Introduction
Networked innovation: developing the AXE110 ``mini-exchange'' at Ericsson Tomas HellstroÈm and Ulf Malmqui...
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Introduction
Networked innovation: developing the AXE110 ``mini-exchange'' at Ericsson Tomas HellstroÈm and Ulf Malmquist
The authors Tomas HellstroÈm is a Researcher at Chalmers University of Technology, Gothenburg, Sweden. Ulf Malmquist is a Researcher at Stockholm School of Economics and Telia MegaCom, Sweden. Keywords Innovation, Networks, Competences, New product development, Entrepreneursialism Abstract This article describes an informal process of new product innovation that took place outside of the established structures in a large Swedish telecom company; how a number of individuals brought a product idea from invention to innovation by creating and enabling an informal competence network within the company. The purpose of the article is to bring out a number of insights into how ``networked innovation'' might be accomplished and supported, by elaborating this case and pointing to some of its management implications. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
European Journal of Innovation Management Volume 3 . Number 4 . 2000 . pp. 181±189 # MCB University Press . ISSN 1460-1060
The concept of networks has gained an increasingly important role in scholarly and practitioner writings on management of innovation (Savage, 1990; Powell and Koput, 1996). Networks have been conceived of both at the level of nascent intrapreneurs; individuals and their social and material relations within a company (Pinchot, 1985; Tsai and Ghoshal, 1998), as well as on the inter-organizational level and here foremost in relation to corporate alliances and innovation systems at large (Gulati, 1998). The attractiveness of the network concept may be that it provides a unifying lens through which to view an otherwise increasingly complex social and commercial reality. Some of its sensemaking power is without a doubt derived from its acknowledgement of internal diversity and redundance as being important characteristics of prospering systems (Aldrich, 1999). Apart from allowing for diversity, organizational networks also consist of personal, emotional and material ties that bind people and departments together and make communication important. For the innovator or entrepreneuring employee, an important property of such a system thence becomes the association between diversity and tie strength (Burt, 1992). Tie strength is necessary for quick mobilization of resources, while diversity supports the existence or new combinations of resources in the first place. This article is about informal product innovation in an organizational system where these characteristics proved especially important for success. The article describes how a ``networked innovation'' came about at a large Swedish telecom company (Ericsson), how it progressed and was sustained through different organizational mechanisms, from invention to a finished product. The underpinning assumptions behind the idea of networked innovation are that entrepreneurial teams, which combine different personalities, knowledges, skills and backgrounds, are more likely to accomplish an innovation than a homogeneous team (Vyakarnam et al., 1997). Van den Ven (1993) shows how innovations The authors are both researchers at the FENIX Research Program, which is a collaborative effort in management research between Chalmers University of Technology, Stockholm School of Economics, Ericsson, AstraZeneca, Volvo and Telia.
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most often are achieved by many actors working together, in parallel at different locations and over an extended period of time. The concept of collective invention put forward by Allen (1983) puts the free exchange of information about techniques in the forefront of innovation. Peters (1983) suggests the term ``skunk work'' to designate those processes of internal entrepreneurship that develop in the hidden (reward) structures of the company, and which are highly dependent on such information exchange and on personal ties. The so-called ``industrial network approach'' to innovation and entrepreneurship brings to our understanding of innovation the totality of relationships among firms or functional units engaged in production, distribution and use of goods and services (MoÈllerud, 1999). This approach emphasizes the underlying technological interdependencies of innovative networks, and links technological development to changes in the network governance structure and to resource structures in companies (HaÊkansson and Snehota, 1995). Even though most of the works in this tradition deal with networked innovation between companies, it is our belief that many of the same mechanisms for innovation are at work in the large mature enterprise (LME) like the one under study in the present article. The article will proceed by outlining the approach used in studying the networked innovation at Ericsson. After that the case description will follow which outlines the actual progression of events from an emphasized network perspective. Finally a discussion of the findings will be presented, partly from the point of view of one of the participants of the innovation under study. Method The case description is based on a number of detailed semi-structured interviews with members of the innovation network described below. This group included developers, marketing personnel, line managers and consultants who were involved in the network. Apart from interviews, disparate forms of documentation were perused that followed in the trail of the innovation (e.g. newsletter articles and memos). The description and analysis is based on the accounts found in this material as read by and told to the research team. Questions posed by
the researchers were for example: ``How and why did the product group form?''; ``What did the network and the product development look like?''; ``What were the benefits/ disbenefits of working like this?'' Initial contact with the network was taken through a well-known product champion on the marketing side (SA), and after that further ``sampling'' was conducted through personal referencing.
Developing the AXE110 ``mini-exchange'' at Ericsson What is AXE110? The AXE110 is a very small telephony exchange, weighing about 20 kilos. It is a miniature version of the larger AXE10 exchange, which is widely used around the world. The normal AXE10 has a capacity of 50,000-100,000 lines, compared to the AXE110's 500-3000 lines. An advantage with the AXE110 is that the same software is used as in AXE10 and AXE110, which makes it simple to update and serve. It is light in weight and competitively priced compared to both the AXE10 and similar exchanges. Although similar to the AXE10 in terms of software, the AXE110 differs still in terms of redundance; the AXE10 is almost never out of order due of hardware malfunction. The AXE110 is more of a ``plug & play'' product than the AXE10, with low cost for installation and maintenance. The AXE110 can be used both for mobile and fixed networks, and is connected to the operator's access network on one end and to the backbone network on the other. The marketing idea behind AXE110 was to offer a small, easy to install exchange (compared with the big AXE) in order for the investment not to be too heavy for the operator. The product is not intended to compete with AXE10, but rather to open up new markets, mainly in Russia and Eastern Europe. The developing time for AXE110 turned out to be an exceptional two years.
Background The AXE110 exchange developed out of a spontaneous and unexpectedly compiled network involving marketing and development personnel (as well as consultants) in and around Ericsson. The bulk of the involved actors gravitated to Ericsson's so-called Analog Mobile Systems; a network organization of about 350 people. Thus, most of the people involved in developing the AXE110 came from analogue technology, or NMT, a branch of mobile telephony generally considered to be at the
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end of its product cycle. In spite of, or because of this the development of the project within the NMT-section proved to be strategically sound. The fact that the digital GSM represented a more ``attractive'' technology at Ericsson would make it hard to recruit that kind of competence, as it is typically heavily guarded by the line organization and top management. Analogue technology (NMT) on the other hand has more agility in that respect, as it is not considered strategically important. In effect a very agile product development network emerged and through novel combination of technologies that were in themselves not groundbreaking, a very promising product and business idea could be realized. Thus, some of the most prevalent features of this case are: . Unexpected cooperation between business and development side ± ``skunk works''. . Unexpected innovation in the end of the product cycle of analogue technology. . Unexpected combination of technology. . Extensive use of networking. . Success story: today AXE110 is ready for shipping after only two years. We will now outline how the AXE110 came about, and try to capture the networking flavor that is ever present throughout the interviews. Startup: Market demand ± technological presence and networking SA (initials explained in the appendix) has worked at Ericsson for about 30 years and from 1994 to the end of 1998 he worked with business development in Russia. The analogue NMT-system for mobile telephony had been a sale success in Russia, but the customers frequently asked for a smaller exchange system. They found the traditional AXE-exchange too big and costly. When SA decided to move on this demand, his manager in Russia, YR, who also knew about the needs of the Russian clients, backed him up. On a top management visit to Moscow, SA and YR brought Russian clients to a meeting with the CEO and a board member of Ericsson, to let the clients themselves express their need for a smaller exchange solution. Unfortunately this meeting did not result in any concrete action. Around the same time, Product Development at Ericsson Radio, a subdivision
of Ericsson, needed a cheap way to test different network switches for telephony. The way that this had been done in the past had been exceedingly costly, mainly due to the use of capital-intensive full-scale switches. An engineering consultant at Ericsson, PB, who was at the time developing switching and related software, felt the need for an alternative and also knew of a cheap solution. Together with his team, which was partly located outside of Ericsson at the consultancy company Softsys, he developed a software (SIMAX) that behaved exactly like the real switch, with an equally high capacity but at a considerably lower cost. During his time in Russia, SA occasionally went home to Sweden for business purposes. While there, he often went by to see some people he knew at Ericsson Business Networks (now Ericsson Radio) in Kista outside of Stockholm. He refers to these people as an informal network hanging around in the cafeteria of Business Networks. These people usually kept him updated on the latest developments within their own field, i.e. printed circuit boards. They were involved in developing a small scalable switch for the Mobility Server and Wireless Office (DEWOS), called ``the Switchboard''. When SA found out about this, he realized that this was a good opportunity to try to develop something for the Russian customers. Having earlier heard of the SIMAX group at Ericsson Radio through hearsay, SA contacted PB's group and suggested that they and the Switchboard ``cafeteria network'' informally start developing a cheaper AXE exchange, and then just see what happened. The groups went for it, and the AXE110 project was born, a ``skunk work''. Initially, the most important goal was to establish a critical intellectual mass in terms of exchange switching know-how. Thus the group started to scout for knowledge and information in this area. As the following statements suggest, the network structure was far from simple or easily navigated.
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Most of the early technical development in the AXE110 project was done in the cafeteria of Ericsson Radio in Kista. It worked like a network where different persons involved in the project met and exchanged experiences (Interview with AXE110 co-worker). The initial AXE110 team consisted of people from the SIMAX group, PBG, a software researcher who was the key inventor behind the software of AXE110 working from the core unit
Networked innovation: developing the AXE110 ``mini-exchange''
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for research at Ericsson Radio and his friend from Australia, who was working on AXE technology. During the discussions that were held with SA, the group gradually decided on who might be interested in joining in. We looked up the people who built the original AXE10, and the receptions were varied. We managed to get people who came home from projects in Croatia to participate and to be a part of the initiative, but there were also people who hardly gave any information at all. There were also eight consultants from Softsys who worked in the AXE110 project team (Interview with AXE110 co-worker).
Becoming concrete PBG, PB and the people involved in the original network constellation started to look around for a suitable application to build the mini-exchange around, and the analogue NMT450 was chosen. CP, who was responsible for Business Development at Analog Systems made some financial resources available. The project now picked up but still developed informally outside of the established structures at Ericsson. Since many of the project workers were hired 30-60 percent on different projects it was fairly easy to access competence and ask relevant people to make limited contributions to the development, both with respect to design, programming and hardware solutions. Those that contributed would receive, for instance, movie tickets as reward. An important factor was that there were people who had the time and will to search for people with information and knowledge. [...] Most of the people we looked up were very busy and tied up in different projects. [...] It is better to approach the technician or developer directly instead of trying the manager. Using ``the backdoor'' is easier since the person often finds the problem interesting enough to take time to help out (Interview with AXE110 co-worker).
In this vein, the informal AXE110 team continued, working from a number of different geographical locations, to scout for knowledge, funding and resources within Ericsson. We used trade fairs and exhibitions within Ericsson where people presented their products and project portfolios. The internal newsletter, ``Contact'', also became very useful for finding out what was going on in our area of interest at Ericsson. Otherwise informal contacts, networking etc. did most of the work. I perceive these Knowledge Management instruments, like BIC etc., to be useful for coming up with the ``first name'', the first contact. After that the informal networking does the rest (Interview with AXE110 co-worker).
A loosely coupled team had been brought together, mainly through dual championship from both the marketing and development side (SA and PB), competence and knowledge had been sought for and found, and some financing had been secured. The group now turned to internal marketing of their idea in which they pointed to a whole range, more or less realistic, of uses for the technology. Initially internal marketing of the project was very hard. The product owners at Ericsson were hard to convince. While potential external customers only seemed to see pros with the solution, most of the marketing effort turned out to be internal. Even though there was considerable gambling and risk taking in marketing a cheap version of an AXE exchange internally, all involved in the development network tried hard not to make the project seem a threat to already existing structures and projects, and to keep a low profile, especially during early start-up. In this respect there were some benefits on the part of the consultants from Softsys from not being completely established at Ericsson, and yet having spent a lot of time within the structure of the company on different projects. There are a lot of consultants who work with the development of new products since [Ericsson's] personnel are tied up in other projects. During the SIMAX project, Softsys learned how the Ericsson internal political system works. They consider this knowledge to be very valuable. (Interview with AXE110 project co-worker).
After having developed the innovation as a ``skunk work'' and network effort, the group sensed that there was a need to connect up to a political heavyweight in the organization, both in terms of funding as well as in terms of protecting the idea from more established activities that could be potentially threatened by AXE110. They needed a person who could ``kick things through'' on their behalf. The AXE110 suffered all the time (although to different extents) from political attempts at halting its progress. One of the project members reflected on this:
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Partly because of this, I believe, the product has become stronger. We were forced to develop a broader, stronger base for our project, and for the product. . . . This ``survival game'', as well as the internal marketing of the product, certainly taught us a lot about how this type of company works. We also learnt a lot on how a product comes about, since basically the same people were involved in the whole developing process, from customer need to putting together the actual box (Interview with AXE110 project co-worker).
Networked innovation: developing the AXE110 ``mini-exchange''
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For the project to reach the next stage of industrialization there was need for stability and anchoring in a line organization. Stability and change In order to establish some relative stability for the project, the group hooked up with a line organization in Ericsson, Business Innovation, which was not very interested in the technology per se, but had a great deal of appreciation for innovations. From there the project team got money for very short periods, sometimes only for two months at a time, after which they had to show progress and point to the usability of the results. The financial pressure and the short lead times forced them to think strategically about their idea, as well as about alternative technical and commercial routes. In December of 1997, the first successful basic test of the new exchange was carried out, and in the beginning of 1998 the first presentation was made to top management. However, after that the project was halted for six months due to the yet unsolved issue of how to handle the new product in the company. Management commissioned Ellemtel (a large sub-section of Ericsson) to investigate how to use the AXE110. When they presented their report half a year later, the first prototype had already been made operational by the original team, who had covertly proceeded with the development in spite of the investigation. In June 1998 the case was presented to the CEO before which the team had carried out an active lobby. The CEO went for it and a virtual company, Micro Switch Solutions, was constructed for the purpose of further developing, commercializing and selling the AXE110. Its board members were recruited from different subsidiaries and companies within the Ericsson group, as well as from outside of the company. Today there are about 50 people, including the SIMAX team, the Switchboard ``cafeteria network'' and six consultants from Softsys, who work with the AXE110 on a steady basis. SA is still involved in the AXE110, and is currently stationed in Ericsson Business Consultancy, but works 100 percent in the virtual company with internal and external marketing. The AXE110 team has successfully negotiated a contract with Kyrgyzstan for a large number of exchanges, and several other contracts are under negotiation. Two years after the
original idea of SA, the AXE110 is ready for shipping. Figure 1 shows how the AXE110 innovation network was constituted and how it developed, starting from above. For an explanatory time line, key actors and abbreviations used, see Appendix.
