, rather than a unique advantage. The firm slips into the form of a formal organization in need of managerial direction rather than entrepreneurial leadership. The firm must maintain a number of complexPr operations, i.e., sourcing, procurement, manufacturing, marketing, sales, finance, accounting, and administration, etc. Seeking growth through relatively risky ideas becomes secondary to managing what already exists. General management skills, accounting skills, finance skills, cash flow management skills, marketing skills, sales skills, human resource management skills, and manufacturing management skills become very important in the control and performance of the firm. Michael Gerber (2001) argues that many small businesses were formed out of the love and desire to practice a technical skill that the founder enjoys, rather than the wish to become an entrepreneur. Through the stresses of running a business, the technician orientated founder is forced to become a manager and overcome the complexities of running a business. Some
128 Murray Hunter people are good technically, while others are good at starting new things, while others may be good at managing. Not many people are good at all three. People tend to be skilled in particular areas and take time an experience to develop skills in other areas. This should occur in a firm if the founder has the willingness and motivation to do so. Not all founders do. Specific areas and problems require specific skills, and therefore different businesses will also require different skill sets. Conceptual and technical skills are important early on, while management and functional skills become more important later on during the enterprise’s evolution. What is important that the skills a person has and develops go together to synergize into competencies which bring strategic intuition and wisdom. Before moving onto discussing personal competencies, it is important to mention that y each of the basic skills discussed above are made up of sub-skills and parts of knowledge. For example accounting skills require book keeping skills, arithmetic skills, knowledge of the basic accounting rules and procedures. These sub-skills and parts of knowledge are important nl for mastering each basic skill. Some skills may also be skills in their own right but also a sub- skill of another skill, making up a web of skills and knowledge required to master any specific skill. For example finance skills, would require the sub-skills of accounting, cash flow management, budgeting, costing and estimating, etc. Many business issues are interdisciplinary where for example procurement systems are embedded within business O accounting and financial systems and also related to product costing and manufacturing planning. Table 3.1. shows some basic business skills and the sub-skills that make them up. Studies have shown that a perception of lack of knowledge and experience relevant to business can put people off the idea of going into business because of their self-perception of self efficacy (Gibb & Ritchie 1985, Robertson et. al. 2003). fs Table 3.1. Some Basic Business Skills, Sub-Skills and Knowledge Required Finance Skills Marketing Manufacturing Interpersonal Management Skills skills Accounting skills Research skills Organizing skills Oraloo Book-keeping skills Product knowledge Planning skills presentation Mathematical skills Planning skills Budgeting skills skills Estimating skills Promotional skills Costing skills Written Costing skills Interpersonal skills Engineering skills presentation Budgeting skills Empathy Problem solving skills skills Forensic accounting Sales skills Interpersonal skills Empathy skills Logistical skills Human resources skills Listening skills Procurement Administrative skills Product knowledge Clear andPr Tacit knowledge Costing skills Tacit knowledge concise Tacit knowledge expression abilities PERSONAL COMPETENCIES Personal competencies can be considered higher level characteristics encompassing personal traits, behaviour, knowledge, and groups of skills. For example, swimming is a skill
Skills, Personal Competencies and Enterprise Capabilities 129 and synchronized swimming can be considered a competency. Competencies are much wider than skills, expertise, motivation, personal traits, self concept, knowledge, and acumen, as they combine to form a platform for future behaviour. Personal competencies are also situational and socially defined. For example, the ability to find where schools of fish exist is a maybe a very important competency for an Eskimo in Alaska, but useless to a stockbroker in Wall St. New York. Personal competencies are the total ability of a person to perform a job or a task successfully (Man et. al. 2002). They are a set of attributes that are relevant to the exercise of successful activities, in the case of entrepreneurship, the creation, growth and survival of a firm. Personal competencies have important implications for firm performance. In early enterprise start-ups, personal competencies almost directly influence y organizational performance. The basic role played by the owner/manager is one of the major determinants of SME competitiveness because the concentration of decision making power is in the hands of the owner/manager. Thus competencies become firm capabilities in the SME nl environment, which consequently influences the firm’s overall strategy. Personal competencies have been vaguely defined and often confused with skills, attributes, traits and capabilities (Hayton & McEvoy 2006). Terms like competencies, skills, knowledge, and expertise are often used interchangeably with insufficient consensus on the meanings. The boundaries of personal competencies are ill-defined and overlap, as many O skills, knowledge, and other traits are not exclusive to any single competency. One of the difficulties of defining personal competencies is that we have difficulties explaining what characteristics make a person successful, although we can see that they are successful. One can consider the CEOs of Goldman Sachs - Lloyd Blankfein, Oracle - Larry Ellison, Xerox – Ursula Burns, John Paul DeJoria – John Paul Mitchell, OWN – Oprah Winfrey, Las Vegas Sands group – Sheldon Adelson, Starbucks – Howard Schultz, Cirque Du Soleil – Guy Laliberte, Chelsea FC and Oil Tycoon – Roman Abramovich, and Hutchison fs Whampoa Ltd. – Li Ka Shing. All commenced their lives in different forms of adversity and started their careers from the bottom8. Yet their individual successes are based on totally 8 Lloyd Blankfein was the son of a postal sorter and brought up in Brooklyn. He started his career as a teenager as aoo concession vendor at the Yankee Stadium. Larry Ellison was an adopted son and worked his way up with no family connections or inheritance. He twice dropped out of university taking on odd jobs, until he got a job at Ampex Corporation. He went on to co-found Oracle Software and now considered the 6th wealthiest person in the world. Ursula Burns grew up on New York’s lower east side where her mother ran a home day-care centre and ironing shirts for neighbours. John Paul DeJoria started his first job at the age of nine, waking up at 4am to fold newspapers for morning deliveries. He was homeless twice as a single father. He got a job as a sales representative at Redken before borrowing USD $700 to create John Paul Mitchell Systems with his friend Paul Mitchell. Oprah Winfrey was born to unmarried teenage parents. She was abused in her early years and became pregnant at the age of 14, with her baby dying one week after birth. She took her first job as a grocery store worker. She eventually got a scholarship to study at Tennessee State University and upon graduationPr became Nashville’s first African-American female news anchor. Sheldon Anderson grew up in working class Dorchester, Massachusetts. His father was a cab driver and Adelson started selling newspapers on street corners at the age of 12. Adelson also dropped out of university. Howard Schultz was brought up in Brokklyn, living in a cramped two room apartment. Schultz’s father lost his job as a nappy service delivery driver after breaking his ankle when Schultz was the age of 7. Guy Laliberte dropped out of college at the age of 19 and performed on the streets of Europe and Canada as a street performer. He eventually got a troop together and performed in the Los Angeles Arts festival in 1987. Four years later Laliberte’s troop called Cirque du Soleil started working in Las Vegas. Roman Abramovich was orphaned at a young age. He later dropped out of college and served in the army. He started his business career selling stolen gasoline to other officers in his unit. After his marriage, Abramovich started selling plastic ducks from his Moscow apartment and black market goods as a street trader. He later started a plastics factory and eventually entered the oil business. Li Ka Shing quit school at 15 after his father died of tuberculosis and found work in a plastic factory, where he worked 16 hours a day. He eventually accumulated knowledge about plastics and started his own business.
130 Murray Hunter different factors, behaviour, and mixes of competencies that enabled them to found (in some cases) and lead these successful corporations. The characteristics of people are not the same, entrepreneurs and managers develop and transform their organizations and add value in their own unique ways of organizing resources and opportunities (Bird 1995). Competencies are not uniform within the population. They probably exist within a “bell curve” distribution, so only a small percentage of the population possess the competencies necessary to spot opportunities, strategically evaluate them, engage in a start-up, and manage an organization (Lado & Wilson 1994). Competencies aren’t easily transferred from one person to another. If competencies contain both functional and tacit knowledge, the functional y aspects like marketing knowledge can be taught, but the tacit aspects are not teachable in the same way. Tacit competency knowledge involves creative, inductive, deductive and generative thinking processes which are more easily picked up by individuals who are nl naturally talented. Any teaching curriculum cannot develop competencies needed by an entrepreneur, but only serve to demonstrate the processes involved in being successful (Henry et. al. 2005). Educators cannot create entrepreneurs anymore than they can provide foolproof, step by step methods that ensure success (Miller 1987). Self confidence, persistence, and high energy levels cannot be taught in the classroom (Miller 1987). We hope to develop O competencies through education, but it is more likely we advertently pick up groups of skills that have not yet formed into competencies. These aspects of competencies can only be learnt through practice, experience and trial and error. Personal competencies don’t directly contribute to firm competitive advantage. Being competitive and operationally effective requires different disciplines (Waheeduzzaman & Ryans 1996). Competitiveness is related to strategy which deals with external factors, while competencies enhance internal organizational capabilities, which form the anchors of fs strategies. Therefore competencies facilitate capabilities. The level of operational effectiveness that individuals assist in creating will depend upon the freedom within the organization for individuals to be allowed to excel and work together for the organization’s benefit9.oo Different frameworks and competencies have been suggested by various authors. Boyatzis (1982) suggested that all competencies should have three major elements; 1. They should contain motives and traits, 2. There is a social role and aspect of self concept, and 3. Competencies enable role transactions. Competencies thus have a functional and tacit aspect which enables behaviour. For example a management competency is made up of various pieces of management knowledge but rely on personal skills to act upon the knowledge. Some of the major types of personal competencies that have been described in the literaturePr are summarized below. Opportunity Competencies are related to recognizing and developing market opportunities by various means and methods (Bartlett & Ghoshal 1997, Chandler & Jansen 1992, McClelland 1987, Mitton 1989, Snell & Lau 1994). Opportunity competencies are about alertness, i.e., the ability to see unexploited opportunities (Kirzner 1973, 1979) and having the ability to see the environment through different perceptions (Casson 1982). An entrepreneur must have the ability to interpret environmental conditions and distinguish 9 There are many reasons members of an organization are prevented from contributing their personal competencies to the organization. These blocks may occur because of stifling bureaucracy, autocratic leadership, centralized decision making, group norms preventing people from excelling, and political considerations, etc.
