Farley Simon Nobre, David Walker, Robert Harris Technological, Managerial and Organizational Core Competencies Dynamic Innovation and Sustainable Development PDF

Technological, Managerial
and Organizational Core

Competencies:
Dynamic Innovation and
Sustainable Development
Farley Simon Nobre
Federal University of Parana, Brazil
David Walker
The University of Birmingham Business School, UK
Robert Harris
The University of Wolverhampton Business School, UK
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Library of Congress Cataloging-in-Publication Data
Technological, managerial and organizational core competencies: dynamic innovation and sustainable development / Farley
Simon Nobre, David Walker and Robert Harris, editors.
p. cm.
Includes bibliographical references and index.
Summary: This book investigates the impact of knowledge management, information systems, finance, organizational
networks, internationalization, strategic management, marketing, entrepreneurship, and sustainability on an organization that
pursues dynamic innovation and sustainable advantage--Provided by publisher.
ISBN 978-1-61350-165-8 (hardcover) -- ISBN 978-1-61350-166-5 (ebook) -- ISBN 978-1-61350-167-2 (print & perpetual
access) 1. Knowledge management. 2. Organizational learning. I. Nobre, Farley Simon, 1971- II. Walker, David, 1947
Sept. 1- III. Harris, Robert, 1961 Apr. 21-
HD30.2.T4235 2011
658.4038--dc23
2011027029
British Cataloguing in Publication Data

A Cataloguing in Publication record for this book is available from the British Library.
All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the
authors, but not necessarily of the publisher.
In memory of my Father (1938-2010), who I love and miss dearly, for his constant family support,
warm heart, happiness, and brilliant mind, and to my Mother who struggled to educate me, and to
Carolina, for her kindness, patience, and love.
Farley S. Nobre
Editorial Advisory Board
Neil Anderson, Brunel University, UK
Thomas Andersson, Jnkping University, Sweden & the Research Council, Sultanate of Oman
Glauco Arbix, University of Sao Paulo, Brazil
Michael Brown, Birmingham City University, UK
Elias G. Carayannis, George Washington University, USA
Steven Cavaleri, Central Connecticut State University, USA
Erik G. Hansen, Leuphana University Lneburg, Germany
Colette Henry, University of London, UK
Yuya Kajikawa, The University of Tokyo, Japan
Valentina Lazzarotti, LIUC University, Italy
Enrique Leff, Universidad Nacional Autnoma de Mxico, Mexico
Caroline Mothe, Universit de Savoie, France
David L. Rainey, Rensselaer Polytechnic Institute, USA
Pedro Lpez Sez, Universidad Complutense de Madrid, Spain
Joanne L. Scillitoe, New York Institute of Technology, USA
William H. Starbuck, University of Oregon & New York University, USA
Eric Viardot, EADA Business School, Spain
List of Reviewers
Oihana Valmaseda Andia, Universidad del Pas Vasco, Spain
Theodora Asimakou, London Metropolitan University, UK
Andrea Bikfalvi, Universitat de Girona, Spain
Adriana Bin, University of Campinas, Brazil
Luiz Caseiro, University of Sao Paulo, Brazil
Mara Catalina Ramrez Cajiao, Universidad de los Andes, Colombia
Milton de Abreu Campanario, University of Sao Paulo, Brazil
Gregorio Martn de Castro, Universidad Complutense de Madrid, Spain
Jason G. Caudill, Carson-Newman College, USA
Claudio Cruz Czares, Autonomous University of Barcelona, Spain
Alok K. Chakrabarti, Thapar University, India
Javier Alejandro Carvajal Daz, Universidad de los Andes, Colombia
Pilar Fernndez Ferrn, Universidad del Pas Vasco, Spain
Diana A. Filipescu, Autonomous University of Barcelona, Spain
Sergio Salles Filho, University of Campinas, Brazil
Jonas Gabrielsson, Lund University, Sweden
Jorge Cruz Gonzlez, Universidad Complutense de Madrid, Spain
Amir Grinstein, Ben-Gurion University of the Negev, Israel
Jerald Hage, University of Maryland, USA
Erik G. Hansen, Leuphana University Lneburg, Germany
Robert Harris, University of Wolverhampton, UK
Colette Henry, University of London, UK