Discussion and conclusions Instead of a traditional discussion section where we would try to look at the case from a couple of analytically different viewpoints, we will instead provide some practical reflection on the AXE110 network. This is done through parts of the interview protocol of one of the line managers involved in the innovation network and his reflections on what the AXE110 innovation implied for management. After that a number of conclusions will be pointed to and related to some of the issues touched upon in the introductory section above. An interview on networked innovation OL, a manager at Analog Mobile Systems is ``the informal center'' of a cooperative network of functions and individuals at Ericsson that deals with restructuring NMTtechnology (or so-called analogue mobile systems) for new emerging markets, especially China, Russia and Italy. He is also currently responsible, on the business side, for launching the new miniature exchange for
Figure 1 The AXE110 innovation network
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European Journal of Innovation Management Volume 3 . Number 4 . 2000 . 181±189
mobile telephony, the AXE110 in the CIS countries. This interview was the first in a series of discussions between the people involved in this effort and the authors of this article. Q: Tell us a little about the context in which you work and where the AXE110 initiative developed. A: One can say that I work in a network organization revolving around the development of analogue technologies for new markets. This network makes use of several different units from Ericsson, in Sweden as well as Customer Service Offices abroad, that is both on the business and on the development side. I would say there are about 350 people involved in the network altogether. The development of AXE110 took place in a sub-network of say altogether 60 people in the end. Although they started out being only about three! Q: Why a network organization? A: It is generally easier to staff a network organization. You can put together temporary teams without the need to fit them into an existing line. Interesting ideas are created in such an organization because of the fluidity of personnel influx. For us there has been another advantage in that being at ``the end'' of the product cycle with analogue systems, we have got to be able to get started quicker and brake quicker on new initiatives. You cannot do that in a line organization. This helped a lot in the AXE110 case. Ideas got off the ground. Q: Describe further how the AXE110 project related to this structure? A: One could say that AXE110 was developed because there was a market for small and cheap AXE exchanges in Russia. But that would not be the whole truth. Because of the network organization, developers (engineers) were in close proximity to the business side, which could see and communicate the opportunity. This is essential to take note of. By being in a network, I think it was also easier to attract the competence necessary to bring it all to becoming a product. I mean, the NMT [analogue] technology is not thought to be attractive enough in itself to get good people working on it within the established structures. It had to be a ``skunk work'' to get that competence; the informal network became an attractive work form in itself. That
in combination with the strong business side was probably what made the difference. The people who were originally involved, who came up with the idea, thought that the company was stuck in an old mode of thinking, that is line-thinking, too much mindless routine. Those people were a couple of adventurous engineers and marketing people, now they're about 60 in number, with their own organization, representing a new node in the network which is responsible for the platform product. They represent excellent competence in NMT-technology, sales support, and logistics and with a sales office in Russia! It is obvious that things had to straighten up for that to happen. Q: What do you mean? How did the process develop? A: Well it is difficult to manage knowledge in any traditional way in this kind of organization. The need increases to pay attention to how the idea can be taken from the innovative little cell and be brought to a finished product. Innovative people like the ones involved in the first stage of developing the AXE110 often have a difficult time finishing up, in bringing their brain child to closure. Certainly, that's where the network comes in, to compel and motivate. In the beginning of the process the influence of the network was kind of chaotic, and there was a strong need to ``exchange'' competencies into and out of the effort. That is to put different competencies in the project depending on what stage it was in. Eventually the innovative people that started it needed to hand it over and go on to other projects. I do not know if that was efficiently done in this case, but the overall network has certainly evolved because of that project. We [in the network] have identified the need for rationalizations and support in particular parts of the development cycle, especially to be prepared to land the projects on proper business and logistics ground when it is ready to go to product stage. Q: Where do you stand today with respect to network management? A: I believe it helps to think about the network organization that we work in as an ``evolutionary network''. We have to help it to evolve; define its ramifications, and then it spreads like rings on the water. In our case this evolutionary network has been born out of engineer ideas and customer needs. The
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deceitfully simple rules that follow from our experiences for developers in network are: . Dare to go for the idea. . Take the step from idea to industrial product. . Understand how the product is handled in the market. . Exchange competencies in and out of the project, as they are needed, in order to achieve the above three. From the AXE110 case, as well as from the interview/discussion above, can be gleaned a number of important insights that have a clear bearing on management praxis, as well as extends theory somewhat. . For a network organization to work in this fashion their needs to be in existence certain predispositions. There must exist organizational knowledge and technology that can be mined by the network outside of its original purpose. Also such knowledge and technology must be visible and stable enough so that people knowledgeable of market needs and technology demands can identify them. Finally, technology, knowledge and market must be provided a stage or arena (a network or an agile organization) to realize a fruitful co-constitution, i.e. to be allowed to co-evolve. This insight extends the theory reviewed in the introduction that internal diversity and redundance must exist for innovation to take place (Aldrich, 1999). A network actor must also know ``where people sit'' in order to network with them and to seek out their knowledge successfully. Networked innovation not only requires diversity and strong network ties (e.g. Burt, 1992), but also environmental stability. . Following the case there seem to be generally low startup costs for networked innovations, since many of these spontaneous agglomerations of initiative are not really ``paid for'' in the traditional budgetary sense, but fall in between lines, departments and projects. By decentralizing the initiative in this way, esprit de corps is likely to compensate other costs (cf. paying for internal consultancy with movie tickets!). . The location of the project in a line that appreciated the innovative drive, but did not pay too much attention to the technology may stimulate new thinking
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and hamper the ``not invented here'' syndrome often seen in technology heavy developing environments. The short lead times for funding and the demand for usability were probably conducive factors in speeding up developing times, and to minimize the ``path-dependency'' of the project: since ``any usability was OK'' the team constantly tried to reinterpret what this technology was (could be) about (cf. Kaufman, 1985). By dint of not being tied to an administrative line, the network organization may be easy to staff. New competence can quickly be exchanged in and out of the team structure; informal contacts can be made and limited jobs performed without having to write up contracts etc. However, the AXE110 case suggests a need to find mechanisms for disassembling competence cluster as well as assembling them, as the project enters new phases. Such mechanisms are harder possibly to achieve than the assembling ones! This insight suggests a corollary to the network enabling ``strong ties'' forwarded by Burt (1992) and Peters (1983), but directly supports the combinatory demand of networked innovation in terms of personal skills and competencies suggested by Vyakarnam et al. (1997). Finally, the innovation network has the chance to make quicker starts and quicker brakes in its development because of the weaker formal commitment to a specific evolutionary path. This may be of benefit when developing very complex and market driven products, where the specifications up-date fast. The related problem hinted above that it is easy to ``exchange in'' competencies, but sometimes difficult to ``exchange out'' may need to be managed in this regard.
References Aldrich, H.E. (1999), Organizations Evolving, Sage Publications, Thousand Oaks, CA. Allen, R. (1983), ``Collective invention'', Journal of Economic Behavior and Organization, Vol. 4, pp. 1-24. Burt, R.S. (1992), ``the contingent values of social capital'', Administrative Science Quarterly, Vol. 42 No. 2, pp. 339-65.
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Gulati, R. (1998), ``Alliances and networks'', Strategic Management Journal, Vol. 19, pp. 293-317. HaÊkansson, H. and Snehota, I. (Eds) (1995), Developing Relationships in Business Networks, Sage Publications, London. Kaufman, H. (1985), Time, Chance and Organizations, Chatham House Publishers, Chatham, NJ. MoÈllerud, B.G. (1999), Entrepreneurship in Technological Systems ± The Development of Mobile Telephony in Sweden, EFI, Stockholm. Peters, T. (1997), ``A skunkworks tale'', in Katz, R. (Ed.), The Human Side of Managing Technological Innovation, Oxford University Press, New York, NY. Pinchot, G. (1985), Intrapreneuring, Harper & Row, New York, NY. Powell, W.W. and Koput, K.W. (1996), ``Interorganizational collaboration and the locus of innovation: networks of learning in biotechnology'', Administrative Science Quarterly, Vol. 41, pp. 11645. Savage, Ch. (1990), Fifth Generation Management: Integrating Enterprises through Human Networking, Digital Press, Bedford. Stymne, B., Carlsson, R., Hatchuel, A., HellstroÈm, T., Malmquist, U., BjoÈrklund, A., Miles, I., Le Masson, P. and Earl, M. (2000), The Practice of Knowledge Management: An International Comparative Analysis, Project Report, FENIX Research Program, London Business School, Ecole des Mines, Gemini Consulting. Tsai, W. and Ghoshal, S. (1998), ``Social capital and value creation: the role of intrafirm networks'', Academy of Management Journal, Vol. 41 No. 4, pp. 464-76. Van den Ven, H.A. (1993), ``The development of an infrastructure for entrepreneurship'', in Bull, I., Thomas, H. and Willard, G. (Eds), Entrepreneurship, Perspective on Theory Building, Elsevier, Oxford. Vyakarnam, S., Jacobs, R.C., and Handelberg, J. (1997), ``Formation and development of entrepreneurial teams in rapid growth business'', in Reynolds et al. (Eds), Frontiers of Entrepreneurship Research 1997, College Babson, Wellesley, MA.
Appendix Timeline in the development of the AXE110 (1) Market need for small, low cost, switch in Russia. (2) Market need in Russia identified by SA (business developer). (3) SA and his manager bring Russian clients to meeting with CEO and a board member of Ericsson. (4) Product Development at Ericsson Radio identifies need for cheap way to test different network switches. (5) External engineering consultant at Ericsson Radio (PB) develops software for testing different network switches, SIMAX.
(6) SA pays visit to informal ``cafeteria network'' at Ericsson Business Network, which has developed a product called ``Switchboard''. He suggests they develop an AXE mini-exchange. (7) Business developer contacts external engineering consultant and an informal network starts up consisting of people from SIMAX and ``Switchboard'' groups, which forms the AXE110 team. (8) The members of the AXE110 team choose NMT450 platform. (9) Head of Business Development of Analog Systems at Ericsson makes financial resources available. (10) Internal marketing of AXE110 idea by members of the AXE110 team. (11) Hook up of AXE110 to Ericsson line organization (Business Innovation). (12) First successful basic test of the AXE110 in December of 1997. (13) Presentation of AXE110 to Ericsson top management in January 1998. (14) Top management commissions Ellemtel to investigate AXE110. (15) The AXE110 team continues to develop AXE110 and first prototype is made operational by the same time as Ellemtel presents their report in spring of 1998. (16) Letter of Intent signed with customers in Russia, stating joint development of AXE110 in April 1998. (17) Presentation for CEO of Ericsson after active lobby by the AXE110 team. (18) A virtual company, Micro Switch Solutions, starts up in early fall of 1998 for the purpose of further developing, commercializing and selling the AXE110. (19) December 1999, successful negotiation of AXE110 contracts in Kyrgyzstan.
Key actors in the AXE110 case presented in order of appearance . SA ± Business developer at Ericsson in Russia. . YR ± Manager of SA in Russia. . PB ± External engineering consultant at Ericsson. . PBG ± Software researcher at Ericsson Radio.
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CP ±Responsible for Business Development at Ericsson Analog Mobile Systems. OL ± Responsible for AXE110 launch in new emerging markets at Ericsson Analog Mobile Systems.
Abbreviations used in AXE110 case AXE ± an electronic digital telephony station system. . BIC ± Business Information Center . DEWOS ± name of the Mobility Server and Wireless Office.
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GSM ± Groupe Special Mobile. Group that has developed the standard for digital mobile telephony. Also used as name for the developed standard. NMT ± Nordisk Mobil Telefoni. Analogue standard for mobile telephony. Divided into NMT450, operating in the 450Mhz band, and the nowadays seldomused NMT900, operating in the 900Mhz band. SIMAX ± simulation platform for testing of AXE exchanges.
Competitive positioning and market orientation: two interrelated constructs Enrique Bigne Natalia Vila-LoÂpez and IneÂs KuÈster-Boluda
The authors Enrique Bigne is Professor in Marketing in the Department of Business and Management of Enterprises at the University of CastelloÂn, Spain. Natalia Vila-LoÂpez and IneÂs KuÈster-Boluda are Assistant Professors of Marketing, both in the Department of Business and Management of Enterprises at the University of Valencia, Spain. Keywords Spain, Cosmetics industry, Large companies, Marketing, Market orientation, Competitive strategy Abstract Aims to interrelate two lines of research: market orientation and strategic groups identification. Suggests that degree of market orientation of an enterprise should be connected to its competitive strategy and, also, to its final levels of performance. Identifies, in a highly competitive Spanish sector, groups of homogeneous enterprises with regard to their market orientation degree to see if the identified groups differ significantly in the competitive strategy mainly followed by their members and, also, in their economic profile. Uses cluster methodology and the analysis of variance. Also applies multidimensional scaling to visually represent the position of each enterprise in a perceptual space. Recommends some guides to get a market orientation status and also a competitive position in the competitive space. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
European Journal of Innovation Management Volume 3 . Number 4 . 2000 . pp. 190±198 # MCB University Press . ISSN 1460-1060
Introduction We would like to begin by introducing the two concepts we use in our work. These are market orientation and competitive groups. Later, we will continue by presenting a small empirical analysis that we have carried out in Spain. The paper analyses market orientation as a possible criterion for identification of competitive groups in a competitive Spanish sector. The selection of this subject is based on the idea that the combined study of market orientation and competitive groups can be useful to reduce the competitive environment where companies move. Market orientation First, we will start by introducing the market orientation concept. For several decades until now, market orientation has been the central idea of many published works in marketing literature and strategic management. A degree of consensus exists among the theorists (i.e. Llonch, 1993; Greenley, 1995; AtuaheneGima, 1996; Pelham and Wilson, 1996) to affirm that the most explanatory contributions about the market orientation concept and what it implies itself are those of Kohli and Jaworski (1990, 1993) and of Narver and Slater (Narver and Slater, 1990; Slater and Narver, 1994). However, in our opinion, some others of no less importance should be considered (i.e. Shapiro, 1988; Ruekert, 1992; Deshpande et al., 1993). In our view, Benson Shapiro (1988) deserves to appear as one of the pioneers in the delimitation of the market orientation concept. This author states that there are three characteristics which make a business oriented to the market: (1) complete knowledge of the market and of the customers; (2) strategic and tactical decisions made interfunctionally and interdivisionally; and (3) divisions and functions well co-ordinated and executed with a sense of commitment. These characteristics are repeated in one way or another in subsequent works (i.e. Kohli and Jaworski, 1990, 1993; Narver and Slater 1990; Slater and Narver, 1994; Ruekert, 1992; Deshpande et al., 1993). Likewise, Kohli and Jaworski (1990) define market orientation as:
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The organisation-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organisation-wide responsiveness to it.
In the same year, the above mentioned Narver and Slater (1990) define market orientation as a concept consisting of ``three behavioural components and two decision criteria ± customer orientation, competitor orientation, interfunctional co-ordination, a long-term focus, and a profit objective . . .''. Later on, they add the importance which the generation and dissemination of market intelligence deserves and the management response to this information (Narver and Slater, 1994). With it, some approximation and complementation between the proposed patterns of Kohli and Jaworski (1990) and Narver and Slater (1990) are advised. In this article, the popular approach of Narver and Slater (1990) has been followed and for two essential reasons. First, the pattern is highly operative and has a ``more competitive and managerial approach'' (Magalhaes and Carvalho, 1994). Second, as noted by Greenley (1995), the scale given by Narver and Slater (1990) can be useful to measure two kind of results: the way a company is oriented to the market and its degree of orientation. The concrete proposal that we present herein aims to divide up the three behavioural components of market orientation proposed by Narver and Slater (Narver and Slater, 1990; Slater and Narver, 1994), that is, customer orientation, competitor orientation and interfunctional co-ordination, together with the competitive groups that we introduce below. Market orientation influences on business position Traditionally, market orientation has been studied from two different, although complementary, approaches: from a philosophical point of view and from a behavioural one. Recently, some authors have developed market orientation as a resource/ capacity of the enterprise, able to sustain competitive advantages (Hunt and Morgan, 1995). For example, Day (1994) states that market oriented firms have distinctive capabilities that allow them to achieve higher results. In this sense, Varela et al. (1998) affirm that
``given that capabilities show activities like market intelligence generation . . . market orientation represents a real capability of the firm'' (p. 137). Additionally, as Vila and KuÈster (1998) recommend, this orientation could be considered as a strategic capacity as soon as the firm adopts and implements this culture inside this organisation (p. 339), because a market oriented firm is better located to identify competitive advantages, using the resources and abilities to reach them (VaÂzquez et al., 1998). So, market orientation can be considered from the Resources and Capacities Theory. In this way, Martin Armario (1995) shows in an empirical work that this theory is able to explain competitive enviroment, presenting market orientation as an internal factor of the firm. Additionally, Tuominen et al. (1997) use the resources-learning approach as a link between the most accepted approaches of market orientation (philosophical approach and behavioural approach). Other authors like HernaÂndez (1997), also include the market orientation with other organisational abilities. But also market orientation could be considered a resource of the firm, not only a capability. For example, Langerak and Commandeur (1998) analyse market orientation as a source of competitive advantage and as a set of abilities that a firm could develop to create and offer a superior value for the customer. From an innovative perspective, Grunert et al. (1996) define market orientation as the process that uses abilities, resources and capabilities to satisfy customer needs. In this sense, the linking between market orientation and business position can be justified by the works from several authors. So, Narver and Slater (1990; Slater and Narver, 1994) note that an enterprise will give a better performance if this firm considers market orientation as a sustainable competitive advantage with respect to the rest of its direct rivals. In the same way, Day (1990) sustains that market orientation represents a strong competitive advantage because it is an ``invisible triumph'' and so it requires a lot of time to implement and it is difficult to imitate. Also, Deshpande et al. (1993) point out that market orientation, like organisation culture, increases competitiveness and allows us to be oriented strategically towards the competitive
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advantage in a strategic way. Recently, Llonch (1996) says that ``the orientation that a firm presents, is a determinant factor of its competitiveness . . .''.