Skills, Personal Competencies and Enterprise Capabilities 131 between the subjective and objective environments (Westerberg et. al. 1997)10. Opportunity competencies are closely related to relationship and conceptual competencies in developing the competitive scope of SMEs (Man et. al. 2002). Relationship Competencies are related to interpersonal interactions and relationships. They are concerned with building trust, empathy, cooperation, building teamwork, communications, networking, persuasive abilities, and other interpersonal skills (Bartlett & Goshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et. al. 1993, Lau et. al. 1999, McClelland 1987, Mitton 1989). It is through relationship competencies that entrepreneurs and managers utilize their other competencies. Relationship competencies are closely related to organizational competencies as it is through relationships that things get done. y Conceptual Competencies are related to a person’s conceptual abilities. Conceptual competencies are reflected in understanding problems, problem solving, decision making, seeing things holistically, and conceptualizing things ideas and concepts (Bartlett & Ghoshal nl 1997, Bird 1995, Chandler & Jansen 1992, Durkan et. al. 1993, Lau et. al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Conceptual competencies are important in innovating new ideas, new processes, new products and new services (Man et. al. 2002). Conceptual competencies are closely related to opportunity, entrepreneurial, managerial, leadership, and organizational competencies. O Creativity Competencies are related to constructing opportunities, crafting strategy, and solving problems. Creativity involves the traits discussed in chapter four of volume one which include a motivational trigger, creative sensitivity, focus and attention, attenuation, imagination, curiosity, prior knowledge, emotion affect, and ego to create the right conditions. Creativity also requires knowledge and mastery of a number of creativity tools (or ways of thinking) to exercise creativity and gain new insights into the environment, opportunities, or in solving problems. The distribution of creativity is not uniform throughout fs the population (Simonton 2003). Creativity competencies are closely related to emotional intelligence, opportunity, entrepreneurial, strategic, management, and conceptual competencies. Entrepreneurial competencies are related to the exercise of successful entrepreneurship.oo Some believe that entrepreneurial competencies are invaluable for start-up and enterprise development activities (Man et. al. 2002). Entrepreneurial competencies involve resource gathering, self confidence, persistence, sense of achievement, decisiveness, optimism, networking, opportunity evaluation, strategy crafting, intuitive decision making, development of products and services, idea generation, negotiation skills, environmental scanning, and opportunity exploitation abilities. Entrepreneurial competencies are the total ability of the entrepreneur to perform a job role successfully and are extremely important in the start-upPr and early growth phases of the enterprise. Management Competencies can be used interchangeably with the term Organizational Competencies which are related to the organizing of internal and external physical, financial, human, and technological resources of an organization. They involve teambuilding, leading, 10 It should be mentioned that there are no real objective views of the environment and potential opportunities in the environment are subject to perception. Opportunities are likely to be perceived with relation to the competitive scope or ability of the entrepreneur, the perceived competitiveness of the industry, demand for new products and services, the influence of suppliers, barriers to entry, technology, social and economic conditions, and the general regulatory environment, available and potential resources required, verses what can be acquired by the entrepreneur, and their personal competencies.
132 Murray Hunter mentoring, training, allocating, and controlling employees (Bartlett & Ghoshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et. al. 1993, Lau et. al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Other management attributes that are important to managerial competencies include, the ability to develop management systems necessary for long term functioning of the enterprise, resource acquisition skills, operational skills, managerial experience, coordination skills, communication skills, familiarity with the market, financial and budgetary skills, management style, and technical skills, etc. Management or organizational competencies involve transforming resources into higher value products and services (Grant 1991), i.e., using inputs effectively and efficiently, and the delivery of value to organizational stakeholders. Management or organizational competencies assist the y entrepreneur enact a beneficial firm-environment relationship (Hambrick & Mason 1984, Tushman & Romanelli 1985). Management or organizational competencies are closely related to relationship, conceptual, managerial, and entrepreneurial competencies, and nl contribute to organizational efficiency and effectiveness. Strategic Competencies are related to setting, evaluating, and implementing strategies of the enterprise (Bartlett & Ghoshal 1997, Bird 1995, Chandler & Jansen 1992, Durkan et. al. 1993, Lau et. al. 1999, McClelland 1989, Mitton 1989, Snell and Lau 1994). Strategic competencies provide a cognitive map (Weick 1979) that supplies the underlying logic for O combining, deploying, and mobilizing resources within the firm and among the various organizational business units (if a large organization) (Prahalad & Bettis 1986). Strategic competencies are important in ensuring the long term performance and survival of the firm, verses the short term. Therefore people that possess strategic competencies will tend to consider the medium and long term implications of the decisions they make. Strategic competencies add a vision dimension rather than allow the making of decisions through impulse. There appears to be a positive relationship between planning and performance fs (Davig 1986, Ibrahim 1991, Kargar 1996), even if planning is informally undertaken is most entrepreneurial and SME firms. Informal planning has the function of forcing the entrepreneur to think towards focused objectives. Not only is goal setting and motivation required in the early stages of a firm, but this should continue into the growth and matureoo periods of the enterprise’s lifecycle (Kuratko et. al. 1997), which strategic competencies tend to support. Leadership competencies are related to the ability of the entrepreneur or manager to articulate a strategic vision, communicate the vision throughout the organization, and empower employees about the vision (Westley & Mintzberg 1989). Some leadership traits include the ability to motivate and lead staff, building trust, conflict resolution, creating shared visions, developing teamwork, and mentoring. The leadership competency is closelyPr related to the management, entrepreneurial, and strategic competencies and is important to firm performance. Commitment Competencies drive the entrepreneur to commence and remain committed to the business (Bartlett & Ghoshall 1997, Bird 1995, Chandler & Jansen 1992, Durkan et. al. 1993, Lau et. al. 1999, McClelland 1989, Mitton 1989). The entrepreneur needs to maintain internal focus on organizational activities, whilst also maintaining a critical external focus on the larger business environment (Adam & Chell 1993). Commitment competencies also incorporate ambition, aspirations, desire, and long term motivational factors that drive the entrepreneur to meet his or her objectives. While commitment competencies can have a very positive effect, they also can have a negative effect. Commitment competencies can distort
Skills, Personal Competencies and Enterprise Capabilities 133 objectivity concerning firm performance and thus prevent a person coming to a decision that it is no longer viable to support a firm that is continuing to perform poorly over a long period of time where exit may be the best option. Commitment competencies are strongly related to strategic competencies as a factor contributing to long term performance. Ethical Competencies can be considered the possession of appropriate personal and professional values and the ability to make social judgments based upon a work related situation (Cheetham & Chivers 2005). Ethical competencies bring an ethical frame into the decision making process domain of an individual. Ethics usually come from history, the law, a society’s cultural values, personal moral codes, religion, various institutions, other social codes, and sensitivity to the needs of others. Ethics are not synonymous with knowledge as y ethics require interpretation in order to apply rules and codes to real life situations. Individuals are usually left with discretion in developing and applying concepts. Ethical competencies tend to be integrated with opportunity, conceptual, entrepreneurial, managerial, nl and leadership competencies. It could be argued that Emotional Intelligence (Competencies) is a personal competence required in entrepreneurship and developing an enterprise due to the need of emotional maturity, objectivity, and stability required. Some important aspects of emotional intelligence are the ability to recognize and manage one’s own and others emotions, to motivate oneself, O to be able to restrain impulses, and to handle interpersonal relationships effectively. According to Daniel Goleman (1998), emotional intelligence is a learned capability that results in outstanding performance in working situations and determines our potential to learn, based on our self awareness, motivation, empathy, self-regulation and adeptness to relationships. Some of the important traits related to emotional intelligence include emotional awareness, self assessment, self worth, self control, adaptability, commitment, initiative, optimism, ability to manage conflicts, leadership, ability to influence others, and team fs capabilities. Personal competencies are the building blocks upon which organizational capabilities, and in turn, organizational strategies are built upon. How effective this is depends upon how freely employees are able to exercise their personal competencies and how well respectiveoo employees’ competencies are synergised within the organization. This is not so important in an entrepreneurial start-up where the competencies of the founder will usually dominate, but very important in a firm with many employees. While the entrepreneur’s experience, education, and training are important to the possession of personal competencies, there is little conclusive evidence that strong competencies are reflected in age (Cooper & Gascon 1992). An individual is as effective or limited in functioning effectively at specified tasksPr according to the limits that their personal competencies allow. There are numerous personal competencies and great overlap between them. Personal competencies tend to form an overlapping lattice where competencies are balanced and mutually support each other. When this occurs, a person will be able to work very effectively and perform at their best. There mere procession of competencies does not make a person necessarily competent. It is a person’s view and perception of the environment that triggers the use of personal competencies, so competency activation is reliant upon external stimuli and motivation. To develop our personal competencies, one must develop what Peter Senge (2006) calls ‘personal mastery’. Personal mastery is concerned with personal growth and development so that real learning can take place. Personal mastery involves using our skills and competencies