Gretchen Jordan, Sandia National Laboratories, USA
Milton de Freitas Chagas Junior, Instituto Tecnolgico de Aeronutica, Brazil
Jose Carlos Korelo, Federal University of Parana, Brazil
Valentina Lazzarotti, LIUC University, Italy
Jos Emilio Navas Lpez, Universidad Complutense de Madrid, Spain
Patrizia de Luca, University of Trieste, Italy
Jonathon Mote, Southern Illinois University, USA
M. Elena Aramendia Muneta, Universidad Pblica de Navarra, Spain
Hiroko Nakamura, The University of Tokyo, Japan
Farley Simon Nobre, Federal University of Parana, Brazil
Jos Tiberio Hernndez Pealoza, Universidad de los Andes, Colombia
Diamanto Politis, Halmstad University, Sweden
Andrew Pollard, University of Wolverhampton, UK, & Caparo Innovation Centre, UK
Paulo Henrique Muller Prado, Federal University of Parana, Brazil
Renata Lbre La Rovere, Federal University of Rio de Janeiro, Brazil
Pedro Lpez Sez, Universidad Complutense de Madrid, Spain
Horst-Hendrik Scholz, The University of Birmingham, UK
Javier Amores Salvad, Universidad Complutense de Madrid, Spain
Joanne L. Scillitoe, New York Institute of Technology, USA
Danielle Mantovani Lucena da Silva, Federal University of Parana, Brazil
Marcello Muniz da Silva, University of Sao Paulo, Brazil
Gavin Smeilus, University of Wolverhampton, UK, & Caparo Innovation Centre, UK
William H. Starbuck, University of Oregon & New York University, USA
Shinji Suzuki, The University of Tokyo, Japan
Adriana Roseli Wunsch Takahashi, Federal University of Parana, Brazil
Miriam Delgado Verde, Universidad Complutense de Madrid, Spain
Valter A. Vieira, Federal University of Parana, Brazil
Beln Bande Vilela, Universidad de Santiago de Compostela, Spain
David S. Walker, The University of Birmingham, UK
Table of Contents
Foreword by Alan D. Meyer and William H. Starbuck.................................................................... xii
Foreword by Colette Henry................................................................................................................ xv
Preface.................................................................................................................................................xvii
Acknowledgment............................................................................................................................ xxxvii
Section 1
Sustainability and Innovation
Chapter 1
Environmental Rationality: Innovation in Thinking for Sustainability................................................... 1
Enrique Leff, Universidad Nacional Autnoma de Mxico, Mexico
Chapter 2
A Model for Improving the Adoption of Sustainability in the Context of Globalization
and Innovation....................................................................................................................................... 18
Chapter 3
Product-Service Systems as Enabler for Sustainability-Oriented Innovation:
The Case of Osrams Off-Grid Lighting................................................................................................ 40
Friedrich Grosse-Dunker, Dark Horse GmbH, Germany
Erik G. Hansen, Leupana University Lneburg, Germany
Chapter 4
Innovation for Sustainability in Aviation: World Challenges and Visions............................................. 55
Hiroko Nakamura, The University of Tokyo, Japan
Shinji Suzuki, The University of Tokyo, Japan
Chapter 5
Diffusion and Adoption of Innovations for Sustainability..................................................................... 73
Helen E. Muga, University of Mount Union, USA
Ken D. Thomas, Auburn University, USA
Chapter 6
Social Innovation, Environmental Innovation, and Their Effect on Competitive
Advantage and Firm Performance......................................................................................................... 89
Javier Amores Salvad, Universidad Complutense de Madrid, Spain
Jos Emilio Navas Lpez, Universidad Complutense de Madrid, Spain
Gregorio Martn de Castro, Universidad Complutense de Madrid, Spain
Chapter 7