Competitive groups Now we will turn to developing the concept of competitive groups, which, although considered similar in the studies of strategic groups (Frazier and Howell, 1983; Choi and Hilton, 1993) in our opinion, and in line with some recent works, like those of Porac et al. (1989), Fiegenbaum and Thomas (1993), Reger and Huff (1993), Bogner and Thomas (1993), Wijnnberg (1995), Smith et al. (1997) and Peteraf and Shanley (1997), we believe that there are some slight differences at least in two aspects. First, competitive groups add a dimension of rivalry to the members of each group. And, second, competitive groups pay more attention to the importance of the cognitive dimension, briefly dealt with in the theory of strategic groups. We should therefore define a competitive group as ``a whole group of enterprises in direct rivalry with each other''. However, the main problem arises with regard to the acceptance of what is understood by enterprises in direct rivalry with each other, or which is the same, relating to which criteria can be used to obtain homogeneous conglomerates. In any case, the distribution in groups of all the competitive enterprises in an industry can be understood as a simplified measure of the competitive environment in which they operate. This simplification is justified when the groups can be an intermediate unit between the industry as a whole and each individual enterprise. When defining a competitive group we should not forget, as we have already suggested, that the concept has a multidisciplinary nature as it rests, on the one hand, on economic concepts and, on the other, on subjective concepts. Relating to the former, we have just proposed the studies of ``strategic groups'' and the approach to the latter seems to be based on the individuals (Bogner and Thomas, 1993). However, both approaches make analysis of the competitors of an enterprise easier (Aaker, 1988). In any case, and given that the competitiveness between two enterprises is a matter of degree, it can be said, following
some authors (Caves, 1984; Weitz, 1985; Porac et al., 1989; Fiegenbaum and Thomas, 1993) that two enterprises will compete to a maximum degree if both fullfil these conditions: . if they attend the same market; . if they share a common structure; and . if they follow similar competitive strategies. With regard to this last condition, according to authors such as Porter (1980) and Arraiza et al. (1985), it seems that when a company formulates its competitive strategy, it selects, at the same time, the group it would like to compete in. All these conditions referred to would result, at the same time, in both firms being perceived in a similar way, and further, that both companies would require a particular scope and resources to support the position selected in the long term. Finally, and once we have briefly presented the concept of competitive group, we would like to remark that the objective of the project is to introduce some specific details for its identification. Therefore, we start from the point that in order to recognise a group of directly rival enterprises some variables must be selected or criteria adopted to group the firms in competitive groups. The last objective is to reduce the increasingly complex competitive environment in which the enterprise operates, so that, following the literature (Porter, 1980; Mas, 1995), homogeneous enterprises will respond in an analogue way to external turbulence and changes. Therefore, the reactions and behaviour of enterprises of a similar group will follow the same direction and as a result the competitive plurality of many enterprises becomes simplified in a few constellations of firms (Harrigan, 1985; Nohiria and GarcõÂa Pont, 1991).
Research development Objectives The general objective of the present study is to simplify the competitive environment in which the enterprises of a highly competitive specific sector operate. As the competence of a firm obeys the degree in which it is itself oriented to the market, the following specific subobjectives have been noted:
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to measure the degree of market orientation of the competitive enterprises in the sector studied by adopting a multidimensional construct proposed by Narver and Slater (1990); to analyse the competitive strategy of each enterprise following the dimensions proposed by Morrison and Roth (1992); and to identify groups of homogeneous enterprises with regard to market orientation and to verify if these groups are significantly different to competitive strategies. The aim is to measure the competitive positioning of a firm compared to the others in a simplified way.
content of such questionnaires, we will just state that they were completed by each CEO personally, in relation to his own enterprise, evaluating two types of variables. First, those proposed by Narver and Slater (1990) to measure market orientation and second, those proposed by Morrison and Roth (1992) to measure competitive strategy. To complete this last group of variables we also received the help of the marketing director of six leading firms in the sector, who agreed to take part as experts, in the description of competitive strategy.
Based on the literature review, we can observe that firms of a similar industry are not homogeneous with regard to their degree of market orientation (see for example Greenley, 1995; Pelham and Wilson, 1996). These firms are neither homogeneous with regard to the kind of competitive positioning they are applying (see for example Porter, 1980; Day et al., 1987; Carroll et al., 1992). This way, the objectives defined below can correspond with the following hypotheses. H1: The manufacturers of the Spanish cosmetic sector can be grouped in sets whose members share a similar market orientation degree. H2: Each of these groups identified, with a similar market orientation degree, will be characterised for using analogous competitive dimensions.
Now, and to summarise our empirical work, we are going to comment on the main results of our research pointing out that these are part of a more extensive research.
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Through the empirical verification of both hypotheses we aim to demonstrate that, in general, the degree of market orientation of an enterprise is not independent of the key dimensions of its competitive positioning.
Results
First hypothesis So, to study the first objective, that is, the one related to the measure of the degree of market orientation of an enterprise, we applied two techniques: multidimensional scaling and cluster analysis. With the first technique, multidimensional scaling, we obtained the perceptual map, and with the second technique, cluster analysis, we identified five groups of enterprises with a similar perceived degree of market orientation (Figure 1). All of this allows us to conclude that the studied firms could be grouped into five clusters with respect to their degree of market Figure 1 Perceptual map of the studied enterprises and clusters identified between them
Methodology Moving on now to the methodology used, we want to underline that the information was obtained through postal interviews, directed to the CEOs of the 129 main companies of the Spanish cosmetic sector, selected annually by a Spanish publication, titled in Spanish Anuario de Fomento de la ProduccioÂn (1995). We obtained 34 valid questionnaires after a reminder phase. Although the number of respondents is not too high, the population is well represented because of the different composition of the sample. With regard to the 193
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orientation, as we proposed in the first objective. Even more, as the identified clusters differ significantly with regard to 14 of the 16 market orientation variables analysed, for a significance level of 10 per cent, we could accept H1 (Table I). Second hypothesis To study the second objective, that is, the one related to the measure of the competitive strategy of an enterprise, we used one technique: the analysis of the variance. In this case, the clusters defined previously differ significantly with respect to ten of the 18 competitive dimensions considered, for a significance level of 10 percent. So, we could partially accept H2 (Table I). Final characterisation of the clusters Finally, we have attempted to characterise each cluster of firms based on two types of variables: the ones related to market orientation and the ones related to competitive dimensions. In this way, we are following the research developed by Slater and Narver (1993), who also identified and characterised clusters using both types of variables. In Table II the five clusters obtained previously have been labelled with regard to their degree of market orientation and their competitive dimensions. So, the enterprises in cluster number one are those with the worst values for all the
dimensions of market orientation, and also for all the dimensions of competitive strategy. With regard to their economic profile, these firms, in general or on average, offer the minimum values with respect to the level of income and to the number of workers employed. The enterprises in cluster number two are those which we could name ``neutral'', because they do not exceed either positively, or negatively in any of the dimensions of market orientation and in any of the dimensions of competitive strategy. That is, they obtained intermediate values for all the studied dimensions. With regard to their economic profile, these firms, on average, deliver poor values with respect to the level of income and also to the number of workers employed, but any way, are higher than those of cluster number one already commented on. The enterprises in cluster number four are those which exceed in customer orientation and in competitor orientation, but not in interfunctional co-ordination, that is, they are partially oriented to the market. With regard to competitive strategy, it seems that these enterprises are rather interested in segmenting markets. Also, these are mainly big companies (more than 250 workers) with high earnings. Finally, the enterprises in clusters number three and five, are those most oriented to the market. The ones in cluster number three pay more attention to the customer, and the ones in cluster number five to the competitor. With
Table I Significant differences between clusters Market orientation variables F P Statistic SL Customer commitment Create customer value Understand customer need Customer satisfac. objectives Measure customer satisf. After-sales services Salespeople share informat. Respond rapidly to compet. Top manag. discuss strat. Target opportun. comp. adv. Interfuncti. custom. calls Informat. share among fun. Funct. integration strategy Share resources other SBU
4.58 1.91 6.63 4.72 7.92 17.29 2.53 6.19 7.43 2.14 11.05 5.57 4.32 6.63
Competitive strategy variables F P Statistic SL
0.0057 0.1362 0.0007 0.0049 0.0002 0.0000 0.06 0.0011 0.0003 0.10 0.0000 0.002 0.0076 0.0007
2.59 5.59 2.20 4.21 2.11 3.39 6.68 4.33 5.51 2.57
194
0.06 0.001 0.09 0.0085 0.10 0.02 0.0007 0.0075 0.0021 0.06
New product development New manufact. process Distribut. channels control Product quality New mk. techniques Specific product/markets Qualified personnel Plant/equip. modernization Efficient manufact. process High creativity
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Table II Economic profile of each cluster: average Income
Personnel
Product
Cluster No. 1 Worst
Worst incomes on average
Small firms (less than 50 workers)
Cosmetics mainly
Cluster No. 2 Neutral
Second worst incomes on average
Medium firms (between 50 Personal care mainly and 250 workers)
Cluster No. 3 Market oriented; customer focused
Best incomes on average
Big firms (more than 250 workers)
Perfumes, cosmetics and personal care
Cluster No. 4 Not interfunctional co-ordinated
Intermediate incomes on average
Big firms (more than 250 workers)
Perfumes, cosmetics and personal care
Cluster No. 5 Market oriented; competitor focused
Second best incomes on average
Big firms (more than 250 workers)
Perfumes, cosmetics and personal care
regard to competitive strategy, we can say that the enterprises in cluster number three are more interested in marketing techniques, and the enterprises in cluster number five in aspects such as new product development, new technologies or modernisation of plant and equipment. Even more, these companies, on average, deliver the maximum values with respect to the level of income and also to the number of workers employed. Finally, let us note that the enterprises in the last three clusters cover a wide scope that includes cosmetics, perfumes, and personal care products. Conversely, the enterprises in cluster number one are almost exclusively based on the production of cosmetics, and those in cluster number two of personal care (Table II).
Conclusions Taking a specific sector, cosmetic-perfumery, and based on the firms analysed, we could conclude pointing out that market orientation and competitive positioning are not isolated fields. We can summarise this conclusion in two ways. In the first place, and according to Greenley (1995) and Slater and Narver (1994), the companies can be classified in five groups significantly different with respect to their market orientation degree. That is, each of the groups will possess a particular market orientation level and emphasised diverse dimensions of market orientation.
A group can be more interesting in customer orientation, another group can accent a competitor orientation, or highlight any other aspect/dimension of market orientation. In the second place, it is possible to observe different competitive strategies among the five previously identified groups. So, for example, the firms most oriented to the market base their strategies on innovations and new product development, as well as on marketing techniques. As has been proved, market orientation has a positive effect over the results. So competitive characteristics of these market oriented enterprises could guide those firms that search the exit in the market. Through this empirical study, we cannot conclude that the groups differ significantly with regard to the economic profile. That is, it seems that the levels of income, the number of workers and the type of product marketed do not differ significantly among the groups. In this sense, it cannot be concluded that enterprise following similar strategies, or sharing a similar market orientation state, should have the same size, or achieve the same results. That is, the perceived homogeneity of the strategy does not mean similar economic/financial values in objective terms. From a general point of view, the group concept has been tested, understood as an intermediate level between each individual competitor and the global competitive arena. The way managers defined their industry is not that of the classical economic definition
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based on firms with similar technological production characteristics, or easily substitutable products, or materials details (De Chernatony et al., 1993). Managers' time and cognitive capabilities are limited, restricting their effective use of large amounts of competitors' information (Schwenk, 1988). They make decisions by drawing inferences about competitors, according to the group they belong to. Managerial implications A new stream of literature is appearing showing that managers simplify their competitive environment through the use of mental models, whereby competitors exhibiting similar behaviour are grouped together. Managers' pre-existing knowledge structures are the anticipatory schemata, which control environmental information scanning. All of this implies that the perceptions of the top management or management team of these companies should be considered. Especially those concerning the degree of market orientation of their enterprise, and the competitive strategy. Both concepts cannot be studied separately, given the strong relation probed between them. Managers cognitively partition their industry environment to reduce uncertainty and to cope with bounded rationality. Against this background, the group concept has been developed to counteract the lack of resources and time that would be necessary to respond with equal speed and in equal depth to all the competitors that constitute a potential threat to the company. Thus, the proposal is to concentrate on a small number of competitors characterised by the fact that they affect the business activity to a greater degree. The identification of one's group permits a definition of its point of reference, in order to define correctly the competitive positioning. So the idea that the clusters formed are mere artefacts of a clustering technique should be rejected. Even more, the top management should analyse carefully the competition that exists within its group (direct competition) and also consider the characteristics of the competitive strategy of the rest of the groups. The final purpose is to improve the competitive position of each firm in the sector where it operates.
Study limitations and further research The guidelines, as well as the commented conclusions, should be understood under certain considerations. Our results are generalizable only to the main firms of the cosmetic sector. That is, to those that are listed in the principal directory available in Spain. We suggest the use of longitudinal data in future research on both listed and non-listed firms to test such differences. In any case, the error level was acceptable for a confidence level of 95 per cent. So, these results could be extended to the population considered.
e2 k2 pq
N ÿ 1; e 14:48%
N ÿ 1n Because our study relies on the subjective judgement of managers' perceptions, the measurement of the degree of market orientation and competitive dimensions are subject to various cognitive biases. Future market orientation and competitive positioning studies should use external and, perhaps, more objectives sources for judgement. Maybe, and to avoid halo effects of variance, it could be interesting to obtain information about market orientation from customers, and compare these results with competitive strategy of the company. Moreover, other scales to measure both market orientation and competitive positioning, could be incorporated. Due to the exploratory nature of the investigation, the inclusion of a scale to measure the business performance was not considered. For this reason, the relationship among market orientation, competitive strategy and business performance has not been studied. We believe that this relationship is of great interest from the management point of view. Finally, we think it could be interesting to extend this research to several sectors.
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Empresarial. Un Contraste de MetodologõÂas'', Proceedings del X Encuentro de Profesores Universitarios de Marketing, Santander, pp. 135-9. VaÂzquez, R., Santos, M.L. and Sanzo, M.J. (1998), Estrategias de Marketing para Mercados Industriales: Producto y DistribucioÂn, Edit. Civitas, Madrid. Vila, N. and KuÈster, I. (1998), ``Recursos y Capacidades y Posicionamiento Producto-Mercado: Su RelacioÂn con el Rendimiento y la Rivalidad Empresarial'', Proceedings del X Encuentro de Profesores Universitarios de Marketing, Santander, pp. 337-42. Weitz, B.A. (1985), ``Introduction to special issue on competition in marketing'', Journal of Marketing Research, Vol. 22, August, pp. 229-36. Wijnberg, N.M. (1995), ``Technological paradigms and strategic groups; putting competition into the definitions'', Journal of Economic Issues, Vol. 29, No. 9, pp. 254-8.
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The new concept of manufacturing ``DNA'' within an analytic hierarchy process-driven expert system J. Razmi H. Rahnejat and M.K. Khan
The authors J. Razmi, H. Rahnejat and M.K. Khan are all based in the Department of Mechanical and Manufacturing Engineering at University of Bradford, Bradford, UK. Keywords Analytical hierarchy process, Knowledge-based systems, Expert systems, Manufacturing, Planning Abstract Ever since the bronze age, graphical representations have been employed to convey a message or a phenomenon. Graphical representations have been and continue to be a powerful tool to record events and changes throughout history. It is often helpful to use conceptual models to visualise problems, and in order to find possible solutions. Manufacturing planning and control (MPC) as a discipline is no exception to this rule. Many useful methods/models in this field including Gantt charts, CPM, PERT, and fishbone diagrams have been employed. However, representing complex multi-variate problems through ordinary conceptual models can be quite arduous and the results may not be objectively accurate. This paper illustrates how a chain of ``state-space'' models can be formed, based on the analytic hierarchy process (AHP), which can pertain to existing complex practical manufacturing circumstances in an objective manner. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
European Journal of Innovation Management Volume 3 . Number 4 . 2000 . pp. 199±211 # MCB University Press . ISSN 1460-1060
1. Introduction The influence of a host of parameters for successful implementation of push and pull systems makes the selection of the right manufacturing planning and materials control system in a given environment a very complicated task. Razmi et al. (1996) outline a large volume of literature devoted to the interaction of many factors in manufacturing planning and control environments (Hartland-Swann, 1987; Miltenburg, 1990; Murthy and Ma, 1991; Ptak, 1991; and Mehra and Inman, 1992). However, the available literature does not provide a comprehensive approach, in order to identify the most suitable MPC system for a given circumstance and after rapid changes. The somewhat scattered volume of discussion provides valuable knowledge about parameters' interactions in push and pull systems, but the need to build a comprehensive decision-making model is felt more than ever. In practice, investigation of individual parameters upon an overall MPC system, as is often the case in literature, is of little use for planners when dealing with highly interactive environments. It should be noted that: . Many parameters influence the successful implementation of MPC (manufacturing planning and control) systems. . These factors are often strongly inter-related (e.g. it is very difficult to distinguish between the influence of long-term supplier relationship, materials, order cost, and quality of materials, which most of the literature refer to as the imperative MPC requirements for a JIT system). . These methodologies, used to deal with manufacturing supply chain and production, often embody very contrasting philosophies. For example, push systems attempt to determine the optimal number of buffers in order to prevent flow line breakdowns, whilst pull systems endeavour to eliminate waste in order to achieve the same objectives. Therefore, practitioners need a comprehensive model which integrates the effect of all the interacting parameters. It is obvious that there is a need to design a comprehensive model that would emulate the expert knowledge and present answers which take into account the integration of all the
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attribute interactions. This paper illustrates how a chain of ``state-space'' models can emulate the practical dynamic manufacturing environment. This model is formed, based upon the analytic hierarchy process (AHP) concept.