134 Murray Hunter at the highest possible level where we achieve creative fulfilment and spiritual growth (Senge 2006, P. 131). Personal mastery enables a person to see things more objectively without biases and other cognitive blocks. A person with personal mastery has vision and the desire to be creative. He or she remains curious and inquisitive about why things occur the way they occur. People with personal mastery are aware of their strengths and weaknesses and their ability to achieve. They are on a continual quest to learn and improve. Personal mastery also brings true courage and commitment to pursue the personal objectives a person may have. To develop personal mastery, one must work on a series of ‘principals and practices’ according to Senge (2006, P. 136). These principles and practices are; y • One must develop a sense of vision, ‘a big picture’ of what they want out of life. This goes much further than goals and objectives that don’t carry the same deep meanings about life that a vision contains. Visions are intrinsic that gives one a sense nl of purpose, motivating action and persistence. • One must create tension inside to generate energy to pursue the vision from where they are today (This was discussed under the section Motivational Trigger in chapter three of volume one). • We must overcome our own deep feelings of powerlessness and recognize our own • • O coping and defence mechanisms (See Emotional Attachment, Defence Mechanisms and Neurotic States in chapter three of volume one), We must see our true selves and our respective dysfunctional behaviours, and To master a large repertoire of skills so that they can be carried out almost sub- consciously, i.e., the task is integrated with the self. fs People with personal mastery are able to integrate intuition and reason which is where personal competencies can be utilised very effectively. Competencies are thus multidimensional constructs (Smith & Morse 2005). They are deeply rooted in a person’s background, being acquired through education, training, and experience (Man & Lau 2005).ooPr Figure 3.4. A comparison of the relative personal competency levels in an entrepreneurial start-up and mature managed company.
Skills, Personal Competencies and Enterprise Capabilities 135 Competencies play differing roles and importance during the various stages of the firm lifecycle. It is the understanding of the importance of these different roles that can be crucial to successful business growth (Churchill & Lewis 1983). The type of competencies that are needed in the start-up i.e., entrepreneurial competencies will differ from the types of competencies that are needed during growth period, i.e., managerial competencies. As each enterprise varies in the type of opportunity it is attempting to exploit, the entrepreneur has to acquire unique resources and skill combinations to enable the venture to progress successfully (Mitchelmore & Rowley 2010). Likewise, the range of skills and competencies required to run a small business are qualitatively and quantitatively different from those needed to run a large business. New venture founders often find it very difficult to move from the start-up y phase, relying mainly upon entrepreneurial competencies to the maturity stage, requiring mainly management competencies (Galbraith 1982). An adequate level of management skills and training is essential to the transformation of a firm from an entrepreneurial organization nl to a profoundly management organization (Hofer & Charan 1984). Figure 3.4. shows two pie charts indicating the relative amounts of personal competencies required to undertake an entrepreneurial start-up and manage a mature company. This is metaphorical as personal competencies truly blend together and overlap through their common skills. Also, the proportion of each personal competency will vary according to O individual, as each person will have different strengths and weaknesses. Other influences on the proportion of personal competencies within each enterprise situation include the particular challenges facing a person, the type of business, personal business orientations and styles, and the different sets of skills individuals have. When a firm moves from an entrepreneurial to a managed business, or a professionally managed business, this is where it is possible to recognise a change from reliance on individual level competencies to firm level capabilities. Competencies are to an individual, as fs capabilities are to an enterprise. ENTERPRISE CAPABILITIESoo Over the last few decades enterprise capabilities have been referred to as distinctive competencies (Selznick 1957, Snow & Hrebiniak 1980, Hitt & Ireland 1985, Reed & DeFillippi 1990, Fiol 1991), resource deployments (Hofer & Schendel 1978), invisible tenets (Itami & Roehl 1987), organizational capital (Prescott & Visscher 1980, Ranson 1987, Tomer 1987), core competencies (Hayes et. al. 1988, Prahalad & Hamel 1990), organizational capabilities (Ulrich & Lake 1990, Stalk et. al. 1992), and firm specific competencies (PavittPr 1991). These various names reflect differing perspectives concerning enterprise capabilities. Most of these perspectives share the view that the foundation and shape of long-term strategy rests upon a firm’s internal resources and capabilities (Grant 1991, Lado & Wilson 1994). Enterprise capabilities can be seen as sets of skills, competencies, organized routines, and knowledge that utilize complementary assets to perform and coordinate a set of tasks that are consistent with the firm’s strategy at the time. This implies that enterprise capabilities coordinate both at the individual and organizational level to achieve higher level routines that assist in management decision making, operating and coordinating work flows with the view of achieving specific objectives (Winter 2000). These routines are learned and include
136 Murray Hunter manufacturing, marketing, procurement, new product development, and general management, etc (Nelson & Winter 1982). Enterprise capabilities provide the internal firm dynamics needed to pursue company growth and competitiveness (Chandler 1990). They are strategic assets which enable a firm to adapt, compete, and survive within dynamic environments (Teece & Pisano 1994). Enterprise capabilities are heterogeneous and unevenly distributed and deployed across companies within a given competitive field. It is the differences in enterprise capabilities which partly accounts for the different competitive positions of firms and their individual performances (Conner 1991, Rumelt 1984). For example Wal-Mart’s logistical capacity could be seen as being superior to its domestic US competitors and Toyota’s performance on a number of y levels has been superior to that of General Motors and Ford. One will find within single industries that some companies are much more profitable than others, signalling the importance of firm specific factors like enterprise capabilities may play some important role nl (Rumelt 1991, Jacobsen 1988, Hansen & Wernerfelt 1989). Each enterprise capability a firm possesses is drawn from its internal skills, knowledge, systems, routines, efforts, and historical experiences, and therefore to some extent, unique to that firm. Enterprise capabilities in the right areas, truly distinctive ones, i.e., for example logistics for Wal-Mart and quality for Toyota, can provide a real key to a company’s success and future development (Learned et. al. 1969). O The major objective of enterprise capabilities is to anchor strategy and create firm effectiveness in terms of cost, customer service, logistical mastery, sales, technical service, manufacturing, organization, and new product development, etc. This enables a company to compete and pursue its objectives. Therefore in terms of opportunity, the important question is: “Does the organization have the capabilities to exploit a particular opportunity?” Broken down into specific functional areas the question is: “Does the organization have the fs capabilities to execute specific jobs that are needed to be completed in order to exploit an opportunity?” Enterprise capabilities are the means through which things get done. These capabilities reside inertly within the methods and processes by which people in the organization transformoo inputs of labour, energy, raw materials, information, and technology into higher value outputs and within the organization beliefs and values managers and employees utilize when making decisions (Leonard-Barton 1992). Consequently it is very difficult for competing firms to directly emulate many enterprise capabilities of other firms directly, as any capability contains many intangible attributes. Enterprise capabilities cannot be measured and itemized on balance sheets or organizational charts, yet they positively exist (Teece et. al. 1997). The firm’s success in the environment is a result of the effectiveness of crafted strategiesPr within the environment. However any strategy is only as good as what it is premised upon and what anchors it. Thus the success of any enterprise depends upon many factors, not neglecting the ability of managers to maintain a viable balance of (strategy) supporting capabilities (Thompson 1967, Schendel & Hatten 1972). This is the basis of resource based theory where Penrose (1959) argued that a firm creates a strong base by specialising in physical resources, including tangible assets like raw materials, plant and equipment, etc., and human resources including intangible assets like financial, managerial, technical knowledge or skills. A firm explores and experiments with all the resources it has at hand to create new value added products or services in the exploitation of markets that add growth to the