Observe, Conceive, Design, Implement and Operate: Innovation for Sustainability.......................... 105
Javier Alejandro Carvajal Daz, Universidad de los Andes, Colombia
Mara Catalina Ramrez Cajiao, Universidad de los Andes, Colombia
Jos Tiberio Hernndez Pealoza, Universidad de los Andes, Colombia
Section 2
Organizational Networks and Innovation
Chapter 8
The Integration of Independent Inventors in Open Innovation........................................................... 131
Gavin Smeilus, University of Wolverhampton, UK & Caparo Innovation Centre, UK
Andrew Pollard, University of Wolverhampton, UK & Caparo Innovation Centre, UK
Chapter 9
An Examination of Independent Inventor Integration in Open Innovation......................................... 146
Gavin Smeilus, University of Wolverhampton, UK & Caparo Innovation Centre, UK
Andrew Pollard, University of Wolverhampton, UK & Caparo Innovation Centre, UK
Chapter 10
Firm-Specific Factors and the Degree of Innovation Openness.......................................................... 167
Valentina Lazzarotti, Carlo Cattaneo University, Italy
Raffaella Manzini, Carlo Cattaneo University, Italy
Luisa Pellegrini, University of Pisa, Italy
Chapter 11
Effects of Product Development Phases on Innovation Network Relationships................................. 191
Christina berg, Lund University, Sweden
Chapter 12
Maturity in Innovation Network Management.................................................................................... 203
Caspar Van Rijnbach, TerraForum Consulting, Brazil
Gustavo de Boer Endo, TerraForum Consulting, Brazil
Suzana Monteiro Leonardi, TerraForum Consulting, Brazil
Chapter 13
Science Parks and their Role in the Innovation Process: A Literature Review for the
Analysis of Science Parks as Catalysts of Organizational Networks.................................................. 230
Renata Lbre La Rovere, Federal University of Rio de Janeiro, Brazil
Leonardo de Jesus Melo, Federal University of Rio de Janeiro, Brazil
Section 3
Entrepreneurship and Innovation
Chapter 14
Entrepreneurial Learning and Innovation: Building Entrepreneurial Knowledge from Career
Experience for the Creation of New Ventures..................................................................................... 245
Jonas Gabrielsson, Lund University, Sweden
Diamanto Politis, Halmstad University, Sweden
Chapter 15
Innovation and Corporate Reputation: Britains Most Admired Company Surveys 1990-2009......... 264
Paul Turner, Anglia Ruskin University, UK
Chapter 16
Natural Resource Dependency and Innovation in the GCC Countries................................................ 278
Thomas Andersson, Jnkping University, Sweden, & The Research Council, Sultanate of Oman
Chapter 17
Innovation in Scenario Building: Methodological Advancements and a Foresight Study
of the Automotive Industry in Brazil................................................................................................... 302
Ariane Hina Schneider, Industry Federation of Parana, Brazil
Laila Del Bem Seleme, Industry Federation of Parana, Brazil
Felipe Fontes Rodrigues, Federal University of Parana, Brazil
Marilia de Souza, Industry Federation of Paran, Brazil
Helio Gomes de Carvalho, Federal Technological University of Parana, Brazil
Section 4
Knowledge Management and Innovation
Chapter 18
Toward a More Pragmatic Knowledge Management: Toyotas Experiences
in Advancing Innovation...................................................................................................................... 327
Chapter 19
Knowledge and the Politics of Innovation: Insights from a R&D Company...................................... 347
Theodora Asimakou, London Metropolitan University, UK
Chapter 20
Innovation and Knowledge Management for Sustainability: Theoretical Perspectives...................... 365
Ren J. Jorna, Frisian Academy (KNAW), The Netherlands & University of Groningen,
The Netherlands
Niels R. Faber, Frisian Academy (KNAW), The Netherlands & University of Groningen,
The Netherlands
Chapter 21