2. The lattice-space model In order to solve the above mentioned problems a few emulators have been proposed by various authors. For instance, De Toni et al. (1988) have proposed three individual models, which include four conceptual alternatives to address push and pull systems. These are based upon five production parameters: type of manufacturing (i.e. repetitive or non-repetitive), customer and manufacturing lead-times, bills of material level, value of materials, and frequency of consumption. Each of these individual models lead the practitioners to the most appropriate system, according to the effect of a given defined parameter. Although their models encompass a considerable number of parameters, they are devised independent of each other (i.e. they are not integrated). In other words, each figure individually proposes a push or a pull system, based upon one, two or three factors. The problem in employing this approach becomes evident when the user obtains a different set of suggestions from each of the ``emulators'' for the same manufacturing environment. Since there is method employed for integration and for relating the results of these models, when an incongruity has occurred (which is very likely) the user may select the wrong methodology from the proposed set, or indeed eliminate the use of an appropriate model. In another attempt, Karmarkar (1989) has proposed a simple two-dimensional model as an emulator. By splitting the manufacturing functions into three sub-functions (i.e. materials planning, control stage, and shop floor control) and distinguishing between the various manufacturing environments (i.e. production line or job-shop manufacturing), he makes his model easy to understand and increases the accuracy of its outcomes. Although this emulator provides a helpful guide and his model is not segregated as that reported by De Toni et al. (1988), there are still many parameters which have not been considered in his study, such as the effect of
soft issues, the market characteristics, suppliers' commitment, etc. In order to overcome the above shortcomings, a ``state-space'' model is initially devised to encompass many possible environments and, therefore, enable classification of different production control systems. The state-space model, referred to as an ``emulator'', is able to encompass a subset of all possible manufacturing environments. It is important to have such a model, since it is impossible to carry out an in-depth analysis of all the possible system alternatives due to obvious time constraints. To create the emulator, a lattice-space model is chosen. In such a model a point or a region within the lattice space represents a particular class of production control methodology, applicable to a given environment. This approach is highlighted by Razmi et al. (1996), who introduced simple models in order to obtain the most appropriate methodology (which may be push, pull or hybrid push/pull systems). Using some key parameters in implementation of push and pull systems, one can define a lattice model for which the vertices of the model are well-defined boundary points. The sides of this lattice model describe the diversity and spread of these parameters (see Figure 1). The internal volume of this model should,
Figure 1 A three dimensional ``state-space'' model
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therefore, encompass as many manufacturing environments as possible. At the origin of the state-space model (Figure 1, No. 1), prescribed conditions promote the use of pull methodology. When one deviates from the origin of the model and reaches the extremity of the model (point No. 8 in Figure 1), use of push systems becomes progressively applicable. Therefore, many intermediate positions correspond to various configurations of hybrid systems. This model, although indicates a general trend of the environment within the emulator model and it is simple and understandable, it has the following disadvantages: (1) it does not effectively describe the regions within the volume of the lattice space; (2) the model is developed, based upon a judgemental approach (therefore, different people can hypothesise different requirements in specific environments); and (3) the effects of each factor are not weighted in this lattice-space model. It is clear that different factors have various influences upon the success of a given production management system. Therefore, there is a need for a tool to consider these influences.
3. The knowledge-based system model In order to eliminate the above disadvantages, an expert system model is developed. Seven parameters which have the most significant effects upon the selection of push and pull systems have been taken into account in order to address the optimal production planning system for a given manufacturing environment (Razmi et al., 1998a). The parameters include demand fluctuation, production lead-time, record accuracy, forecast accuracy, quality issues, changeover time, and soft issues (such as personnel commitment). In order to analyse all the given alternatives, the knowledge-based system needs to be executed by a reasoning mechanism and a search control method, which is called the inference engine. In this model a forward chaining strategy is used for controlling the reasoning process. In this manner the available knowledge, (published in literature or obtained from experts) is coded into a standard expert system shell (i.e.
the application manager (AM)) as rules. These rules lead the knowledge base to the deduction of the goal and the most likely methodology to implement it. The combination of the seven factors (mentioned above), each with two intensity levels (except for the case of soft issues which has three intensity levels) creates 192 different environments. The user is led by the knowledge base into one of the alternatives by replying to a number of devised queries. The process involves comparison of user responses to the devised questions and environmental requirements by the inference engine in its final deduction of the ``optimal'' solution. Figure 2 illustrates a part of the reasoning mechanism of the knowledge-based system. There are some intermediate environments which are not properly compatible with either an MRP driven system or Kanban, but they can satisfy many of these systems' requirements. In other words, in this intermediate group, combinations can be seen which match with some factors required to implement a pull system and other factors point to the use of a push system. It is clear that most of the practical situations can be classified in this group. Therefore, hybrid applications of push and pull systems would be the best approach to deal with these intermediate systems. Although the expert system model provides a more accurate and a more detailed answer in comparison with the original lattice-space model, it still has some shortfalls. Firstly, there is a remarkable limitation in analysing the tremendous number of combinations, resulting from the chosen parameters. For instance, if the number of parameters in the existing model is increased by one (with only two different outcomes), the number of environments are increased from 192 to 384. This shows that small modifications can remarkably affect the entire model. Secondly, the influence of factors are rigidly predefined. For example, implementing MRP II systems needs a high record accuracy, and, therefore, MRP II systems are not recommended for cases with less than 85 per cent record accuracy in the model. However, the required accuracy is practically different from one industry to another. In other words, different parameters may have different effects in different industries, leading to the selection of push and pull systems. However, in this expert system the range of outcomes for all parameters are fixed in selection of
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Figure 2 Flow chart of the inference mechanism process
push or pull systems. Therefore, attempts have been made to use a more goal-oriented approach as a knowledge-based driven engine, in order to arrive at an ``optimal'' solution more rapidly. AHP can be used as a tool to form a deductive engine for the knowledge-based expert system. This approach has been highlighted in Razmi et al. (1998b) to deal with multi-parameter
problems in manufacturing planning and control.
4. Analytic hierarchy process (AHP) Analytic hierarchy process (AHP) is a simple decision-making tool to deal with complex, unstructured and multi-attribute problems,
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and was first developed by Saaty (1980). Applications of AHP have been reported in numerous fields such as conflict resolution, project selection, budget allocation, transportation, health care, and manufacturing. The strength of AHP lies in its ability to mimic the management judgement about the importance that would be attached to different influential factors and to structure a complex and multi-attribute system matrix. The AHP consists of three basic steps: design of hierarchy, the prioritisation procedure, and calculation of results. AHP initially breaks down a complex multi-criteria decision-making problem into a hierarchical structure. The decomposition forms the structure of the decision problem according to its main components. The top level of hierarchy, referred to as focus, consists of a single element or goal, which is the overall objective. The elements that affect the decision are called attributes or criteria, and are included in the subsequent levels, each of which may have several elements. Attributes are mutually exclusive and their priorities are independent of the elements positioned below them in the hierarchy. The lowest level of hierarchy is referred to as alternatives, which are decision options (see Figure 3) (Saaty, 1980). Once the problem has been decomposed and the hierarchy constructed, the prioritisation procedure starts in order to determine the relative importance of the elements within each level. The pair-wise judgement starts from the second level (first
level of attributes) and finishes in the lowest level alternatives. In each level the elements are compared pair-wise with each other, according to their levels of influence upon an element position in the immediate higher level. The decision maker must express his/ her preference between each pair of elements. Each pair-wise comparison is scored as: equally important (1), weakly more important (3), strongly more important (5), very strongly more important (7), and absolutely more important (9) (Saaty, 1980; 1982). An even preferential number scoring system can also be used to represent comparisons among a pair of attributes. This method of ranking enables the decision maker to incorporate his/ her experience and knowledge in an intuitive and natural manner. After forming the preference matrices, the mathematical process commences in order to normalise and find the priority weights for each matrix. The AHP process then determines the consistent nature of the pairwise comparisons (i.e. consistency ratio (CR)) for all matrices. If the CR value is larger than 0.10 (which is the acceptable upper limit for CR (Saaty, 1982)), it implies that there is a 10 per cent chance that the elements are not compared well. In this case the decision maker must review the comparisons again. The mathematical process then starts to integrate the assigned weights in order to develop an overall evaluation process (i.e. the mathematical process to determine the CR values and the corresponding weights for each alternative). Although the mathematical process of AHP is tedious, the use of expert
Figure 3 A graphical representation of the mechanics of the AHP
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system makes it simple and accurate to apply (Turban, 1993).
5. The analytic hierarchy process (AHP) models The devised knowledge-based expert system (KBES) selects the most suitable production planning system for a given environment, based upon a four-level hierarchical AHP model (see Figure 4). The first level ``focus'' sets the main objective, here referred to as the optimal production planning system. The focus (i.e. referred to as main considerations) is divided into three main attributes or objectives, which are cost, flexibility, and market issues. These are major considerations for a manufacturer, that affect the selection of a production planning system. The third level of hierarchy includes sub-attributes for the three above-mentioned objectives as follows: . Cost: inventory control cost, capital investment, and operating cost. . Flexibility: resource responsiveness, soft issues (i.e. commitment and skills), and product variety. . Influence of market issues: product quality, serviceability, and external factors. The fourth and the last level consists of the four alternatives of production planning systems (i.e. Kanban systems, hybrid systems, MRP II systems, and order scheduling).
The above AHP model has been designed in the knowledge-based system by defining appropriate rules. The KBES not only shows that it is a very useful tool to ease the tedious computations, but also it is an effective tool to interface with the user and prevent any eventual mistakes. The disadvantage of AHP is that it is not easily understood by the uninitiated, and that the mathematical outcome does not include the reasoning behind the selection of the ``optimal'' selection. Therefore, it is very helpful to provide the system with means to portray the AHP model results in a more understandable and graphical outcome model, such as the ``lattice-space'' model.
6. The manufacturing DNA theorem In order to show the result of the AHP calculation, four block diagrams and nine barcharts have been devised. The former represent the comparison matrices, related to attributes and sub-attributes and the latter represent comparison matrices related to the MPC methodologies. The block diagram is structured in a manner that each of its dimensions represents the entire alternative solutions about a tested factor. The result of paired comparisons is illustrated by dotted lines in Figure 5. In other words, the dotted block diagram represents all the possible alternatives for a given parameter. The acceptable intensity level for each factor is
Figure 4 The AHP model for production planning section
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Figure 5 Graphical representation of the AHP manufacturing emulator for the bottling company (first session)
illustrated by drawing a full line block diagram. The volume addressed by the full line in the diagram shows the acceptable region which has been calculated by the knowledge-based expert system, based upon the elementary data which has been entered by the user. It is clear that the acceptable interval is complementary to the calculated priority by KBES. For example, if the pairwise comparison of the matrix results in a priority of 0.8 for a certain factor, this priority is interpreted as the organisations' sensitivity of 80 per cent to that factor and, therefore, only the top 20 per cent of the intensity level of this factor must be considered as the acceptable region. For instance, the priority of 0.619 which is determined by AHP for flexibility attribute in the first matrix (see Table I) means that the accepted interval outcome must be between 0.619 to 1.0. This region (0.619 to 1.0) has been highlighted along the ordinate (Figure 5, first block diagram). The bar-charts are structured, based upon the same concept, although the chart portrays the actual priority vectors instead of their complementary value (see Figure 5). It is clear that the information about individual pair-wise comparisons in the
AHP model can be presented by block diagrams for 33 matrices and by bar-charts for 44 matrices. The bar-chart has been used because representation of more than three parameters in a three-dimensional block diagram is not possible. Indeed, illustrating the pair-wise comparison matrices by decorating these conceptual figures cannot portray the exact meaning of the information obtained in the AHP model. For example, the information about attributes and subattributes has been weighted in the AHP model, whilst the factors carry equal weights in this conceptual model. Nevertheless, introducing this analogous model can simplify the above objectives (i.e. the recognition given to various manufacturing environments and understanding the procedure in selecting the optimal methodology). In other words, these block diagrams visualise the characteristics of a given manufacturing environment. Arranging these block diagrams in a line can be considered as a chain of ``state-space'' models, which represent a certain environment. This chain is termed ``manufacturing DNA'' (see Figure 5). In a similar manner to a DNA (deoxyribonucleic acid) sequence which primarily determines its
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Table I Paired comparisons of attributes and alternatives for the bottling company (first session)
genetic properties that ultimately depends upon the arrangements in an organism, the different inter-related schematic diagrams here can also show many manufacturing environment variations in the same theme, each of which being unique. In the same
manner as in a DNA chain which shows different genetic specifications of cells by identifying the order of organism, application of a series of schematic diagrams here can also illustrate different manufacturing specifications. When the manufacturing 206
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specifications are identified, then the knowledge-based expert system can address the proper production planning for that environment by tracing its rules which embody the AHP principles and the rules which are obtained from open literature about push and pull systems. The following two examples are provided in order to illustrate how the MDNA represents the result of AHP's comparison matrices. In addition, dynamic application of the AHP model and MDNA have been indicated through the following practical case studies.
7. A case study A small soft drink bottling manufacturer is studied in this section. This case has been previously studied by Finch and Cox (1986) for application of push and pull systems. The company's capacity is about 6,000 cases per day, which are distributed to the surrounding 13 countries. The bottling company is licensed to bottle and distribute eight varieties of soft drinks in refillable and non-refillable bottles. Refillable bottles are in four sizes and non-refillable bottles are in three sizes. The variety of flavours used in products and containers results in 56 different end products. The company employs 17 personnel in the production area who operate on a four-day working week. The demand patterns are erratic and depend on the weather and other unpredictable seasonal factors. For example, the demand for soft drinks may double from one week to the next. Bottling is a highly repetitive, automated process. The bottles (either new or refills) are removed from a carton and placed on a conveyor, cleaned, rinsed, dried, filled, capped and heated to reduce condensation. Then non-refillable bottles are inserted into plastic contour packs and the refillable bottles are returned to the same carton. Because of the automated process pattern of production almost all the inventory is in raw materials and finished goods. Although the production process is the same for all the varieties of drinks, the syrups differ significantly in sugar content and consistency which is an important factor in the set-up processes. In addition, the bottles differ for each product because of labelling. Carriers also differ for all products.
The company procures each required raw material (syrups, bottles, enclosures, and carriers) from a few suppliers and their delivery lead-times are between one and four days. Production set-ups involve cleaning lines and adjusting the equipment. Equipment is sanitised daily and rinsed between runs of different beverages. Set-up times can be increased, causing eventual problems in the rinsing process. A changeover which involves rinsing, but no equipment change, takes about 30 minutes. A changeover that requires equipment changes to accommodate different bottle sizes and types takes from 60 to 90 minutes. One run for each flavour is used to fill the weekly production needs for all bottle types, because of the current time needed for set-up for a particular flavour. Thus, the long production runs of a particular flavour could allow a build-up of finished goods inventory. ``Comparison matrices'' and local priorities for this company can be seen in Tables I and II. The full description of the mechanics of paired comparison of parameters in each matrix is stated by Saaty (1980). As an example, the first comparison matrix in Table I is briefly explained here. The erratic demand pattern, which is clearly highlighted in the case study, is a reason to allocate the highest priority for flexibility attribute as compared with cost and market issues. Therefore, a weight of 5 (which means ``strongly more important'') in row 2, column 1 has been assigned to the flexibility priority over the cost attribute, whilst a weight of 3 (which means ``weakly more important'') in row 2, column 3 has been given for the market issues (see first matrix in Table I). The market issues attribute is recognised as more important than the cost attribute, because of the bottling company's size. Usually, the small enterprises do not have enough leverage to influence their competitors, suppliers, government rules, etc. Therefore, the market issues attribute is Table II KBES's results for the bottling company (first session) Production planning systems MRP II systems Order scheduling Hybrid system Kanban system
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Final priority weight 0.304 0.263 0.241 0.192
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considered as the next priority. Thus, in Table I the number 4 in row 3, column 3 is assigned for market issues, when compared with the cost factors. This means that the market issues attribute is more important than cost. The matrix elements above the diagonal are reciprocals of the values (described above) for elements below the diagonal. The diagonal values are all unity for obvious reasons. The remaining matrices can be obtained in the same manner, based on the circumstances of the bottling company. When the comparison matrices are formed, the priority vector and the remaining performance indices can be determined by the rather lengthy AHP methodology. The stepby-step explanation of the method is beyond the scope of this paper and readers are referred to other texts on the subject such as Saaty (1980) or Razmi (1999). The final result for the above example is shown in Table II. The highest score belongs to an MRP II system (0.304) which is quite logical and has been in fact applied by the bottling company at the time of their investigation (Finch and Cox, 1986). The same conclusion can be achieved according to the graphical emulator (MDNA concept) which is shown in Figure 5. Figure 5 shows that the flexibility attribute is the most significant attribute for this company, having the priority rating of 0.677 out of 1.0. The second important attribute is market issues, having the priority of 0.284. Since the full line covers almost all the cost attribute boundary (along the abscissa), it is concluded that the company is not sensitive to this factor. Therefore, the user need not consider one of the major attributes in his/her decision-making process. In this step the user merely needs to focus the most important sub-attributes in the other two attributes, (i.e. flexibility and market issues). The third block diagram shows the effects of flexibility sub-attributes. It is apparent that product ranges is the most important issue among the other sub-attributes, having the local priority of 0.677. It is shown in bar-chart ``d'' that order scheduling and MRP II are respectively the most suitable MPC systems which can satisfy the bottling company's needs in this situation. In order to obtain the superior system between these two alternatives, the user should refer to the fourth block diagram (which refers to the market issues). It is clear that the company is very sensitive to serviceability. Referring to
the bar-chart ``h'', it can be seen that MRP II is the best methodology to satisfy this factor and that order scheduling is the least suitable. Therefore, it can be easily concluded that the best methodology for this situation would be an MRP II system. Location A in Figure 1 shows the position of the bottling company in the simple state-space model. After implementation of MRP II for a period of time in the company, its management decided to take some actions in order to improve the company's situation. The management would wonder if these changes were to be implemented, a pull system could become the optimal production planning system or would an MRP II system still remain the best practice. This type of condition can occur for many manufacturing companies. The following shows how such changes, having been undertaken recently, can actually affect the AHP outcome and how the MDNA (graphical emulator) can be employed as an effective monitor in the dynamic situation described above. The bottling company has in fact implemented the following improvements. Initially, the focused factory concept was applied to reduce the variety of products. In this case, the production is limited to putting carbonated beverage in certain bottles and container types. Furthermore, they reduced the production lead-times by transferring the internal set-up operation to an external operation, reducing the downtimes for the machinery, and installing quick-change attachments for capping and bottle holding devices. Machine utilisation and worker efficiency was also increased. These innovations enabled the firm to reduce run times and the volume of finished goods inventory. These improvements have helped in running smaller batches and have resulted in improvements in flexibility which were needed to keep up with the changing demands. They have all resulted in scheduling by bottle size and types, rather than by beverage flavour (i.e. the focused factory concept). This has also eliminated internal conflicts between departments and between plant goals. Because of the erratic demand patterns for beverages, the firm is unable to maintain a completely uniform work-load. Therefore, a sophisticated forecasting tool and a suitable level of safety stock is necessary. However, smaller lot sizes decrease this problem and
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resources can be delivered more frequently, reducing the inventory levels. The problem of increasing cost of shipment (inefficient use of truckload) can be eliminated by co-operating with other bottlers and creating delivery circuits for the vendor. Therefore, more frequent and smaller deliveries for other bottlers in the area would be possible and cost effective. The following shows how the above changes can affect the paired comparison of the attributes and sub-attributes (see Table III).