Skills, Personal Competencies and Enterprise Capabilities 137 enterprise, rather than collecting unrelated resources. These resulting capabilities are the result of years of accumulated decisions and actions taken in uncertainty (Henderson 1994). Enterprise capabilities are thus effectively developed through years of work and experience (Cohen & Levinthal 1190), historical condition (Barney 1991), and through socially complex interactions (Amit & Schoemaker 1993, Reed & DeFillippi 1990). Consequently enterprise capabilities can become rigid. For example, organizational culture (Barney 1986), Organizational routines (Nelson & Winter 1982), and the firm’s reputation and image (Weigelt & Camerer 1988) cannot be transferred very easily to other organizations. Enterprise capabilities become unique to the firm. However although these capabilities may be diverse, they are set in, rigid, but intangible. As a result a firm may not be able to diversify y its capabilities due to this rigidity and miss out on future opportunities (Leonard-Barton 1992), or may be able to grow incrementally along the path set by the cluster of capabilities through slow expansion and diversification (Davies & Brady 2000). nl Each firm will have a number of enterprise capabilities which will differ in number, types, and quality from enterprise to enterprise. Each enterprise capability contains embedded knowledge, skills, values and norms. These characteristics with their embedded tacit knowledge affect the firm’s ability to undertake strategic and functional tasks, to create more knowledge resulting in new products and services, make both strategic and managerial O decisions. Enterprise capabilities also define value and influence of particular knowledge structures within an organization. They decide individual verses collective decision making, centralized verses decentralized decision making, who controls information flows, and the degree of autonomy verses control. Enterprise capabilities also carry political values, where the weight of marketing over production, finance over procurement, and divisional management over line management is decided within the nature of enterprise capabilities. Enterprise capabilities are institutionalized (Zucker 1977) and become a firm’s taken for fs granted realities, within the fabric of the firm’s corporate culture (Schein 1986). Enterprise capabilities also dictate the degree of creativity the members of a firm can express depending on the types, combinations and rigidity of these institutionalized routines. Some of the major enterprise capabilities are summarized below.oo MANAGEMENT CAPABILITIES Management knowledge is a pivotal firm resource and plays an important role in firm performance (Fayol 1948, Mintzberg 1973, 1994), although this relationship with performance has not been explored thoroughly in management literature (Bartlett & GhoshalPr 1993). Management plays a key role in delivering business performance and logically better management capabilities should engender higher management performance. Management capabilities comprise accumulated explicit and tacit knowledge that is utilized to fulfil a large number of tasks and requirements needed in driving and operating an organization through the different levels of management11. Basic traits, routines, and outcomes required of 11 These levels of management are senior management which considers the strategic aspects of a firm, middle management that translates strategic goals into specific objectives and activities, and junior management which is involved in dealing with non-managerial employees, implementing specified plans developed by middle managers. In flat organizations, the middle level may be absent where the responsibilities of the second level of management are shared.
138 Murray Hunter management capabilities are listed in Table 3.2. below. There are great differences in the types and composition of management capabilities between organizations (Clark & Fujimoto 1991). To understand the performance of firms, great attention should be paid to the knowledge the enterprise has access to, and to the knowledge creation process itself. As knowledge supports the basis of managerial capabilities, this creates barriers to competitors who try to imitate the firm, which infers knowledge is a strategically significant resource of the enterprise (Grant 1996). Continual knowledge creation is imperative in a dynamic environment as the firm needs to adapt to changing environmental conditions and evolving competition (Nonaka & Takeuchi 1995). This includes both explicit and tacit knowledge y creation, which occurs at the organizational level through analysis, problem solving, and decision making, utilizing various levels of creativity, as enterprise capabilities are essentially organizational (Kogut & Zander 1992, Teece et. al. 1997). However enterprise capabilities nl also rely upon individual knowledge absorption, as knowledge occurs both at the individual and organizational level (Spender 1996). Table 3.2. Basic Traits, Routines, and Outcomes required of Management Capabilities The facilitation of job satisfaction Functional performance – accumulated clusters of skills and competencies O Setting visions, goals, and objectives The ability to translate a vision into a Leadership and the ability to work through people Moulding of organizational culture The development of efficient management processes The ability to turn strategies into action mission, a mission into objectives, and fs objectives into strategies Moulding and motivating a team, ensuring The ability to collect and analyse commitment, team building, and empowering information, solve problems, and make employees decisions Consistency and continuity Impartialityoo The ability to negotiate and mediate The ability to perceive the environment The ability to allocate resources efficiently The ability to develop future performance and effectively capabilities The ability to enable individuals utilize their The ability to be able to spot and evaluate personal skills and competencies within the opportunities organization for the benefit of the organizationPr Integrated knowledge at the organizational level is primarily related to how assets, resources, and capabilities are deployed to pursue strategy for the firm (Grant 1996). Within this integrated knowledge is a combination of higher order knowledge in regards to how to undertake the functions of organization. The various knowledge domains produce mental models both on an individual level and on an organizational level. These domains encapsulate experience, knowledge, intelligence, skills and competencies related to each respective area. The functional (operational) knowledge domain includes all knowledge about general management, human resources, logistics, marketing, manufacturing, and finance capabilities,
Skills, Personal Competencies and Enterprise Capabilities 139 etc12. Functional knowledge can be broken down into specific technical knowledge domains. An example of a firm with outstanding functional qualities is McDonalds which produces exceptionally consistent products, human resources training and management, market research and localized product development, financial control and operations management that enable it to operate thousands of restaurants with remarkable consistency throughout the world. Katz (1955) defines technical knowledge as an understanding and proficiency in specific kinds of activities involving methods, processes, procedures, and techniques. This includes both general knowledge and specific company skill knowledge (Castanias & Helfat 1991). Black and Decker’s designing of tools utilizing small electric motors or Canon’s ability to y integrate optical, microelectronic, and precision mechanical technologies together in their cameras are examples of outstanding use of technical capabilities. These functional and technical capabilities will generally be held by the junior and middle managers within the nl firm. Company specific knowledge would include specific conceptual skills that assist in the ability to see the enterprise as a whole and conduct what is specifically necessary for the firm to function. Company specific knowledge grasps and integrates technical, human, processing, and conceptual knowledge together. Company specific knowledge also entails what the firm capabilities. O stands for (Simon 1985). Air Asia’s ability to provide an efficient service that is on time, convenient, and safe, with a young enthusiastic team is an example of company specific Environmental knowledge relates to industry specific knowledge that enables the firm to operate within the environment. Banks know how to operate in the financial environment, as do airlines understand how to operate within the aviation environment. Competition knowledge specifically relates to operating within the competitive field the firm is directly fs engaged within. Sara Lee, Kraft, Cadbury, and Pfizer all understand how to compete exceptionally within their respective competitive fields. Some managers will specialize in particular areas, but the combined knowledge is integrated to form management knowledge. These aspects of knowledge share a tacitly sharedoo accumulated experience (Tsoukas 1996), which socializes, externalizes and internalizes, sets governing principals, which is codified for specific firm operation, integrates the organization (Boisot 1995) and forms routines (Nelson & Winter 1982). Again, they exist both explicitly and implicitly (Tsoukas 1996). The combination of all this knowledge at the integrated organizational level is something like‘management cognition’, guided by management processes forming a strategic logic (Sanchez & Heene 1996). This integrated knowledge is different to the individual knowledgePr of respective individuals (Sanchez 1997), who will have their own mental model (Mahoney 1995) as well as shared enterprise mental models. How static or dynamic is knowledge accumulation depends upon how flexible management is in regards to contingencies posed by the changing environment and how creative management is in analyzing data, making decisions, and solving problems through reintegrating and reconfiguring their knowledge to create new combinations of knowledge. 12 Enterprise capabilities are a very flexible concept in that there are potentially an infinite number of potential capabilities. What types of capabilities a firm has depends upon the nature of the firm and cumulative individual skills and competencies.
140 Murray Hunter Creativity Managerial Capabilities Organization Knowledge Generation Analytical/Decision Integrated Making & Problem Knowledge Solving Abilities Integrated Collective Knowledge Individual/Dispersed Collective Knowledge Knowledge Domains y Explicit Knowledge nl Functional Technical Company Specific Environmental Competition (operational) Knowledge Knowledge Knowledge Knowledge Knowledge “Know‐what” “Know‐how” “Know‐when & where” “Know‐why” “Know‐who” Tacit Knowledge Figure 3.5. The hierarchy of organizational knowledge. O Individual Level Learning fs Social background Education Organizational Learning oo Organizational Culture Experience Managerial Firm Prior Knowledge Capabilities Performance Managerial Discretion Pr Group Cohesion Motivation Expectations Figure 3.6. Some factors that probably influence managerial capabilities and enterprise performance.