This section is testing the justification for the MPC systems, after these initial steps have been undertaken. At first the focus factory concept was applied by the company, in order to reduce the product ranges. This has eliminated the problem of conflicts between the departments through a simplified production scheduling function, and has eased the purchasing of materials. These improvements in the manufacturing process have resulted in major changes in the first level of the AHP (Table III, matrix 1,1) and
Table III Paired comparisons of attributes and alternatives for the bottling company (second session)
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the flexibility matrix (Table III, matrix 1,2). Since the production planning function has been simplified, the priorities for serviceability have also changed, when compared with other factors (see matrix 2,2). Due to the introduction of new technology in the bottling industry at the time of implementation of changes, the change-over times and the required time for sanitation and cleaning of conveyors have been decreased tremendously. Implementing the new technology was reported not to have required an intensive capital investment. Therefore, the priority rates in the last cost attribute matrix cannot be considered as valid anymore. In addition, the effect of reducing the set-up times and introducing preventive maintenance have resulted in the modifications to the flexibility matrix. The result of these changes can be seen in Table III. The expert system scores for each alternative are shown in Table IV. It is clear how the above important changes made by the bottling company have made it possible to implement a JIT system. The following shows that the same conclusion can be made by employing the MDNA graphical emulator.
Table IV KBES's results for the bottling company (second session) Production planning systems Kanban system Hybrid system MRP II systems Order scheduling
Final priority weight 0.340 0.257 0.250 0.153
The graphical representation of the AHP results is given in Figure 6. It is clear that the attributes' priorities (first level) have been changed. In the new situation cost and flexibility have the largest priorities (each of which has the priority of 0.4 out of 1.0). It means that the user should consider these two attributes and their sub-attributes as the first priority. The second block diagram (from the bottom) shows that the investment cost subattribute is the most critical factor in the cost attribute group, having a priority of 0.6. The bar-chart ``b'' shows that the priority in this group has been changed in favour of MRP II systems. However, the priority of flexibility attribute group (which was the most effective attribute in choosing an MRP II system in the
Figure 6 Graphical representation of the AHP manufacturing emulator for the bottling company (second session)
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last situation) has been radically changed in the current situation. The priority of machine response is the most critical factor rather than the product ranges. In fact bar-charts ``f'' and ``d'' prove that the radical changes have affected the AHP calculations in favour of a Kanban system. In addition to the above changes, it is clear from bar-chart ``g'' that under the new circumstances, the external factors demand a pull system rather than a push system. Moreover, it is apparent that the quality factor is the most critical sub-attribute in the market issues group. Noting this, and referring to bar-chart ``i'', reveals the reasons for the choice of a Kanban system as the most suitable MPC system by the bottling company. Location B in Figure 1 shows the position for the new situation for the bottling company.
Conclusion The conceptual methods are very simple and frequently have been used in order to make the problem simple and ease the decisionmaking process. However, this can often lead to an inaccurate solution, when the number of factors is increased. It is shown that the ordinary conceptual methods are not applicable in selecting the optimal MPC systems in manufacturing-type organisations, since many interactive and complex parameters are involved in these types of decision-making problems. In order to achieve a suitable solution, the AHP method and a knowledgebased system have been applied. Although, the new approach yields acceptable answers, it may be too complex and not clear for non-expert practitioners. Therefore, the manufacturing DNA (MDNA) method has been introduced. This paper has shown that MDNA provides a fair understanding of the mechanics of the AHP method in the selection of a suitable MPC system for a given manufacturing-type environment.
References De Toni, A., Caputo, M. and Vinelli, A. (1988), ``Production management techniques: push-pull classification
and application conditions'', International Journal of Operations and Production Management, Vol. 8 No. 2, pp. 35-51. Finch, B.J. and Cox, J.F. (1986), ``An examination of Justin-Time management for the small manufacturer: with an illustration'', International Journal of Production Research, Vol. 24 No. 2, pp. 329-42. Hartland-Swann, J.R. (1987), ``MRP or JIT: which is best?'', Proceedings of 2nd International Conference of Just-in-Time Manufacturing, November, pp. 81-92. Karmarkar, U. (1989), ``Getting control of just-in-time'', Harvard Business Review, September-October, pp. 122-31. Mehra, S. and Inman, R.A. (1992), ``Determining the critical elements of just-in-time implementation'', Decision Science Journal, Vol. 23 No. 1, pp. 160-74. Miltenburg, G.J. (1990), ``Changing MRP's costing procedures to suit JIT'', Production and Inventory Management Journal, second quarter, pp. 77-83. Murthy, D.N.P. and Ma, L. (1991), ``MRP with uncertainty: a review and some extensions'', International Journal of Production Economics, Vol. 25, pp. 51-64. Ptak, C.A. (1991), ``MRP, MRP II, OPT, JIT, and CIMsuccession, evolution, or necessary combination'', Production and Inventory Management Journal, second quarter, pp. 7-11. Razmi, J. (1999), ``An analytic hierarchy process driven knowledge-based system in push, pull, and hybrid manufacturing systems'', PhD dissertation, University of Bradford. Razmi, J., Rahnejat, H., Khan, M.K. (1996), ``A model to define hybrid systems at the interface between push and pull systems'', Proceedings of Symposium on Advanced Manufacturing Processes, Systems, and Technologies (AMPST 96), pp. 653-63. Razmi, J., Rahnejat, H. and Khan, M.K. (1998a), ``The analytic hierarchy process and knowledge based system in classification of push, pull, and hybrid push-pull systems'', Proceedings of the Pacific Conference on Manufacturing, Brisbane, Australia, August, pp. 230-6. Razmi, J., Rahnejat, H. and Khan, M.K. (1998b), ``Use of analytic hierarchy process approach in classification of push, pull and hybrid push-pull systems for production planning'', International Journal of Operations and Production Mangement, Vol. 18 No. 11, pp. 1134-51. Saaty, T.L. (1980), The Analytic Hierarchy Process, Planning, Priority Setting, Resource Allocation, McGraw-Hill, New York, NY. Saaty, T.L. (1982), Decision Making for Leaders: The Analytical Hierarchical Process for Decisions in a Complex World, Lifetime Learning Publications, Belmont, CA. Turban, E. (1993), Decision Support and Expert Systems: Management Support Systems, Macmillan, Basingstoke.
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Introduction
New product development in British SMEs D.J. Woodcock S.P. Mosey and T.B.W. Wood
The authors D.J Woodcock, S.P Mosey and T.B.W. Wood are all based in the School of Mechanical, Materials, Manufacturing Engineering and Operations Management at the University of Nottingham, UK. Keywords Information, Learning, Data collection, Measurement, New product development Abstract Reports the efforts of six British small and medium enterprises (SMEs) to enhance their new product development (NPD) capabilities. Finds a strong recognition by managers of ``the need for NPD'' yet they consistently deprioritised work on NPD when faced with other shorter-term pressures. The involvement of manufacturing managers was limited in their firms' NPD activities. What involvement there was occurred late in the process. Identifies a major problem in terms of the lack of information available, with only a few of the firms recording the activities undertaken in the NPD process. This has a number of serious consequences; it was difficult to compare their performance with other firms and they did not have the information needed to improve systematically their systems and procedures. In those firms that did maintain records, their record keeping was limited. Much of what was recorded had little value, as it was not used systematically to improve performance. This shortage of suitable information also hindered the ability of management to learn and thus improve future generations of new products. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
European Journal of Innovation Management Volume 3 . Number 4 . 2000 . pp. 212±221 # MCB University Press . ISSN 1460-1060
This paper reports part of a larger project in the UK, which is itself part of a larger European Community funded project. The study discusses work undertaken in six manufacturing SMEs operating in the East Midlands of the UK. The project was financed under the ADAPT programme (ADAPT, 1998), as part of an EU funded programme designed to promote skills within employees of SMEs for firms in regions threatened by unemployment. The overall project involved partner universities in Austria, Denmark and three partners in Germany. The six-university partnership focused on the theme of enhancing innovation in SMEs. The overall group was divided into four sub-groups; (two German universities, Leipzig and Essen, worked together and one German university, Jena and one Austrian university, Vienna worked together. The British and Danish university teams operated as individual agents). Each of the four groupings undertook different parts of the overall project. The contributions of the partners is shown in Table I. The six UK firms are made up of one high-volume producer making a variety of products based mainly on modularised parts, one low-volume producer of one-off products and four firms producing a variety of madeto-order products. Material developed in the UK part of the project will be disseminated to a further 250 SMEs in the form of workbooks. There will be a follow-up study involving some of these companies.
Background The competitiveness of many Europeanbased manufacturing firms is under threat from producers based either in the Tiger economies or from Eastern Europe. Three strategies have emerged out of these pressures. First, there is the cost cutting strategy, which includes reduction in product ranges (Atkins, 1999). The second is a variant of the first and is based around either relocating to a new lower cost area or involving ``make v. buy'' decisions about parts of the value chain (Yoon and Naadimithi, 1994; McIvor et al., 1997). The third strategy is to enhance the company's level of
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Table I The contributions from each group Group
Contribution to overall project
Universities of Leipzig and Essen Universities of Jena and Vienna
The innovation manager Customer satisfaction, and process improvement Knowledge-based management The skills in formulating business strategies, and enhancing skills at new product development
University of Aalborg University of Nottingham
differentiation from competitors by boosting its innovation. Central to this strategy is increasing the speed and quality of the product development process (Crick and Jones, 1999). We are concerned in this paper with the third strategy. These problems are not, as is popularly misconceived, limited to UK firms. It is argued by some that the problem is also relevant to German manufacturing industry (Bloch and Groth, 1998). In our, as yet unpublished, ADAPT project in all four countries we have identified weaknesses in the way firms were able to innovate. The challenges to European producers have historically focused on lower prices. However, it is now evident that Governments in a number of Asian countries are actively promoting the production of higher quality products (Chen, 1997). Indeed, via the process of globalisation (Bloch and Groth, 1998) many European-based producers can face a combination of Western (including Japanese) designed, Eastern made products. These bring with them modern designs and technology with lower costs of production. Thus, the competitive advantage of a differentiated product is largely reduced. For most enterprises this means paying closer attention to supply chain management. Within this process there has also been a tendency to seek cost reductions via selective outsourcing to firms in lower cost economies (Chen, 1997; Handfield, 1994). However, for other producers, the development of a capability to support innovative product development integrated with their own manufacturing capability is proving a powerful source of competitiveness, (Hayes et. al., 1996). It is to this latter category of producers, those producing within the EU, that this paper is addressed. For a number of companies, the development of technologically superior products and/or
development of new products more quickly and cheaply can be a powerful element within a competitive strategy. It should be noted that simply developing innovative products is unlikely to be sufficient. Such an approach will need to be supported with effective manufacturing strategies. Much of the knowledge necessary for this is known, if not widely utilised, in the SME sector. The authors of this paper consider that, with suitable modifications, many of these ideas can be economically adapted to suit the requirements of SMEs. We also believe that this can be of considerable benefit to their competitiveness. Tony Blair, the British Prime Minister, in the foreword to his Government's White Paper on competitiveness advocates a knowledge-driven society creating high-value goods and using advanced business practices (DTI, 1998). The task of creating an innovative industrial society is not an easy one. Zhuang et al. (1999) argue that innovation activities are under-recognised and thus there is a lack of resource committed to this type of activity. The Confederation of British Industry (CBI) is also interested in promoting innovation and monitors its progress in UK companies (CBI, 1999). Innovation is most often associated with higher priced goods, but this link represents only one of a number of possibilities. It can also contribute to lower costs and prices (Utterback, 1994). In some products, such as the modern automobile, the knowledge content of the final value has been estimated to be as high as 70 per cent (DTI, 1998). Despite the high knowledge content, many products currently made in Western Europe could be manufactured elsewhere. The comparison of manufacturing costs is made more difficult by the issue of exchange rates. The high value of the pound was quoted as a contributory factor in BMW's choice to withdraw from manufacturing at Longbridge in the UK. This deficiency has been similarly argued by a number of businesses. New product development process New product development is seen by many academics and industrialists as a major source of increased sales volume and improved profit margins (Kotler, 1999). Such efforts are generally directed primarily to new and growing industries, as these offer the highest scope for growing sales. In addition, they are
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less likely to suffer from over-capacity which brings with it reduced prices. By definition mature markets have either slowed or stopped their growth in demand. Further, it is widely agreed that profit margins contract when over-capacity occurs and firms fight for a share of a fixed market (Porter, 1985). In the mature phase, there is also a tendency for differentiation between products to reduce as each competitor copies the best features of their rivals' products (Grant, 1998). Successful NPD programmes can reverse these trends restoring growth and profitability. We therefore contend that the production of differentiated new products can improve competitiveness at any phase of the market. NPD literature has grown rapidly in recent years. However, as we noted earlier, much of it is written in a form more suited to large, often multi-national, enterprises (Clark and Fujimoto, 1991). Such enterprises are typically able to support specialists with a variety of skills and capabilities dedicated to tightly defined roles. They are also more likely to be able to (and appropriately) support relatively formal systems and organisational structures. This in turn can lead to the capture of large volumes of data recording the processes used for administration and development. Conversely, SMEs, who do not understand its value, are likely to minimise their data and performance review activities. Without such data, it can be very difficult to achieve a high degree of learning and innovation. Attention has been drawn to the potential for improvements from the new product development process (Clark and Fujimoto, 1991). Some authors have emphasised controlled management of the processes used in NPD (Wheelwright and Clark, 1992). Others have emphasised the collection and use of customer ``wants and needs'' (Cooper, 1993). Yet, others have emphasised the collection of primarily financial data. This is then analysed to minimise risks and hence speed up time to market (Smith and Reinertsen, 1998). However, much of what has been written reflects the situation in large companies. Typical examples are in the automotive and parts of the electronics industries. Even within these narrowly defined segments, the scope for a variety of solutions has been recognised. When we extend the field of study to the SME, we need
to be cautious about proposing frameworks that may not suit the circumstances. The involvement of manufacturing in NPD has often proved to be problematic and commonly late in the process (Wheelwright and Clark, 1992). Even this late involvement may be deferred further when other activities, that should precede it, are themselves delayed. This is exacerbated by product launch dates which are often fixed, in the sense that they have to match the markets' requirements such as seasonal availability. Nevertheless, manufacturing may still be required to meet the delay to the original schedule. As manufacturing are the final phase in the process, any delays can appear to be their responsibility and they can find their activities perceived in a negative light (Wheelwright and Clark, 1992). As has been suggested by Rosenau et al. (1996), a significant part of the problem is in terms of the inadequate communications between manufacturing and marketing. Ramp-up phase Ramp-up is the final phase in the NPD programme. During this phase, production builds up its output levels to the targeted quantities. Manufacturing ramp-ups potentially provide firms with rich environments for learning. However, they often end up at the end of a chain of delays resulting in frantic efforts to re-establish the planned launch date. Under these circumstances the scope for learning evaporates as those involved struggle to cope with the complexity of the situation. Management of this phase is important. It is the time when many problems surface. This does not automatically mean that they are caused during this phase, but it may be only at that time that earlier problems become apparent. Where the communications between manufacturing and design (including marketing) have been weak, it is more likely that defects will occur. It is not that there are always more defects, but that they have remained undetected until late in the process of development. This means that correcting them takes up valuable time and often costs considerably more, as revisions will also need to be made to other parts to accommodate the corrections. We have noted that in the SME sector there is often an inadequate knowledge of the competitors' products. This means that only when the firm's products are ready for
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market do they discover their relative standing in the market place. Three of the main difficulties are poor quality products reaching the market, low levels of productivity and low yield levels (proportion of goods to total output). Clark and Fujimoto (1991) have identified three variants of the ramp-up process. Each represents a different strategy for handling the transition from the previous product to the next: a complete shutdown, a block introduction or a step by step change. In instances where ramp-ups have been empirically studied, major differences in performance levels have been noted. This indicates an opportunity for better firms to develop a competitive advantage. Shutdowns typically lead to greater pressure occurring on production to achieve a rapid ramp-up. This may lead to problems in correcting products or process design weaknesses. These apparently temporary fixes may prove difficult to subsequently resolve. The shutdown method is made worse when a hand-picked team of supervisors and highly skilled workers undertakes the transition. Such workers can often minimise the problems encountered, in ways beyond their less capable replacements for long-term production. Both the ``block introduction'' and the ``step by step'' methods introduce increased complexity into the manufacturing system. However, they can both accommodate slower rates of production (including missed sequences) to enable the workers to produce a correct part and to learn from their experiences in getting that part right. The shortening of product life cycles can afford a new, or at least enhanced, set of opportunities for learning and improving competitive advantage. Previously, the traditional long interval between development projects tended to lead to an atrophying of the developmental competencies. Today, there is an increase in the number of products with short product life spans. Thus, in the CBI (1999) survey, nearly twice as many firms had life cycles of less than three years compared with their 1996 situation. Admittedly, this still reflected a minority of firms, i.e. currently 26 per cent compared with 14 per cent previously. With much shorter intervals, or indeed continuous activity in terms of product development, it became much more practical to learn systematically from the development process. While Pisano (1997) has talked
about this in terms of the manufacturing process, the application of the same concept in the product development process is conceptually the same. We also share Pisano's view that less is understood about how to foster such learning and that the subject has received scant attention in terms of empirical research.