Skills, Personal Competencies and Enterprise Capabilities 141 Wisdom in any domain is concerned with understanding it as a system. Management must know what, how, when, where, why and who in order to apply knowledge through solving problems and making decisions, thereby creating more knowledge. Know-how, know- why, and know-what are related to firm processes, purpose, and current state of existence (Sanchez 1997). Know-how is concerned about how the different elements within a domain and the organization are interrelated. Know-why is concerned about why different parts of the system are interrelated. Know-what is concerned about what causes of action are available to the firm. Know-where is concerned about where the important and critical issues are located within the firm. Know-when is related to the time dimension of management and strategy (Van den Bosch & de Man 1997). Know-who is related to working through other people y (Koontz 1964) and who controls or possesses certain parts of the system and has the power to make decisions. Wisdom is related to the ability of the knowledge system to become a ‘self organizing system’ where solutions and new insights through manipulating knowledge nl patterns occur through management analysis, problem solving, and decision making. This creates new knowledge which enables the creation of new products and services, routines, perceptions, system rectifications, and new strategies. The hierarchy of organizational knowledge is shown in Figure 3.5. However one of the risks with ingrained management capabilities is complacency, with a O high regard for a firm’s own management capabilities where organizations fall victim in a belief of their own infallibility due to past successes in the marketplace. Strategies can reflect hopes for the future and wishful thinking rather than wise contemplation. Many companies did not see the threats posed by new competitors entering the market as the US automobile makers ignored Toyota and Honda’s entry into the US market and Harley-Davidson and BSA-Triumph did not believe Honda could seriously challenge their market leadership in the market for “up-market” motorcycles. fs As mentioned in the introduction to this section, there is a relationship between management capabilities and enterprise performance, although we are not sure to what extent. The effectiveness of managerial capabilities is contributed to by a number of possible factors, which we also cannot quantify their influence. Firstly, managerial capability effectiveness isoo dependent upon the integration and cohesion of the members of the firm. Strong group cohesion should lead to shared perceptions, knowledge, values, and sense of importance in a collective setting, where managers are able to complement each other (Penrose 1959, pp. 46, 52). Poor group cohesion for whatever reason may lead to dysfunctional management capabilities. Then come a set of background factors which may have varying influence upon management capabilities (which have all been discussed before), including socialPr background, education, experience, prior knowledge, and motivation. These interactions are so complex that it may be too difficult to individually determine the influence of any individual factor upon management capabilities. Expectations are very important as they set a benchmark upon what performance is measured and what is expected. Management discretion or autonomy provides managers with the freedom and opportunities to use and develop their own judgment. The influence of organizational culture and learning will be discussed in their own sections. The broken arrows between managerial capabilities and enterprise performance indicate that the correlation of this relationship is unknown. This is schematically shown in Figure 3.6.
142 Murray Hunter ENTREPRENEURIAL CAPABILITIES Firms mostly start with an idea and in their infancy are small, flexible, and adaptive to the nature of the chosen opportunity. The fact that a small start-up firm can make decisions fast, do things quickly and on the cheap, enter small market segments without direct competition, and modify products and strategy easily where needed, are the very traits that make a small entrepreneurial firm successful. Ideas can be gestated into products reasonably quickly, giving the small entrepreneurial firm many advantages over larger and mature incumbents. Large firms can become cumbersome, lethargic, and complacent, making them slower to react because of high fixed cost to serve smaller market segments and find difficulty in y modifying strategies due to their sunken investments. They lose the entrepreneurial drive that first made them successful and become very formal and management orientated. Many mature firms act as though they exist within a stable environment, only undertake revisions of nl strategy on a periodic basis and rely on natural growth of the market for their development, rather than making any innovations. The capability to maintain a state of adaptation to the environment requires more than just management capabilities. Entrepreneurial capabilities are concerned with maintaining alertness to opportunities, evaluating them, and making decisions to exploit them. O Entrepreneurial capabilities encompass more than gaining access to the necessary resources to make things happen, steering growth and surviving. Entrepreneurial capabilities are about actively searching for an applying new technology13 to fulfil continuing visions of what the management of the firm envisages for the future. Entrepreneurial capabilities are about finding growth through rearranging resources, building new capabilities, employing new technologies in the pursuit of new visions14. Entrepreneurial capabilities are about fs maintaining alignment with the changing environment through making conscious strategic choices (Child 1972). Change does not just occur in the environment while a firm passively looks on. A firm’s strategic interventions also change the environment (Wernerfelt 1984). During early firm infancy, the founder may rely on his or her skills and personal competencies to get through. These evolve through the growth of the firm into firstoo entrepreneurial capabilities and then into other enterprise capabilities. Entrepreneurial capabilities are built up upon early entrepreneurial initiatives (Garret & Covin 2007). Entrepreneurial initiatives build up new knowledge that develops other enterprise capabilities (Zahra et. al. 1999). The development of other enterprise capabilities is an evolutionary process, usually entailing trial and error and experimentation (Zahra & Filatotchev 2004, Zahra & George 2002). A continued entrepreneurial capability throughout the life of the firm can facilitate the identification and pursuit of new entrepreneurial initiatives, thus maintainingPr alignment of resources, capabilities and opportunities. Entrepreneurial capabilities provide flexibility where mature firms can quickly deviate from set strategic paths. Entrepreneurial capabilities assist in providing flexibility (Birch 1987), innovation (Backman 1983), and growth (Drucker 1985). Entrepreneurial capabilities facilitate two types of entrepreneurial initiatives, those that are intended and those that are emergent on an ad hoc basis. Intended entrepreneurial 13 Technology in this case may also mean new business processes. 14 These visions need not be visions for an overhauled firm, they may be for a new product, a new market segment, a new line extension that will attract new customers, etc.
Skills, Personal Competencies and Enterprise Capabilities 143 initiatives are activities that are the result of planned and purposeful action based on a strategy. This may include opening of a new outlet, a branch, the development of a new product or service, etc. They are intended to return a purposeful revenue and profit based upon the perceived opportunity and crafted strategy intended to exploit it (Lovas & Ghoshal 2000). Emergent entrepreneurial activities just happen without any formal recognition of any specific opportunity. They are an extension, or flexible move following a perceived opportunity path that is emerging of perceived within the environment. These initiatives occur serendipitously but usually linked to the current competitive field and technologies of the firm. These initiatives often occur where the founder or management cannot properly assess the scope of the opportunity and are very common occurrence at SME level. y The existence of entrepreneurial capabilities within a firm is dependent upon the attitude of individuals within the firm (Stevensen & Jarillo 1990). It is not just the founder/manager’s attitude but also the rest of the employees as well. In addition opportunities cannot be pursued nl and exploited if they are not spotted and identified in the first place. Alertness to the environment is an important aspect of entrepreneurial capabilities and depends upon individual abilities, product, market, and technical knowledge. Entrepreneurial capabilities assist a firm develop strategic growth rather than rely upon natural market grow for its internal growth. This is a fairly rare capability (Leibenstein 1987) and is somehow connected O to the values of the enterprise founders (Schein 1983). Entrepreneurial capabilities are a driver of a firm’s ability to renew itself (Stopford & Baden-Fuller 1990, Sambrook & Roberts 2005). Entrepreneurial capabilities are the sustaining characteristic of a firm that enables it to react to a changing environment. Without this characteristic a firm will be stifled, unable and unwilling to transform its products, processes, and strategies. Entrepreneurial capabilities enable a firm to keep stretching itself into new areas of opportunity and growth during its lifetime. fs ORGANIZATIONAL CULTUREoo Organizational culture became very popular in management literature during the 1980s. However, most literature took a positivist approach which treated the various aspects of culture as objects that can be manipulated to achieve better organizational performance. The instrumentalist concepts of a power culture (Deal & Kennedy 1982), a role culture, task culture, person culture (Handy 1985), caring culture, integrative culture, apathetic culture and an exacting culture (Sethia & Von Glinow 1986) all tended to ignore that culture is made up of human irrationality and emotion. Culture is in effect a multiplicity of complex conceptualPr structures, many superimposed or knotted into one another, which appear strange, irregular and inexplicit (Geertz 1973). Edgar Schein (2005) defines organizational culture as “a pattern of shared basic assumptions that the group has learned as it solved its problems of external adaption and internal integration, that has worked well enough to be considered valid, therefore, to be taught to members as the correct way to perceive, think, and feel in relation to those problems.” Organizational culture can be seen, felt, and observed through narrative, rules, offices, office layouts, furniture, written documents like mission statements, slogans, the way people dress, the way people react with each other and with those outside the organization,
144 Murray Hunter the way people work, peoples ideals, status and status symbols, the organization’s heroes, traditions, peoples’ emotions, and behaviours. Under this can be seen what is valued within the organization and the underlying set of beliefs members share. These are primarily at the conscious level. Underneath peoples values and beliefs lay the underlying tacit assumptions of the organization, which are primarily unconsciously embedded within the members. These can be picked up through seeing what subjects and issues are taboo within the organization and finding out the “unspoken” rules that people follow. Looking at the difference in what is espoused through narrative and what is actually done by the by the organizations members also exposes deep assumptions (Argyris and Schön 1974). Culture produces paradoxes and y inconsistencies that show up particular values like rewarding people, but at the assumption level take on different meanings like favouritism and/or control, which can have profound influence on the effectiveness of enterprise capabilities. Culture is also a field of power, nl which can either empower members or alienate them (Bourdieu 1988). An organizational culture is greatly influenced by the organization’s leadership through their narrative, actions, style, and symbols. Different configurations of the above produce sub-cultures which can run consistently or counter to the prevailing dominant organization culture. Certain types of culture delineate reflection, thought, spontaneity, impulsivity, an action O orientation, no action orientation, risk taking, risk aversion, aggressiveness and being pro- active verses being laid back and passive, etc. Some cultures suppress conflict in the interests of harmony, while other cultures produce conflict which lead to new meanings, new directions, thus influencing the whole inertia of the firm (Bourdieu 1993). Cultures continually change with dynamic interplay between the organizations members, society, the environment, its leaders, and the results the organization achieves or fails to achieve. Culture provides a collective interpretation and assignment of meaning to the environment (Daft & fs Weick 1984, Morgan 1986, Smircich & Stubbart 1985, Weick 1979). An organizational culture has immense effects upon enterprise capabilities but at the same time is one of the most difficult aspects of an organization to understand and change. The effects of culture can be seen by casual observation of an organization. For example,oo if one experienced the staff at an old Eastern European hotel in one of the old communist bloc countries during the cold war era, one would have found that the staff often appeared complacent and disinterested in guest problems as the state provided job security. Compare this to the enthusiastic staff on Asia’s leading low cost airline Air Asia. Culture plays a role like an “invisible hand” in ensuring an organization’s members adhere to rules and conventions and behave according to the norms of the organization. Organizational culture can play a positive role in an organization. The prevailing culturePr ensures members follow formal and informal rules of conduct and social norms supported with powerful conforming forces, so efficiency, predictability and stability is assured (Morgan 1986, P. 131). Norms are created through enactment where they are tested, and the positive ones that reinforce success are retained and the negative ones that are unsuccessful or unimportant weeded out and rejected (Miller 1993). Eventually these accepted norms mould into shared meanings as beliefs and values. This process over time creates a generation of firm specific symbolic knowledge that success in the past and present has been obtained through. Thus culture links the past with the present and with a certain orientation that can be taken in the future.