Methodology Data for this study were collected by two full-time researchers, assisted by five students who were undertaking an M.Eng degree. The data collection process used a combination of methods to obtain its information. Initial data were gathered using semi-structured interviews with company managers and shop floor personnel. To improve the objectivity of qualitative data collection, multiple interviewers were used to both interview personnel and analyse the data (Flick, 1998; Denzin, 1989). Wherever possible, the data were triangulated by reference to company records. In some instances, the managers involved expressed concern over the confidentiality of the data or it was thought by them to be too deeply embedded in other data to be extracted by an external researcher. In these instances, the data were gathered by company staff using a set of procedures for recording set out by the researchers. For questions regarding processes internal to the company, it is argued that the best indicators of the success or failure of complicated systems are managers integral to those systems (Jennings and Beaver, 1995). Where data were sparse, we therefore relied upon managers' assessments of their processes and their relative success. An inherent problem of this type of research is differences in how companies record events. As the investigation concerned historical events, we could not influence previous methods of recording. Our approach was, therefore, to apply wherever possible a common approach to their interpretation. We recognised that this could not ensure accurate comparisons. However, by this process of cross-checking, we believe that we minimised any distortions. This paper is limited to reporting the findings on NPD.
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Product development activities The following sections discuss the investigation into six SMEs involved in product development activities. They start with a discussion about the level of NPD activity in each plant, followed by a brief review of the NPD process. This in turn leads to consideration of the issues involved in the ``manufacturing ramp-up'' phase. The final section addresses the use and collection of information. Level of NPD activity Evidence is reported from six manufacturing SMEs. Table II shows details of their new product introductions in 1998 and their planned activity in this area for 1999. As is shown in the Table, the primary emphasis was on producing products that were derivatives of existing lines. However, in five of the six firms some new products were being introduced. . Company ``Housing'', which produced cosmetic variations on a high volume, simple housing market product. . Company ``Machinery'', which produced one-off bespoke machines per month. These machines were very complex and involved mechanical parts, electronics and software. . Companies ``Electronic 1'', ``Electronic 2'' and ``Electronic 3'' produced output in similar volumes, their products had a similar level of complexity and all the products were based on electronic
.
products. They were not direct competitors, as they delivered these products into diverse, contrasting markets. Company ``Industrial'', which produced industrial machinery, had not developed any new products in 1998, partly due to its high level activity in making acquisitions of related firms. Its strategy included the subsequent introduction of a high quality, central product development process, once the acquisitions were complete.
A common characteristic of these SMEs was their shared desire to improve their market position with new differentiated products. However, it is interesting to note that only two of the companies planned to increase the number of new products launched in 1999. Companies ``Electronic 1'' and ``Electronic 2'' had the most ambitious plans in terms of new product development. They both planned to introduce new products that offered additional functionality into their product ranges. In addition, both were seeking to reach new segments to those currently served. Finally, both had acquired new manufacturing processes to manufacture these products. Company ``Industrial'' was also planning a significant development effort with one new, and eight derivative, products. This represented a step change for Company ``Industrial'' as it was currently market leader in its main business and habitually released only one derivative every four years. The other companies were all continuing with a similar development effort from that of 1998.
Table II New product details of six UK SMEs
Company
Products launched in 1998
Products planned for 1999
Product types
Volume
Housing
9 Derivatives
6 Derivatives
Building materials
High
a
Degree of novelty (of new product)
Machinery
1 New ; 12 Derivatives
1 New; 10 Derivatives
Software controlled machinery
Very low
New function
Electrical 1.
1 New; 5 Derivatives
1 New; 10 Derivatives
Complex electronic
Medium
New functions; New process
Electrical 2.
5 Derivatives
1 New; 3 Derivatives
Complex electronic
Medium
New functions; New process
Electrical 3.
2 Derivatives
2 Derivatives
Complex electronic
Medium
Industrial
0
1 New; 8 Derivatives
Industrial machinery
Medium
New function
Notes: aIn this table a product is defined as new if it is targeted into a market segment not currently served by the company and it offers functionality not offered by current products
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New product development processes Table III shows three aspects of the SMEs' product development processes. We look at their performance measurement and review activity, both of which are central to improving future developments (Driva, 1997). We also identified the typical stage in the development process where production personnel are first involved. The lack of communication with production early in the process has been highlighted as a major cause of development delays (Wheelwright and Clark, 1992; Rosenau et al., 1996). As might be expected, a range of NPD activities was seen. Company ``Electronic 2'' was the only one to have a documented NPD process. This detailed the stages required to be performed, who was to be involved in each stage, the information required before a stage could start and a detailed milestone review at the end of each stage of the NPD process. This could be attributed to Company ``Electronic 2'' having shrunk from being a much larger company and retaining the formal NPD structure. The other companies, by contrast, had a less structured approach. Companies ``Housing'', ``Electronic 3'' and ``Industrial'' undertook no measurements of their NPD performance. Neither did they have any formal review processes of the progress of the NPD projects. They all considered record keeping as a low priority exercise. They progressed from one project to the next with ``no time to spare'' to assess their performance. This meant that no formal knowledge was systematically transferred between projects to improve the efficiency of future projects. Company ``Electronic 1'' maintained detailed records of its NPD progress, which were discussed in monthly meetings. Unfortunately, this was also the
forum for all other operational issues. As NPD was often considered a low priority issue, discussion of NPD progress was frequently curtailed or even omitted. This meant that NPD received no useful managerial guidance other than ``keep up the good work'' and ``don't spend too much money''. Company ``Machinery'' was seen to measure engineering hours as a matter of routine. Nothing was done with the information beside circulation to managers. No feedback from management could be recalled. Three of the companies, ``Machinery'', ``Electronic 2'' and ``Industrial'', started to involve their production personnel in the development process at the design stage. They claimed that this significantly improved the efficiency of the transfer of the product to the manufacturing function. Two of the other companies, ``Electronic 1'' and ``Electronic 3'', were seen only to begin to involve their manufacturing function in NPD at the preproduction stage. This was thought of as ``the way we have always done it'', even though it was highlighted as the main cause of NPD delays by the interviewees. When the companies were asked about their NPD plans for 1999, two distinct attitudes were seen. Companies ``Housing'' and ``Machinery'' were both of the attitude ``what we are doing is OK''. They were quite pleased with their level of innovation and felt that they were more innovative than their competitors. This attitude was interesting, in that neither performed any form of formal competitor analysis. Companies ``Electronic 1'', ``Electronic 2'' and ``Electronic 3'' were more concerned about their competitors' performance.
Table III SMEs' new product development processes in 1998 Company
NPD performance data recording
NPD performance review Production personnel procedure involvement In NPD
Housing
None
None
Concept stage
Machinery
Engineering hours
None
Design stage
Electrical 1.
Lead times Engineering hours costs
Monthly Reviews
Pre-production stage
Electrical 2.
Lead times Engineering hours costs
Milestone Reviews
Design stage
Electrical 3.
None
None
Pre-production stage
Industrial
None
None
Design stage
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However, informal networking and any information or competitor analysis gained, tended to be qualitative and subjective. This meant that benchmarking their companies' performance against the competitors was very difficult. Despite this problem, Company ``Electronic 2'' was happy with both this level of competitor analysis and with their perceived relative performance. By contrast, companies ``Electronic 1'' and ``Electronic 3'' recognised some of the shortcomings in their new product development processes. In some ways these two companies, which had the most problems during ramp-up, were fortunate in that it forced them to think about changing their approach. Company ``Electronic 3'' had changed its NPD process to a multi-disciplined team approach, with design for manufacture considered a top priority. Company ``Electronic 1'' had employed a new management team, whose brief included the overhaul of the design process to involve production issues much earlier. They had also ``slimmed down'' their monthly meetings and started considering and acting upon product specific ``key performance indicators'', such as internal yield and productivity. Company ``Industrial'' was unique in this group, as it recently acquired two companies in 1998. This had resulted in a drive to change the three companies from sales led to new product led strategies. It had dramatically increased its new product effort in 1999 and it remains to be seen whether its infant development process can deliver these ambitious targets. Early indications are that it was learning from its mistakes and subsequently formalising and measuring development efforts. It also recognised the need to analyse formally its markets and competition but had little idea of how to approach this goal. Introduction of new products to production (ramp-up) Table IV shows a number of factors concerning the introduction of the SMEs' new products to production. We identify the differing mechanisms of introduction (ramp-ups) (Clark and Fujimoto, 1991). We have also analysed the types of data collected by the companies to measure their ramp-up performance. Using the information available from the firms, we estimated the success of the ramp-up
process. Two metrics were adopted following the work of Womack et al. (1990). These were the quality of the products produced in the first week of manufacture and the time taken to reach successful production, i.e. the level of productivity achieved with previous products. Where the data were not recorded, we used anecdotal evidence. We recognise the inherent inaccuracy of this approach and recommend that this data be observed as illustrative only. The high volume producers, Company ``Housing'', are seen to go straight into full production with a very high yield. This can be attributed to the simplicity of its product derivatives. The low volume producer, Company ``Machinery'', introduced its product in a block fashion. This is in some ways a stretching of the ``block'' definition, as the batch size was one. However, the point to be made is that they were able to reach full productivity with this ``batch'' in one day, as a detailed production inventory was required as part of the design process. The 100 per cent failure rate seen was typical for their complex machinery and was due to test failures on novel parts. To some extent failure was accepted as part of the production process which built and tested until the product was right. Company ``Industrial'' also employed a block introduction. They managed to reach full productivity in four days with their derivative product, but made no recorded measurement of quality. They were not concerned with this deficit, as they were confident that they would continue to retain their market-leading position. The three electronic, medium volume companies all gradually introduced their new products in a stepwise fashion. The success of these introductions was seen to vary greatly. Company ``Electronic 1'' undertook the most ambitious project, introducing a range of new functional products requiring a new manufacturing process. However, this was attempted without any formal planning structure to cope with the likely uncertainties. The culture of the company was for people to work in functional groups and ``toss the project over the wall'' to the next function. This led to inevitable delays as the project was ``tossed'' backwards and forwards. The most significant impact of this was that the designs were passed to production, without any forewarning, with fundamental problems in terms of testing. This meant that the product
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Table IV Ramp-up details for new products in 1998/1999 Company
Product type
Ramp-up mechanism
Housing Machinery Electrical 1. Electrical 2. Electrical 3. Industrial
Derivative Derivative New New Derivative Derivative
Full production Block Step by step Step by step Step by step Block
Note:
a
Ramp-up measurement
Ramp-up quality (internal week 1)
Time to full productivity
Productivity internal yield Productivity Productivity Productivity customer returns Productivity customer returns Productivity
0.85 per cent failures 100 per cent failuresa 50 per cent failures 10 per cent failures 100 per cent failures Not recorded
1 hour 1 day 9 months 2 weeks 10 months 4 days
In this table, italics show anecdotal data
failed a high proportion of the internal tests that were specified by the customer. This resulted in some redesign work having to take place during the ramp-up process. Company ``Electronic 3'' was also seen to have major problems with a 100 per cent failure rate on their internal testing, despite the fact that their product was a derivative. They did not have the excuse of a new manufacturing process, but attributed the problems to ``lack of communication with production at the design stage''. They also had a problem with the product launch date being fixed by marketing leaving no time for a pre-production run when the development was delayed by unforeseen problems. It was fully ten months before the production problems were resolved, which included board redesign, new material requirements and poor casing fit. Company ``Electronic 2'', which used production personnel in the design stage and had formal ``introduction to manufacturing'' meetings, was seen to have a relatively successful ramp-up in terms of quality and speed. This is demonstrated in Table IV by its superior performance relative to its comparable colleagues, ``Electronic 1'' and ``Electronic 3''. All of the companies held monthly meetings to discuss production performance. A common theme of these meetings was that current product performance was considered a higher priority than new product introductions. However, if the onus had been on improving ramp-up performance, most companies would have found it difficult. This was due to there being little easily accessible data collected. Most productivity data collected were not product specific and were ``buried'' on individual databases.
Collection and use of information One of the most notable findings was that regarding the collection, storage and use of information. We saw in the review of the literature that many of the modern paradigms of the manufacturing and management literatures are based on knowledge and learning. However, we found that in very few instances did the firms capture the data needed as core inputs into corporate learning. The problem was not simply one of not recording the information in a computerised format. The problem was that it was not recorded in any format, nor were the managers aware of this as a deficiency in their approaches. This deficiency in recording tends to differ quite significantly from the practices of larger firms, which exhibit a much greater inclination to capture data. However, it is important that we, as academics, avoid the arrogance of believing that people do not know things unless they are recorded. It was quite clear that the senior managers had reasonably accurate, if somewhat broad pictures of how long each phase of development took. Where no records existed, as part of our triangulation of the data, we asked several managers about their recollections of events and found a high level of agreement between their contemporaneous accounts. We were thus able to ``construct records'' that appeared to have an acceptable degree of creditability with the managers involved. Although such ``data'' have some value, we argue for a greater emphasis on capturing hard data, to increase the confidence in subsequent analyses. Two reasons for not capturing data were given by the managers concerned. The first reason was that of costs; while the second reason was the lack of value from any captured data. While the managers were
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themselves convinced of the improvements being accomplished, the lack of initial data made it impossible for us to demonstrate the existence and scale of these improvements. We found that in all the firms there were negative cultures regarding the collection of data.