Skills, Personal Competencies and Enterprise Capabilities 145 Developing enterprise capabilities requires more than just assembling skills, personal competencies, assets and other resources together. Capabilities require complex patterns of coordination between people and the resources they have. Capabilities must become routines which are supported by the organizational culture to be effective. The effectiveness of capabilities requires cooperation and coordination within the membership of the organization and the values, norms, traditions, and leadership are all important in gaining member commitment (Grant 1991). Finally through the socialization aspects of culture, tacit knowledge gets passed on from member to member through specific use of models, symbols, analogies, metaphors and other means that ‘objectifies’ implicitly (Schultz & Luckman 1985). Implicit knowledge is necessary for any capability to operate effectively. y An organizational culture can also cause an organization to behave dysfunctionally and affect the firm’s perceptions, performance, efficiency, effectiveness, and the ability to implement meaningful strategy. At the extreme, firms that rely on formal bureaucracy and nl rules for control tend to produce employees who fear superiors and spend their time trying to avoid censure. Fairness is achieved through impersonal rule creation that is orientated around reporting and measurement, i.e., time clocks and punch cards, etc. (Bies & Tyler 1993). Authority is top down, usually in the hands of “powerful people” who use intimidation to make employees feel they are beyond questioning. Bureaucracy and rules are also used to O mask leaders’ biases (Moore & Haas 1993), or to justify self serving actions. Consequently employees feel that they have little power and discretion and develop a sense of mistrust of the organization (Sitkin & Roth 1993). The poor congruence between competent people and the values and requirements of the bureaucracy may create feelings of alienation, despair, frustration, and apathy (Argyris 1957). As a result individuals may only perform to their minimum to satisfy organization requirements, refusing to do anything more for the organization than is necessary (Bateman & Organ 1983). This may result in employees fs creating dysfunctional work routines15 to cope with their feelings of alienation which may emerge as covert sabotage of the workflow, or resignation from the organization, leading to the inability to exercise their enterprise capabilities effectively, affecting overall performance and efficiency of the organization (Martinko & Gardner 1982). When employees engage inoo behaviours that are negative to the organization, management may respond by tightening their controls on employees, creating a spiral of actions and reactions that can destroy enterprise capabilities (Lado & Wilson 1994). Leaders that utilize hierarchical authority to control and coordinate their organization may lead it to being a very rigid one. This is advantageous when existing values, norms, and routines may be orientated around existing enterprise capabilities which have worked in the past. However excessive rules and procedures hinder any potential innovation as members ofPr the organization have become risk adverse and are unwilling to experiment and make any extra efforts on behalf of the organization. Therefore any organizational culture that supports existing enterprise capabilities can also constrain their evolution and development (Leonard- Barton 1992). This weakens the firm when existing enterprise capabilities do not align to the changing needs of the environment. This can become very difficult to rectify as the firm finds 15 These can be mild actions such as being late and going home early from the office, taking longer than necessary for tea and coffee breaks and lunch, to more dramatic actions that are designed to disrupt the workflow such as purposely interfering with product quality, leaving work uncompleted, or in extreme circumstances going on a rampage.
146 Murray Hunter that current enterprise capabilities are supported by deeply ingrained knowledge, values, management and technical systems. Firms often become trapped by their own cultures which distort perceptions and create barriers to taking action. Firms can exhibit “defensive routines” just as individuals exercise personal defence mechanisms. Organizational “defensive routines” may be utilized at a group level to cope with ambiguity, contradictions, or surprises emerging from the environment (Argyris 1986). This may lead to management denial or ignoring of ambiguous and contradictory situations within the environment. Management may blame “external factors” for poor performance, rather than try to improve their own performance (Cangolesi & Dill 1965, Starbuck 1983). The phenomena of groupthink discussed back in chapter three of y volume one can come into play where management backgrounds tend to be very similar. Finally firms may not be apt to take action because they over analyse the situation looking at quantifying irrelevant things, thus preventing decisions. Any potential remedy to a threat is nl discounted due to over scrutiny which produces negativity and pessimism. There are numerous ways of viewing and mapping organizational culture with each method providing different perspectives of the meaning for an organization’s members and/or for the organization as a whole. As mentioned at the beginning of this section, much of the management literature takes a positivist or instrumentalist approach to the subject, O simplifying the concept of culture down to a few variables that can be manipulated to create a certain type of culture. From the point of view of being able to develop and evolve enterprise capabilities and utilize them effectively within the strategic environment a cultural environment should both have a propensity towards stability, coordination and control on one side, and nurture creativity and learning on the other. Burns and Stalker (1961) through their studies found that organizations that are characterized as hierarchical, highly structured with well defined formal fs roles and rules, with top down communication, are mechanistic organizations and more suited to repetitive and routine tasks like manufacturing and distribution, etc. On the other hand firms that were more fluid in structure and where teams were formed around expertise rather than formal authority were organic organizations that were better suited to facingoo environmental ambiguity and unpredictability, approaching new problems and opportunities, and had better internal environments for creativity and learning. Firms need to find a balance between the two types of organizations to maximize their enterprise capability effectiveness and also be able to develop and evolve them. The work of Theresa Amabile et. al. (1996) discussed back in chapter four of volume one can add more depth to the concept of mechanistic and organic organizations. Amabile points to six continuums that affect the level of creativity within an organization; 1) the level ofPr organization encouragement, 2) supervisors encouragement, 3) work group support, 4) personal freedom, 5) available resources, and 6) the personal challenge involved. Amabile (1998) also mentions that domain expertise i.e., competence is very important for creativity and innovation. Rosabeth Moss Kanter (1988) stated that innovation is most likely to occur in organizations that 1) have integrative structures, 2) emphasize diversity, 3) have multiple structural linkages inside and outside of the organization, 4) have intersecting territories, 5) have collective pride and faith in people’s talents, and 6) emphasize collaboration and teamwork. Robinson & Stern (1997) also highlight the positive aspects of open communication on firm innovation.