Discussion SMEs face a dilemma in the area of new product development. While they recognise the need for NPD, attention to work in this area is frequently driven out by other immediate priorities. Where NPD activities are undertaken, they have to be achieved with limited resources. Ideally, this should promote the use of efficient and effective systems in order to maximise the benefits obtained. Regrettably, this does not appear to be the case in practice. From this pilot study of six SMEs a number of common themes have been observed: (1) The use of formal documented procedures to control the introduction of new products existed in only one plant out of six. With the growth in the number of new products and the frequency of their introduction, this deficiency must be overcome with the use of appropriate systems and procedures. Because of the limitations of managerial time and resources, such processes must be streamlined to achieve the best value-formoney approaches. (2) None of the companies used formal competitor analysis to compare their NPD performance against that of the competition. With the increasing intensity of competition, it is unlikely that firms will adequately recognise the importance of efficient/effective NPD processes unless they know how well their leading competitors are doing in this field. Furthermore without detailed knowledge of competitors' products, firms were unable to make effective decisions regarding the likelihood of success of their products. (3) We found that the firms did not have cultures supporting data collection. No systems existed to record their performance during NPD processes. Few relevant records existed in either paper format or on computer systems. This
hindered them from making comparisons with their own previous efforts and/or those of competitors. In some instances, such as the time per phase, we were able to construct retrospective records that helped in the analysis. However, in other areas, no such reconstructions were possible. Thus, in terms of their losses in productivity or process yield losses during the NPD process (including manufacturing ramp-up) we were unable to obtain relevant data. It is known from studies where this has been done that such losses are often significant. Unless such data are collected, it is likely that managers will understate the losses incurred. Nevertheless, the collection of such data has serious difficulties. The cost of collection can be high, the systems may not exist and above all the skills to analyse the data, if collected, may also not yet exist. All of these deficiencies would need to be overcome before any gains were accomplished. Nevertheless, it is believed that such a systematic approach is required, always given the need in SMEs to develop cost-effective mechanisms for doing so. Further, because they did not capture large parts of the data concerning NPD, it was not initially possible to show the firms precise comparisons between their own performance and that of other firms in similar circumstances. (4) We found that manufacturing were typically involved too late in the NPD process. This finding is very much in line with that found in larger firms. However, with very limited resources available it is imperative that SMEs maximise their early involvement. This should produce savings if design changes are required, as later changes are typically far more costly. Additionally we found that the involvement of production personnel early in the design stage significantly reduced quality problems during ramp-up. It is difficult to recommend an ideal ramp-up procedure for these six SMEs to adopt, however. This is because they all had differing requirements in terms of product volumes and market demand. (5) Possibly, the most serious problem concerns an inadequate level of determination to bring about change. This lack of determination may be due to
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their deficiencies in competitor and market analysis, leaving them with an over-optimistic view of their own performance. Additionally, it is apparent that in order for them to facilitate any change, they need systematically to measure their performance. The SMEs studied here did not make adequate measurements of either NPD or ramp-up procedures. Furthermore, any data which were collected needed to be periodically reviewed and benchmarked in the context of the competition. Two of the companies were seen to improve their measurement capability, in the face of poor performance, but still performed no rigorous review or benchmarking procedure to this end. Future research To put these comments in context, it should be recalled that the firms involved had all shown positive attitudes towards NPD, in that they attended training programmes and encouraged investigations by the university researchers. They were also seen by the researchers as progressive SMEs. This has implications for both the businesses themselves and for researchers involved in SMEs. The primary reasons for not collecting such data were a fear of the possible costs involved and a lack of awareness of the value of such information (including not knowing precisely what data to collect and how to analyse it). Unless SMEs can be convinced of the value of data collection as an essential element in learning and improvement, they will miss most of the benefits of that approach. We do not expect firms to record data unless they recognise the potential performance improvement that can be gained from the information.
References ADAPT (1998), This study was financed by the European Community under the ADAPT programme. The work is being undertaken in conjunction with the Universities of Vienna (Austria), Aalborg (Denmark), and the Universities of Essen, Leipzig and Jena in Germany. Atkins, R. (1999), ``Restructuring comes slowly to model German Industry'', The Financial Times, 16/17 October. Bloch, B. and Groth, K.J. (1998), ``German managerial failure: the other side of the globalisation dilemma'', European Business Review, Vol. 98 No. 6, pp. 311-21. CBI (1999), Innovation Trends Survey in Technology and Innovation Brief, Confederation of British Industry.
Chen, C.Y. (1997), ``Manufacturing management: the weak link in Taiwan's strategy'', PhD thesis, University of Nottingham, Nottingham. Clark, K.B. and Fujimoto, T. (1991), Product Development and Performance: Strategy, Organisation and Management in the World Auto Industry, Harvard Business School Press, Boston, MA. Cooper, R.G. (1993), Winning at New Products, Addison-Wesley, Reading, MA. Crick, D. and Jones, M. (1999), ``Design and innovation within `successful' high-tech firms'', Marketing Intelligence and Planning, Vol. 16 No. 6, pp. 21-30. Denzin, N.K. (1989), The Research Act, Prentice-Hall, Englewood Cliffs, NJ. Driva, H. (1997), ``The role of performance measurement during new product development in a manufacturing environment'', PhD thesis, University of Nottingham, Nottingham. DTI (1998), Our Competitive Future: Building the Knowledge Driven Economy, White Paper, CN 4176, HMSO London. Also available at http://www.dti.gov.uk/ public/frame7.htlm Flick, U. (1998), An Introduction to Qualitative Research, Sage Publications, London. Grant, R.M. (1998), Contemporary Strategy Analysis, 3rd ed., Blackwells, Oxford, UK. Handfield, R.M. (1994), ``US global sourcing: patterns of development'', International Journal of Production Operations Management, Vol. 14 No. 6, pp. 40-51. Hayes, R.H., Pisano, G. and Upton, D. (1996), Strategic Operations; Competing Through Capabilities, The Free Press, New York, NY. Jennings, P.L. and Beaver, G. (1995), ``The performance and competitive advantage of small firms: a management perspective'', International Small Business Journal, Vol. 15 No. 2, pp. 63-75. Kotler, P. (1999), Marketing Management, 10th ed., Free Press, Glencoe, IL. McIvor, R.T., Humpherys, P.K. and McAleer, W.E. (1997), ``A strategic model for the formulation of an effective make or buy decision'', Management Decision, Vol. 35 No. 2, pp. 169-79. Pisano, G.P. (1997), The Development Factory, Harvard Business School Press, Boston, MA. Porter, M.E. (1985), Competitive Advantage, Free Press, New York, NY. Rosenau, M.D., Griffin, A., Castellion, G. and Auschwetz, N. (1996), The PDMA Handbook of New Product Development, John Wiley & Sons, New York, NY. Smith, P.G. and Reinertsen, D.G. (1998), Developing Products in Half the Time: New Rules New Tools, Von Nostrand Reinhold, New York, NY. Utterback, J.M. (1994), ``Radical innovation and corporate regeneration'', Journal of Research Technology Management, Vol. 37 No. 4, pp. 10-21. Wheelwright, S.C. and Clark, K.B. (1992), Revolutionising Product Development, Quantum Leaps in Speed, Efficiency, and Quality, Free Press, New York, NY. Womack, J.P., Jones, D.T. and Roos, D. (1990), The Machine that Changed the World, Rawson Associates, New York, NY. Yoon, K.P. and Naadimithi, G. (1994), ``A make or buy decision analysis involving imprecise data'', International Journal of Operations & Production Management, Vol. 14 No. 6. Zhuang, L., Williamson, D. and Carter, M. (1999), ``Innovate or liquidate: are all organisations convinced?'', Management Decision, Vol. 37 No. 1, pp. 57-71.
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Introduction
R&D and marketing integration in NPD in the pharmaceutical industry Mohammed Rafiq and Tim Saxon
The authors Mohammed Rafiq is a Senior Lecturer in Retailing and Marketing at Loughborough University, Loughborough, UK. Tim Saxon is Senior Director, International Business Development, at Whitehall Robins, Madison, New Jersey, USA. Keywords R&D, Marketing, Integration, New product development, Innovation, Pharmaceutical industry Abstract Reports exploratory research focusing on this neglected area based on semi-structured interviews with R&D and marketing managers of major international pharmaceutical companies. Major findings include the fact that few of the responding companies integrate marketing and R&D in the formulation of product development strategy which is a considerable source of resentment between the marketing and R&D functions. Also, whilst the move from functional specialisation to cross-functional therapeutic teams is effective in focusing NPD activity and delivering projects on time, they ignore innovative opportunities that are not directly related to the project. External specialist companies are an increasingly important source of innovation and the ability to manage them effectively is essential for maintaining competitive advantage in the pharmaceutical industry. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com
European Journal of Innovation Management Volume 3 . Number 4 . 2000 . pp. 222±231 # MCB University Press . ISSN 1460-1060
The pharmaceutical industry today, as with many other industries, is under intense pressure to meet ambitious growth objectives. Net sales growth of 20 per cent per annum is a typical target for major players, whilst ``single digit growth'' is regarded as unacceptable by the financial markets. In order to meet these ambitious sales targets and to maintain the output of the stream of innovative products, the pharmaceutical industry is one of the biggest spenders on R&D. For instance, British pharmaceutical companies are estimated to have spent 15 per cent of sales revenues on R&D in 1998, a growth of 10 per cent on the previous year (Osborne, 1999). However, whilst R&D expenditure has doubled in the last seven years, total revenues for the industry are only forecast to grow by 7 per cent per annum in the next seven (Arlington, 2000). A consequence of this shortfall is that pharmaceutical companies must either increase sales per product or make more efficient use of their resources to produce new products and reduce the time-to-market. The former is difficult in a situation where governments are keen to reduce expenditures on drugs in order to maintain control over health care expenditures. Efficient use of resources implies reducing ``time-to-market'', which became in the 1990s one of the key correlates of success in NPD (Urban and Hauser, 1993; Griffin and Hauser, 1996). This clearly places a greater emphasis on efficiency in NPD and encourages organisations to adopt short cycle times from idea generation to launching products (Urban et al., 1987; Urban and Hauser, 1993). Corstjens (1991) asserts that NPD has become the major form of competition among ethical pharmaceutical (prescription drugs) companies. R&D and marketing have key roles, both separately and in terms of synergy between the two. However, the interaction between the two functions has been problematic with frequent conflict. He argues that a more systematic approach to drug discovery has made this relationship more important, as marketing's role in providing input to the development process is becoming more and more crucial early in the developmental process. In other words, the role of marketing has become more strategic, and more closely aligned with that of R&D.
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Despite the importance of the marketing and R&D interface in new product development, there is very little research in this area directly relating to the pharmaceutical industry. This article reports exploratory research focusing on this neglected area.
Integration of R&D and marketing Numerous studies have provided evidence of co-operation between marketing and R&D leading to new product development success (see for instance, Cooper, 1983; 1984; Hise et al., 1990; Souder, 1988). The research evidence suggests that inter-functional cooperation leads to projects being completed on time, within budget and require fewer design changes (Griffin and Hauser, 1996; Pinto and Pinto, 1990). Hise et al. (1990, p. 155) report on findings from research conducted amongst 252 manufacturing companies ± their main conclusion is that the involvement of marketing in the product development process: . . . is more likely to result in higher levels of commercial success for new consumer products than for new industrial products.
However, they do not recommend a blanket increase in the level of co-operation between marketing and R&D; rather, the focus should be on the design stage of the product rather than at the stage of collecting information from the market or the product evaluation stage. The relationship between marketing and R&D is also considered by Urban et al. (1987), with the conclusion that both R&D and marketing are critical to the successful development of new products. Effective communication must exist between functions, and management must develop an organisation and decision structure that will allow innovation to flourish and to create an atmosphere of entrepreneurship. However, there is also a great deal of evidence suggesting that there are a number of important barriers to co-operation between R&D and marketing functions (Griffin and Hauser, 1996; Gupta et al., 1985; 1986; Moenaert and Souder, 1990). Identified barriers to co-operation include inherent personality differences between functions (Saxberg and Slocum, 1968; Lucas and Bush, 1988), cultural differences or thought worlds
(Gupta et al., 1986; Saxeberg and Slocum, 1968; Souder, 1987), language differences (Griffin, 1992; Griffin and Hauser, 1992), organisational barriers due to differences in task priorities and responsibilities and reward systems (Dougherty, 1992; Souder and Sherman, 1993), and physical barriers resulting from different locations of departments (Allen, 1986). Souder (1987) suggests that interdepartmental conflict can be a severe barrier to innovation, and that communication difficulties and a lack of openness often mar the relationship between R&D and other functions. This does not necessarily imply that absence of conflict will lead to innovation. Rather, it is the manner in which conflicts are managed which characterises the innovative companies ± confrontation and resolution of conflict (rather than ignoring it) and managing the process of resolution often lead to new product ideas and a more receptive organisational climate (Souder, 1987). There are also other organisational barriers. Griffin and Hauser (1996), for example, comment that joint responsibility and reward is known to be productive, but not used in many organisations. Souder (1987) argues that classical organisational structures create major barriers to innovation, and new structures are needed to provide the flexibility and adaptability to handle continuous innovations. This is resonant of the work of Burns and Stalker (1961) and more recently, Quinn (1996). Souder (1987) prescribes organisational structures with a new enterprise division for innovations. However, the existence of appropriate structure does not necessarily stimulate behaviours to achieve innovation, but their absence will certainly present a barrier to innovation.
Methodology A semi-structured interview schedule was constructed, drawing specifically on the work of Urban and Hauser (1993) and Wind and Mahajan (1997). The work of Urban and Hauser on formal and informal organisational structures for innovation was used to inform sections of the questionnaire. The questionnaire concentrated on three key areas relating to the degree of integration and barriers to co-operation between
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marketing and R&D in the pharmaceutical industry. First, there were questions focusing on the issue of involvement of marketing and R&D in the formulation of strategy that drives the NPD programme. Second, there were questions aimed at understanding the structure for NPD, especially the distinction between formal and informal structures. Formal structures include cross-functional project teams, and development committees. Third, there was a focus on the nature of the NPD processes adopted in the organisation ± in particular, on how a particular approach enables management of the process. Many pharmaceutical NPD organisations have undergone ``transformation processes'' guided by management consultants which have introduced improved processes aimed at speed to market, but which may, or may not, have supported quality issues such as innovativeness in NPD. A number of pharmaceutical companies were approached and asked to participate in the research. Co-operation was obtained from six major international companies either based in the UK or with subsidiaries in the UK. Of the six companies, three were major ethical pharmaceutical (prescription medicine) companies, here referred to as Rx companies. The other three were major OTC (over-the-counter) companies. Due to reasons of confidentiality, we will refer to Rx companies as Company A, B and C, and the OTC companies as Company D, E and F. In each company, the initial intention was to interview senior R&D and marketing managers and their directors. However, due to difficulties in negotiating access, the actual sample comprised many more R&D managers and R&D directors than marketing respondents (see Table I). A total number of 28 respondents were unevenly spread across
the seven companies, with the number of interviewees ranging from two to eight respondents per responding company. In two of the responding companies, it proved possible to conduct research interviews in both the UK and the USA subsidiaries. Much of this variation depended on the enthusiasm of the senior manager or director contacted initially. Marketing personnel appeared to be less enthusiastic to participate, and out of a total of 28 interviews, only seven were from marketing. R&D personnel were prepared to take the time to participate in the research, while marketing interviews proved much more difficult to arrange and were often rearranged to fit the reactive demands of diaries.
Findings The analysis of the results is discussed below in three broad sections. The first section concentrates on formulation of NPD strategies and the degree of involvement and influence of marketing and R&D in the direction setting process. This is followed by discussion of the impact of organisational structures on NPD. And, finally, there is a discussion of the nature of the NPD processes adopted in the organisations and their consequences for issues such as ``time-to-market'' and the ability to innovate. We begin with NPD strategy development and the degree of integration between marketing and R&D.
Innovation strategy development and integration R&D is neglected in the process of strategy development. Few companies integrate marketing and R&D in the formulation of product strategy There is considerable evidence in the literature that supports a strong positive link
Table I Details of responding companies Ethical pharmaceutical (Rx) Companies Company A Company B Company C Type of company Respondents No. of respondents Of which: marketing R&D
Company D
OTC Companies Company E
Company F International UK and US subsidiary 7 1 6
European
European
International
International
UK subsidiary 2
UK operations 4
UK operations 5
UK operations 2
International UK and US subsidiary 8
0 2
0 4
2 3
2 0
2 6
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between cross-functional integration between marketing, R&D and NPD success (see for instance, Griffin and Hauser, 1996; Song et al., 2000). Despite this, in the course of this research it became apparent that pharmaceutical development in pharmaceutical organisations, is something of a Cinderella function in the process of developing the strategy for the pharmaceutical business. This is not exclusively the case, as evidenced from the discussions at Company A, where marketing and R&D were described as equal partners in the formulation of product development strategy, with both functions having a shared view of the commercial goals and how these need to be achieved. In the OTC companies, the marketing function is guardian of the consumer, described as ``over-controlling in their behaviour'', marketing identifies the consumer needs and interprets these for the R&D function. In Company F, we see a NPR (new product research) organisation that is pushing to sit alongside marketing and collaborate in this vital activity, hoping to participate in market research and understand the nuances which may provide such a vital seed for innovation: . . . the scientists have to understand the subtleties of the consumer.
It is interesting to note that Company F distinguishes between the NPR function and NPD. In this company, this function has been established to handle the early stages of the development process, from ideas generation, or ideas gathering, to proof of principle. Whereas the NPD function focuses on delivery of defined projects to market. In the Rx companies (Companies A, B and C) and the OTC Company E, marketing (sometimes with business development) and medical and regulatory affairs, dominate the strategy development process, communicating with the local operating companies. This excludes pharmaceutical development, leaving them only a reactive role of delivering the projects as required and able only to influence the future direction of technology in informal ways. Only in Company B and Company D was technology strategy mentioned as the vehicle by which the pharmaceutical development organisation contributes to the therapeutic category and product strategy. The impact of this trend on
strategy in pharmaceutical development is evidently a willingness to downgrade the innovative capability of the function. As the head of pharmaceutical development in Company C stated: . . . our view of the world is changing and we're much less likely to innovate internally.
Strategy formulation takes place at a remote location (e.g. corporate headquarters) and R&D is not involved The problem of strategy formulation being conducted in a distant headquarters is not new, but nevertheless it affects the level of ``buying-in'' to the strategy in the local development and marketing organisation. The clearest example of this was in Company E, where, not only the UK-based operation felt excluded from the process, but so did the R&D function located a couple of hours flight away from headquarters. In Company A, the problem was avoided at the operational level by giving each location (the USA, the UK and Germany) a therapeutic category to manage. The response to this situation was to adopt local ways of working which met the needs of the local operation and were described as ``pre-projects'' or feasibility work. This behaviour exploited the available autonomy from the corporate centre, and evidently created a more favourable climate for innovation: . . . if someone has a good idea, we push ahead and see if it works.
Integration of marketing and R&D in cross-functional therapeutic project teams paradoxically reduces the innovative capability of the NPD functions Integration of marketing and R&D in crossfunctional therapeutic project teams has many benefits, especially in focusing on delivery of defined projects. The disadvantage is that many innovative ``platform technologies'' do not achieve ``critical mass'' in these therapeutic teams. Novel approaches to drug formulation and delivery may have little impact on the financial valuations of any one of the projects in the development portfolio and may not attract any priority in any given category, but may be worthy of investment across the business. As one respondent commented:
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In Company B, this problem has been diagnosed and treated. ``Technology platforms'' (TPs) have been formed, chaired by a pharmaceutical development scientist, they comprise a multi-disciplinary group of individuals drawn from the project teams across the various therapeutic areas. The remit of the TP is to identify the leading external players in the development of the technology area and actively monitor their progress in order to enable informed decisions to be made about the right time for Company B to invest in the technology and the best choice of partner. Innovation is derived mainly from external specialist companies The dependence on external companies to provide innovative technologies for product development is clear from this research. The interviews revealed an acceptance that the major pharmaceutical companies can no longer justify pursuing specialist technologies for their development portfolios. The economics of the situation demand that these technologies be widely applied across the industry. For this reason, companies such as Company B and Company C have established functions deliberately focused on the monitoring and acquisition of technologies for drug delivery, by formulation chemistry and device technologies.
emulsion cream technology in liquids to solubilise otherwise insoluble drugs prior to drying and tableting, the strengths of mixing these disciplines is apparent. The adoption of a project managementbased organisation requires the implementation of more than just ``core'' NPD processes This assertion is based on the observation that some companies have installed new, formal NPD processes but have incompatible aims and behaviours in marketing and R&D. This is not entirely unexpected, when the findings of Griffin and Hauser (1996) are considered. They contrasted the marketing and R&D functions in a number of different analyses drawn from the literature, including stereotype traits, in the areas of ``goals and aspirations'', ``needs'' and ``motivation''. These authors also analysed the research literature in terms of a number of factors including ``personality'' types, ``cultural thought worlds'' and other barriers to co-operation. They noted that communication and co-operation is difficult to achieve in view of these barriers to cooperation. An example of this incompatibility is in Company E's US operation. The head of R&D remarked that the chief issue inhibiting innovation was the fact that marketing were congratulated (and congratulated themselves) for launching a product into the market, while R&D were strongly criticised if a project failed to deliver a project to market. Whilst Marketing seek a quick win, Development are obliged to deliver every project on time and provide technology platforms for future development projects.
Organisational structure and innovation The change from functional structures to cross-functional therapeutic category structures reduces the ability to innovate This is mainly because with a therapeutic category structure the innovation process relies on a pool of technical resources to build upon the creative idea and to help in the problem solving. The project team structure divides the functional resource, and in many cases divides it between different locations. Another way that this splitting up of functions such as formulation development undermines innovation is in dividing the discipline more finely into specialities. It is typical to find a laboratory used only by the group responsible for formulating creams, whilst the liquids team use separate facilities and the solids team use another location again. When specialist drug delivery companies are busy filling capsules with liquids, or using micro-
This issue causes a deep resentment between the functional areas and illustrates the incompatibility of the organisational ``metrics'' (or performance measures). Formal and informal metrics are drivers of individual behaviour in organisations. Individual managers respond to metrics, as Mintzberg (1998) observed ``what gets measured, gets done''. In the case described at Company E, the metrics on marketing rewarded success with an acceptance of risk and failure of some projects. R&D, however, had metrics that did not tolerate risk or failure, which is unlikely to encourage innovation. The core processes introduced did not include a programme of organisational metrics to encourage co-operation between key functions and innovation.
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The ability to manage external company resources (e.g. drug delivery companies) effectively is an increasingly important source of competitive advantage in the pharmaceutical industry The focus on external companies as the source of innovation means that pharmaceutical companies need to be fast and effective at identifying these companies and establishing an effective working relationship with them. An unexpected conclusion from the research is that the legal department in a pharmaceutical company can be a significant barrier to innovation with their attempts to define the parameters of the relationships with external partner companies. The major pharmaceutical companies generate the vast majority of the new chemical entities (NCEs) and then look for options to present these in innovative ways. These days there is a clear trend towards acquiring this type of technical innovation from third parties. This may be as a result of necessity, for instance, in the case of poorly soluble drugs, where novel approaches to drug delivery have emerged. It may be motivated by seeking to differentiate the drug from similar drugs in the same therapeutic category by adding utility through enhanced efficacy, longer effect or increased convenience. The drug delivery industry is a strong example of this phenomenon, with scores of small companies (and only around three large ones) offering to license their enabling technologies to the major pharmaceutical companies. Typically, these companies promote their technologies to the industry by attending trade exhibitions and congresses, presenting at symposia and approaching their potential clients directly. In most cases, the approach is directed to R&D. Additionally, in many cases, the drug delivery firms have recruited marketing and sales specialists, where approaches may be made to marketing functions (resulting in many instances in naive marketing responses to scientifically impossible proposals!). Increasingly, the pharmaceutical companies have established specialist functions for seeking suitable external partners. Company B has such a function, the External Scientific Affairs Group, which has drawn on a number of commercial and technical functions for its staff and includes licensing specialists. The process for the successful adoption of innovative external technology may start
with any of the players mentioned above (R&D, marketing, specialist functions) but inevitably involves a legal agreement at some stage. The legal agreement between the drug delivery company and the pharmaceutical company may take many forms. It is not usually a simple supply agreement, but may involve limited rights to intellectual property (patents) or a shared development programme, investment by the pharmaceutical company or even a joint venture. Time-to-market is a major valuedriver in this industry, so a swift legal agreement is desirable. In the companies surveyed, legal agreements were all handled by the central legal department, more familiar with major and bureaucratic work. The standard supply agreements used as a basis for the agreement, were inappropriate and required endless redrafting and negotiation. The experience in Company E is that since their corporate legal department in the USA handles all these agreements, they are given a very low priority, take a long time to resolve and the lawyers are excessively aggressive for the task in hand. The result is that the NPD managers comment that the drug delivery companies no longer approach Company E, or at least prefer to try their competitors first! In Company C, a senior manager commented that introducing corporate legal department into the proceedings was ``like setting the dogs on them!'' This issue was reported to be a problem in Companies A, C, E and F. This suggests that the NPD organisation should establish a licensing function focusing on acquisition of technologies for pharmaceutical development, with a dedicated legal resource.
Issues in NPD processes affecting innovation Increasingly, NPD activities are being formalised and, as mentioned earlier, many pharmaceutical NPD organisations have introduced new NPD processes with the help of management consultants to reduce timeto-market and improving the innovativeness of the organisation. This section examines the impact of NPD processes and their impact on innovation.
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Formal NPD processes reduce time-tomarket, but inhibit the ability to innovate The innovation to which we refer is not innovation in drug discovery, delivering ``new chemical entities'' (NCEs) to the development process, but the innovation in pharmaceutical development for novel dosage forms, delivery systems and packaging. There is little doubt that the principal motivation for the adoption of the new NPD processes was to reduce time-to-market. The pharmaceutical industry depends on the 20year patent life of the NCE to derive the revenues to fund research. The increasing complexity of the discovery and development process had led to launches typically as late as year 12 in this cycle, leaving little time (i.e. as little as eight years) to recoup the research and development costs and generate profits. Recent ``time-to-market'' focus has generated a reduction in development times to as little as six years. Respondents remarked that this has been at the cost of innovation and in particular, time to innovate. This means that there is no time for ``skunkworks'' (speculative research), the seedcorn of discontinuous change and radical innovation. There are few examples of science being pursued to create a platform for innovative new products. Innovation has been marginalised, and the resources to innovate have not been reserved, nor have projects been protected in an innovative corner of the NPD. These findings are consistent with that of Griffin (1997) who shows that formal NPD processes reduce cycle times with complex products. However, Griffin's research also shows that the use of formal product development process prior to the physical design stage does not reduce cycle time. This suggests that pharmaceutical companies are trading-off reduction in time-to-market with lower levels of innovation. The sophistication of NPD processes installed by external consultants needs to ``fit'' the maturity of the pharmaceutical organisation The trend towards engaging external consultants to install prescriptive and rational NPD processes appears to have shortened time-to-market, but ``traded-off'' innovation. The research indicates that highly bureaucratic companies benefit most from these sophisticated NPD processes, with companies that have a development portfolio
comprising generally simple projects suffering most from adopting such a highly structured and rigid process. Wind and Mahajan (1997, p. 7) assert that: . . . despite the disclaimers that the innovation process is not designed to be linear, often turns out to be just that, in effect serving as a funnel that screens out new product ideas, concepts and products that seem to meet some a priori criteria (or that seem too risky).
Their comment reflects the evidence of this research, with the participants whose organisations have adopted formal NPD processes from external ``experts'', either finding ways to circumvent the system or finding themselves trapped in the process with little way of driving through any truly innovative projects. Evidence of this problem was provided in the interviews and a selection of illustrative examples and verbatim remarks are reproduced below. I think the company is very short-term . . . I don't even think we have got the ability to do it, or the commitment to look at a five-year project (Company D, Regional Category Manager).
Another respondent in the same organisation cited examples of where the process resulted in a decision being reached too late to implement a seasonal and competitive product launch. In Company F, this issue was less of a problem because the new product research (NPR) function has been created as a structural response to the threat of innovation opportunities being missed in a ``time-to-market''-driven NPD process. However, ideas generated in R&D have to be managed outside the system where possible and respondents admitted ``the planned ten percent free time didn't happen''. Additionally, they created ``an escape route'' for ideas from R&D (as distinct from NPR), to allow creative ideas from the R&D function to be considered in the same way as ideas from NPR or marketing. In Company E, the US operation exhibits evidence of this problem, whereas the UK-based operation appears not to, because the latter has been excluded from the NPD process recently introduced (by an international consulting company) in the USA. The US operations had recently completed a large project (conducted by a major management consultancy firm) to develop and install new NPD processes. The
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manner in which the new NPD process was developed was the subject of speculation amongst senior managers interviewed, one made the following remarks: I suspect [the consultants] had probably sold the same ideas to everyone under the sun and of course they have a very slick way of persuading you in workshops and working parties. They draw you to the conclusions that they want you to.
The inference is clear, that the consultants have made up their minds already as to the process they will install in the company, with no intention to tailor it to meet their client's specific needs. In Company A, the portfolio of complex projects delivering relatively sophisticated prescription products fits well with the maturity of the organisation. The process has been introduced by another major consultancy and includes aspects of concurrent engineering and stage-gates (Cooper, 1990). Importantly, while managing the vast majority of projects in this formalised way, the R&D director adopts the flexibility to conduct ``non-projects'' where analysis of value is suspended. This does not refute the idea of fit between product sophistication and NPD processes being important, but illustrates the need for flexibility in operating any formal procedural NPD process. In Company B, the NPD process is simply designed to deliver products from discovery (research) to the marketplace, or rather to manufacturing. This focus on manufacturing seems to represent some unfortunate historical facet of the organisation, tending to inhibit the innovation that can be achieved in a ``trade-off'' with ease of manufacture. Inevitably, a patch has been applied to this ``puncture'' in the form of an ``interface initiative''. The NPD process relies on early commercial input to establish the required ``product profile'' (around five years before launch), and not surprisingly, the marketing input at this stage is wholly inadequate and entirely counter-innovation. In Company C, the formal NPD process, installed recently by yet another consultancy (the same consultancy as used by Company D) has a good degree of fit with the sophistication of the majority of development projects. This means that the degree of bureaucracy is not inappropriate for their complex projects. Nevertheless, the balance
between functional management with its emphasis on the management of resources, and programme management with its project management focus, has been changed too radically without sufficient compensation for the loss of resource management and the issues arising. The companies who suffer most in this analysis are those for whom the NPD process is too formal and complex for the majority of the products that they are developing. Their ability to innovate is impeded by the overwhelming bureaucratic demands of their NPD processes, with potentially innovative ideas being stifled by the analytical demands of the NPD process. This problem is exhibited most clearly by Company E's subsidiary in the USA and by Company D. In these organisations, the NPD processes are followed slavishly, although at Company E they admit to initiating projects before approval has been granted, to avoid bureaucratic delays. The NPD processes are not adapted according to the level of complexity of the projects and do not recognise the different levels of innovation required. One of the limitations of the NPD processes reported by respondents is that too many constraints are placed on the proposals. The project must have support from marketing, typically initiated by the marketing function. It must also be attributable to a final product, which is a constraint that fails to recognise the various options that may arise as a platform technology is progressed through development. Where steps have been taken to facilitate the development of innovative technology platforms, these have been formalised and require support from senior managers who will be held accountable for delivering the sales forecast for the innovation. There is evidence that the large research-based pharmaceutical companies are more capable of adopting systems for controlling their activity than they are at abandoning these systems if they prove unhelpful ± especially to innovation. All NPD projects have equal priority, leading to problems in resource management The next critical process issue inhibiting the ability of the pharmaceutical organisations to innovate, is that of portfolio management and prioritisation. It was an unexpected finding
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that portfolio management processes were either non-existent or one-dimensional. To explain what ``one-dimensional'' means we will take an example of one of the more sophisticated companies in the survey, Company F. This organisation calculates the risk adjusted commercial value (RACV) from the estimated commercial value and the probability of technical success. Portfolio entry is confined to projects with a high potential value, but risk is defined in a narrow technical sense, neglecting commercial risk, and tends to reflect time-to-market and hence the degree of certainty of the project. The same is found in other risk/value constructed portfolios, with the risk aspect being subsumed into the expected present value figure, hence the single dimension. In none of the interviews was any formal portfolio management process described which attributed a share of the portfolio to each different level of risk, thereby safeguarding a place for a small proportion of high-risk projects. However this approach was adopted informally by Company E's UK operation and Company A. In Company E's US operation, the portfolio carries no priorities, although the selection of projects from proposals is supposed to ``reflect the fit with long-term strategy''. This creates problems in the day to day management of project activities, where conflicts arise and resource has to be allocated by middle managers. It was interesting to hear different managers describing the rules of thumb that they have developed to handle such situations, and to recognise that they were engaged in such subterfuge regularly, but had not asked senior management to justify, or help them overcome this lack of essential information.
Conclusions The foregoing presents clear evidence that the issue of the integration between R&D and marketing is one of considerable importance in the pharmaceutical industry. The research highlights four main areas where the ability to innovate in pharmaceutical companies may be being undermined. First, the lack of involvement of R&D in strategic NPD decisions is a considerable source of resentment and irritation between marketing and R&D. This is further
compounded by weak informal communication networks and (in many cases) the physical separation of R&D and marketing functions. In global companies, the separation of marketing and R&D activities is virtually inevitable and creates additional barriers to communication. Second, whilst the move from functional specialisation to cross-functional therapeutic teams is effective in focusing NPD activity and delivering projects on time, they ignore innovative opportunities that are not directly related to the project and may have application across a number of therapeutic areas. Third, the installation of formal NPD processes has been effective in reducing time-to-market but this has had the effect of reducing time for speculative and more innovative ideas. Fourthly, the high degree of outsourcing of critical R&D functions may undermine the long-term innovative capabilities of the firms. Whilst the trend towards seeking innovative contributions to pharmaceutical development from external drug delivery companies may be irreversible, it does not wholly substitute for the effective, innovative pharmaceutical development organisation. Also outsourcing in critical areas could expose the organisation to being taken hostage in an environment where the external companies to whom they delegate this responsibility are likely to become the acquisition targets of their competitors. Further research would do well to focus on identifying the degree to which pharmaceutical development organisations are undermining their core competencies by outsourcing critical capabilities. All these issues have a direct impact on NPD activity and innovative capacity of pharmaceutical companies and need to be addressed by management in these companies. These issues also need to be further researched and tested both in the context of the pharmaceutical industry and NPD of other industries with similarly complex products and R&D intensity. Further research is also necessary as this research is based on a small number of cases, the generalisability of the research needs to be tested on larger samples. Furthermore, the imbalance between marketing and R&D respondents in this research may have given too much weight to the views of the R&D function, this also needs to be addressed in future research. Future research also needs to
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address the question of the impact of the trends identified in this paper on new product success in financial terms.
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