Skills, Personal Competencies and Enterprise Capabilities 147 Actuality Tangible, Facts, Data, Based on Past Control Collaborative Policy & Procedure Driven, Subjective application of Objective, Principal & Rules, facts, Structured Vision Detached Reasoning, certainty, Driven, Mission Driven, Efficiency, Centralized, Goal Rational Analysis with Time Focus Axis Driven, Functional, Risk Adverse, Social criteria, Work with Vertical Communication, Change Resource Driven, Rational Analysis, High Level of Planning, Reactive, Fear Change Personal Impersonal Relationship Focus Axis y Driven by relationships, Bureaucratic, Impersonal, informal, low status Authoritarian between people Cultivation Competence nl Intuitive, holistic, Deciding According Based on expertise, analysis to Social & Moral Issues, Diversity, and insight, visionary, Organic, Uncertainty, Decentralized, Effectiveness, Vision Possibility Driven, Non‐routine, Driven, Conservative, Adventurous, Lateral Analysis and Learn by Communication, Ideas Driven, Trial & Doing, Accept Change Error, Proactive, Embrace Change Possibility Insights, imagined Figure 3.7. A Map of Organizational Culture. O alternatives, what might occur in the future, ideals, beliefs and aspirations Creativity and learning is also influenced by the time orientation of a firm. According to Drucker (1974) firms that become trapped in analysis of the past succumb to what he calls the fs ‘paralysis-by-analysis’ syndrome. An analytically orientated firm will tend to rely on extrapolated financial models which will give different results depending upon the method used. One of the effects of this reliance on data is that the firm may lose faith in their own judgments, as forecasts become replacements for plans. Firms also become complacent with their past achievements and become over confident about the future (Schumacher 1974).oo Firms that are orientated toward goals in the future will tend to be more open to creativity and learning (Tesluk et. al. 1997). Figure 3.7. summarizes the above with a culture map showing a relationship and time focus axis with four quadrants; control, competence, cultivation, and collaborative quadrants. The organization position on the map will have specific consequences for capacity effectiveness and creativity and learning.Pr LEARNING CAPABILITY The ability of the firm to learn is one of the building blocks of strategy which links the past, present, and future together (Starkey et. al. 2004). The primary objective of an organization is concerned about dealing with the future. This is usually based on analyzing the past and seeing how this information influences the present and then selecting one of the numerous potential strategy scenarios that can be identified for a firm to take (Hamel 1997). Prahalad (1997) suggests that a firm cannot compete in the future with old strategies. It will be the firms that learn faster than their rivals, see and exploit new opportunities that will make
148 Murray Hunter them the most successful in the future. Strategy is about preparing for an unknown future and therefore a learning process. The learning organization metaphor evolved as a concept in the early 1990s and is described as an organization that facilitates learning which consciously transforms that organization and its context (Pedler et. al. 1997). Daniel Kim (2004) stated that advanced organizational learning is about developing capabilities that are consistent with firm objectives. Every firm comes into contact with and deals with customers, suppliers, competitors, and confronting its own internal problems, but some companies are better than others at extracting knowledge from their experiences. The ability to maximize learning from experience is vital to a firm in developing new strategies so the same mistakes are not made y over and over again. The ability to learn at an organizational level is a necessity to developing strategy and as a consequence can be classified as an enterprise capability. Environments for learning differ greatly between organizations. Organizational learning nl requires imagination, the development of generative relationships, and the ability to continually reorganize ourselves (Dixon 1994, P. 81). The emphasis of the learning organization is to develop collective reasoning and the intelligence at organizational level and make learning occur rather than dysfunctional habits and intimidation that management uses as a control tool (Starkey et. al.2004, P. 5). This aspiration aims to create an organization that O functions as an adaptively rational system that continually learns through experience (Cyert & March 1963). The organization becomes an interpretable system of the environment where transitions can occur (Daft & Weick 1984). The core aspect of organizational learning is the ability to act more creatively in viewing, discovering and constructing opportunities and crafting their corresponding strategies that exploit the appropriate sources of opportunity in enterprise innovation. Conceptual learning is concerned with thinking about why things are done and how things are done the way they are fs in the first place. This often challenges the very nature of our routines, procedures, perceptions, and conceptions that presently exist. The challenge enables us to critically question our existing mental models which can open up new opportunities, new directions in strategies, incremental improvements, the realization of market incongruities, and newoo approaches to a problem reframing it in such a way that bring breakthroughs in approaches. Creativity is learning, where if the result is positive, the new framework is reaffirmed into acceptance, and if the result is negative, further investigation is required to find another way that will bring a positive result. Organizational learning is based upon individual learning but is much more complex. In the early stages, organizational learning is synonymous with individual learning. Learning at the individual level is about developing knowledge and skills which through repetition andPr experience become operational skills and conceptual competencies. Organizational learning depends upon knowledge being built up into a mental model and shared amongst members of the organization. This knowledge is mostly tacit and embedded in organizational routines and procedures that become institutionalized. This organizational mental model is held in the assumptions of its members which are deeply ingrained images about how the world works, which has profound influence upon what we see and what we do. Learning at the organizational level is about reframing these mental models. However, our mental models often prevent learning, protecting the rigidity of the status quo that precludes any challenge. As organizational learning is a metaphor of our understanding of individual learning, theories of individual learning are thus important to understand in order to understand
Skills, Personal Competencies and Enterprise Capabilities 149 organizational learning. Definitions of learning from a number of academics and practitioners in this area stress the importance of experience in the learning process (Piaget 1970, Argyris & Schőn 1978, Kolb 1984). Therefore learning occurs when a person continually cycles through a process of having concrete experiences, making observations and reflections upon the experience, develop abstract concepts based on these reflections, and test them in the new life situation which leads to another concrete experience. People learn know-how and apply what they have learnt, demonstrating know-why. For example, a builder knows how to build a house foundation, set up the support frames of the walls, lay bricks, build a roof, and lay tiles, etc. But without knowing what these skills can be used for, i.e., building a house and other conceptual structures, he or she lacks know-why. y Likewise, an architect knows about conceptually developing all sorts of structures, know-why, but lacks the personal know-how to lay foundations, build wall frames, build roofs, and lay tiles, etc. nl This way of learning through experience, reflection, conceptual generation and trying these new concepts in a new situation which leads to a new concrete experience is the basic cycle used in Total Quality Management (TQM), Deming cycle of plan-do-study-act, Schein’s (1987) observation-emotional reactions-judgment-intervention cycle, Argyris and Schőn’s (1978) discovery-invention-production-generalization cycle of learning, and Kolb’s O (1984) experiential learning model (see author’s version Figure 3.8. in volume one). However this learning cycle at an organizational level, i.e., scan the environment, set goals and objectives, and monitor performance, adjusting for any deviations of performance, amounts to what Arygris and Schőn (1978) call single loop learning. This is fine for monitoring spending budgets, production and sales targets, etc. Just like a heater thermostat set to 20°C. If the temperature in the room rises above 20°C, the heater will turn off, and when the temperature falls below 20°C the heater will turn on again. This cycle continues fs unbroken without any changes to assumptions. However, sometimes to correct a situation, the underlying assumptions need to be reviewed. For example when a firm faces inventory shortfalls it may schedule more production by expanding operational hours, utilizing overtime. But there may be seriousoo capacity problems that the production clerk is not considering, requiring a long term solution outside the short term solution of expanding production hours. Finding wider solutions that relying on feedback won’t occur, as questioning the basic assumptions behind the process is required. This is double loop learning. Going back to the heater thermostat example, single loop learning (temperature feedback to the thermostat) does not provide any questioning of other factors that contribute to the temperature level in the room, e.g., insulation, open windows or doors, etc; it just reacts to the temperature feedback. Double loop learningPr enables us to question our assumptions and mental models by allowing us to look at new possibilities and solutions to problems, leading to new actions. However double loop learning is not easy to achieve as it challenges the organizational status quo, the way things are done, and the current mental modals one possesses. This is particularly the case in bureaucratic organizations that are rigid and don’t promote experimentation and risk taking. Within bureaucracies individuals may learn in fragmented sections, but this knowledge is never collated and synthesized at an organizational level. Conflict and political considerations may hinder the organization taking up information from certain sources as it is seen to challenge the authority or power of certain people. It is really questionable whether executives are truly logical, rational, and wise in their deliberations as is
150 Murray Hunter generally believed (Kets de Vries 1995). Much of what takes place in organizations takes place within an intrapsychic environment that exhibits conflict, anxiety, defensive behavior, and tension, etc. These factors lead to defensive routines which block learning and stifle creativity within the organization to protect embedded mental models, ease anxiety, relieve fear, and deflect criticism. They are often hard to see as they may form part of the organization’s values such as ‘we win, do not lose’, ‘we suppress our feelings so not to offend others and maintain harmony’, and ‘we must analyze things before we act’, etc. These types of values are considered the correct way to think and behave, which can lead to dysfunctional actions (Argyris et. al. 1985). In an effective organization, learning is greater than the sum of individual learning. New y knowledge comes from a number of different sources which include; 1. Individual Employees individually know their own specific tasks and duties better nl than others within the organization. They bring various types of expertise and knowledge with them to the organization and also accumulate further knowledge through work repetition. The accumulated knowledge that results over the years from experience and training will if utilized greatly assist in enterprise problem solving (Simon 1984). Diversity of knowledge is very important for the organization to be O able to draw upon it in the developing new innovations, but the effectiveness of this knowledge depends upon how decentralized this knowledge is in the bureaucracy and how free employees are to explore new knowledge and techniques within the organization (Marengo 1992). Human resource selection procedures are very important in selecting the right mix of employees to bring diverse knowledge to the organization. The effect of human resource selection upon performance can be seen in football club recruiting which has an important bearing on how a team will fs perform within each season. 2. Public Domain Knowledge is generally any knowledge that is not covered by intellectual property rights, or that individual property rights have expired16. Public domain knowledge generally includes formal arts and science knowledge,oo mathematical and scientific formulae, general knowledge, most forms of traditional knowledge, expired patents and copyright rights, and any other intangible knowledge that cannot be individually owned. Firms may utilize fundamental knowledge which may include scientific theories and principals that can be used to produce proprietary knowledge. Public domain knowledge allows a firm to pursue competitive imitation strategies, use as building blocks to create other knowledge, or make adaptations or derivatives to create new products17.Pr 3. Migratory knowledge includes specific explicit knowledge like technical books, plans, specifications, designs, and implicit knowledge through the acquisition of employees, consulting, and training etc. Migratory knowledge enhances the building of a firm’s prior knowledge, enabling it to catch up with technically superior 16 Expired intellectual property rights (patents) have a major impact on competition within the pharmaceutical industry. When proprietary pharmaceutical patents expire, other firms are free to launch ‘generic’ versions of the formally patented medicine that are much cheaper. 17 For example, the plots of Shakespeare’s plays have been widely adapted in contemporary entertainment and Disney has adapted and derived “Snow White and the Seven Dwarfs”, “Cinderella”, “The Little Mermaid”, and “Aladdin”, from folklore and fairytales.
Skills, Personal Competencies and Enterprise Capabilities 151 competitors (Badaracco 1991). This is very evident in both the automobile and computer industries where knowledge, technology, production processes, and expertise has been packaged and can be assembled in a way that firms can take advantage of these pieces of knowledge developed externally to their own organizations18. The intellectual property patent system has allowed pieces of technology to be packaged together so they can be transferred through license from firm to firm. Other ways migratory knowledge can be acquired is through purchasing ‘turnkey’ equipment, and through materials and products that can be reverse engineered. Knowledge migration is quicker when organizations have the capabilities to understand, assess, manipulate, manage, deploy, and apply the knowledge they y acquire. Knowledge comes into an enterprise as both explicit and tacit information (Polanyi nl 1966). Explicit knowledge is knowledge that is codified and can be transmitted in formal, systematic language which can be acquired in the form of written information. This information is stored in individuals as skills and vocational knowledge and within the organization as written documents, products, machinery, and other organizational assets. Tacit knowledge is deeply rooted in the human mind and is difficult to codify and O communicate formally. It is expressed through action, commitment, involvement, attention, and focus on specific things within the organization. Much tacit information is embedded in the formal and informal rules, procedures, and routines of the firm (Cyert & March 1963). This is what is sometimes called the organizational memory of the firm (Lawson & Lorenz 1999). Therefore much behavior in firms may not be formed by explicit intentions. Tacit knowledge may have a very important influence which itself may be based upon firm history, traditions, and cultural origins. Tacit knowledge can only be acquired through experience, fs observation, socialization, imitation, and practice within the organizational context. It is tacit knowledge that enables an individual to interpret the rest of the firm’s knowledge base. There are assumptions behind explicit knowledge which provides it with contextual meaning. For example, a person may know how to ride a bicycle. The same personoo may also know how to endure long bicycle rides through various weather conditions. The fact that the person is a member of a road bicycle club gives meaning to the person’s skills and competencies. Explicit and tacit knowledge forms the firm’s prior knowledge base. This may include proprietary explicit knowledge as patents, trade secrets, custom procedures, specifically designed software, etc. However it is tacit knowledge which enables explicit knowledge to work for the benefit of the organization (Howells 1996, Nelson & Winter 1982).Pr Organizational learning is dependent upon absorptive capacity. Absorptive capacity is the basic ability of an enterprise to acquire new knowledge and combine it with the prior knowledge base (Cohen & Levinthal 1990). Absorptive capacity depends upon a firm’s ability to recognize the value of new knowledge. However absorptive capacity can be hindered by what Levitt & March (1988) call the ‘competency trap’ where an organization that is very good at doing something is blind to new ideas and technologies. This resistance to new knowledge is based in some of the assumptions a firm develops behind its tacit 18 For example, automobiles are manufactured with components based on technologies and raw materials from all around the world. Likewise computer assembly relies on different components and licensing from a number of manufacturers.
152 Murray Hunter knowledge. Absorptive capacity can also be limited when a firm has little or no technical knowledge in the domain that new knowledge exists within. Consequently no one within the organization is able to put any value upon the knowledge and it is not absorbed into the firm, and thus the firm is unable to benefit upon it (Tushman & Anderson 1986). So to a great extent absorptive capacity also depends upon individuals’ background knowledge and ability to communicate with other members in the organization. We have discussed in some detail how organizational factors influence the firm’s ability to utilize new information for problem solving, decision making, innovation, and strategy. As we saw in the last section, different cultural aversions create different sets of conditions for creativity and learning within an organization. This also influences our general perception of y the environment. We don’t see objectively, what we see is value laden and given meaning through the scope of our prior knowledge. As we saw back in chapter three of volume one, perception is greatly influenced by our defence mechanisms, cognitive biases, heuristics, nl motivations, abstract inferences, fallacies, and neurotic states, etc. We only perceive what we want to perceive. The organizational mind only exists metaphorically. It is distributed between individuals, groups, enterprise routines and procedures, its products and manufacturing processes, problem solving and decision making processes, letters, spreadsheets, what is on the minds of O organizational members, how the membership of the organizations acts, what they pay attention to, and other sources of explicit and tacit knowledge ‘stored’ around the organization in various forms, making up the prior knowledge base. Organizational learning is bound to the extent of technical, functional, and conceptual knowledge the firm possesses. This ‘stock’ of knowledge bounds the firm to a particular competitive field, thus new knowledge in the environment must bear some close proximity to the existing prior knowledge base to be understood. For example firms are better able to fs recognize and exploit new information relevant to their specific product/markets (Abernathy 1978, Rosenberg 1982). Production experience provides a firm with the background necessary to recognize the value of technical information and exploit it. Therefore new ideas, concepts, new products, strategies, and ways of self organizing canoo only be created to the extent of the prior knowledge base. Thus the breath of categories in which prior knowledge exists and the linkage across each category determines how individuals make sense of new knowledge (Bower & Hilgard 1981). Learning is more difficult in novel domains, limited by the existing expertise. So diversity of knowledge plays an important role. This implies that the act of creating new knowledge is an act of creativity, as creativity is the act of rearranging and making new links in knowledge. An organization is therefore a self organizing system of knowledge. The essence of learning is acquiring newPr knowledge and combining diverse pieces of information together until they make some new meaning. Decision making and problem solving creates new knowledge. Most new knowledge results from knowledge a firm already has and borrowed ideas from other places, rather than inventions (March & Simon 1958). One of the important ingredients that assist in achieving the assimilation of new knowledge into the enterprise is the existence of a shared language and knowledge, which facilitates intra-firm communication (Cohen & Levinthal 1990). Knowledge is transferred by either tacit to tacit conversion where members of the organization transfer their knowledge through training and others observing, or explicit to tacit conversion when explicit knowledge is shared throughout the firm and other members
Skills, Personal Competencies and Enterprise Capabilities 153 use this information to reframe, broaden, or reflect upon their existing tacit knowledge (Nonaka 1994, Nonaka & Takeuchi 1995). Exposure of the organization’s members to knowledge is not enough to learn unless an effort is made. The intensity of effort is the amount of energy expended by organizational members in solving problems, and thus must be somehow related to personal and group motivational factors. Without intensity of effort, there will be no enterprise absorptive capacity, creativity, or learning. Generally organizations with large and diverse prior knowledge bases and high intensity of effort will have a high absorptive capacity for new knowledge. Organizations with a high prior knowledge base and low intensity of effort will lose their capability to absorb new knowledge and may find it difficult to remain competitive y as their prior knowledge base becomes obsolete. An organization with a low prior knowledge base and high intensity of effort will be able to broaden and enlarge their knowledge through absorption. nl Learning occurs through solving problems and testing new solutions through trial and error (Harlow 1959). Time must be invested in solving organizational problems to develop the cumulative knowledge and learning skills necessary to assimilate information and make novel linkages and associations (Kim 1995). Cumulative learning usually occurs along a steady pace within an organization. Because O of the nature of prior knowledge, learning follows a particular trajectory from an historical base. However when a crisis occurs within an organization, periods of discontinuous learning can occur where the whole learning process speeds up. A crisis can occur because of an external event or a deliberately created event that will be effective if it unites members of the organization together. Organizations can potentially come to their best when faced with a crisis (Miller & Friesen 1984, Tushman et. al. 1985). A crisis usually brings with it an opportunity and it is up to the leadership to guide the membership into productive activities fs towards specific goals, rather than allow them to drift into unproductive or self destructive defensive routines (Kim 1997). A constructed crisis is a solution to organization inertia