Dynamic Capabilities and Innovation Radicalness: Review and Analysis.......................................... 384
Jorge Cruz-Gonzlez, Universidad Complutense de Madrid, Spain
Jos Emilio Navas-Lpez, Universidad Complutense de Madrid, Spain
Pedro Lpez-Sez, Universidad Complutense de Madrid, Spain
Miriam Delgado-Verde, Universidad Complutense de Madrid, Spain
Section 5
R&D&T Management and Innovation
Chapter 22
Research Profiles: Prolegomena to a New Perspective on Innovation Management.......................... 408
Gretchen Jordan, Sandia National Laboratories, USA
Jonathon Mote, Southern Illinois University, USA
Jerald Hage, University of Maryland, USA
Chapter 23
Determinants and Consequences of R&D Strategy Selection............................................................. 428
Diana A. Filipescu, Autonomous University of Barcelona, Spain
Claudio Cruz Czares, Autonomous University of Barcelona, Spain
Chapter 24
Institutional Innovation Practices in Technopoles: An Example in France......................................... 450
Anne Berthinier-Poncet, Universit de Savoie, France
Rachel Bocquet, Universit de Savoie, France
Sbastien Brion, Universit de Savoie, France
Chapter 25
Choosing Locations for Technology and Innovation Support Centers:
Methodological Proposal and Brazilian Studies.................................................................................. 474
Mrio Otvio Batalha, Federal University of So Carlos, Brazil
Daniela Tatiane dos Santos, Federal University of So Carlos, Brazil
Nelson Guedes de Alcntara, Federal University of So Carlos, Brazil
Srgio Ronaldo Granemann, University of Braslia, Brazil
Section 6
Marketing and Innovation
Chapter 26
Taxonomy of Marketing Core Competencies for Innovation.............................................................. 491
Chapter 27
Self Regulation on Innovative Products Choice.................................................................................. 508
Paulo Henrique Muller Prado, Federal University of Parana, Brazil
Danielle Mantovani Lucena da Silva, Federal University of Parana, Brazil
Jose Carlos Korelo, Federal University of Parana, Brazil
Chapter 28
The New Product Development Process as a Communication Web Part I:
Introduction, Concepts and Spanish Context....................................................................................... 526
Jos Antonio Varela Gonzlez, University of Santiago de Compostela, Spain
Beln Bande Vilela, University of Santiago de Compostela, Spain
Chapter 29
The New Product Development Process as a Communication Web Part II:
Analysis of Spanish Firms................................................................................................................... 540
Jos Antonio Varela Gonzlez, University of Santiago de Compostela, Spain
Beln Bande Vilela, University of Santiago de Compostela, Spain
Section 7
Finance and Innovation
Chapter 30
Innovations and Financing of SMEs Part I: SME Financing and Credit Rationing:
The Availability of Funds..................................................................................................................... 555
Chapter 31
Innovations and Financing of SMEs Part II: Case Study of German SMEs in 2010.......................... 574
Section 8
Internationalization and Innovation
Chapter 32
The Recent Internationalization of Brazilian Companies.................................................................... 590
Luiz Caseiro, University of Sao Paulo, Brazil
Chapter 33
R&D Internationalization as Mechanism of Innovation in Global Enterprises:
A Brazilian Case Study........................................................................................................................ 619
Simone Vasconcelos Ribeiro Galina, University of Sao Paulo, Brazil
Section 9
Information Systems and Innovation
Chapter 34
Tools That Drive Innovation: The Role of Information Systems in Innovative Organizations........... 640
Jason G. Caudill, Carson-Newman College, USA
Chapter 35
The Roles of Cognitive Machines in Customer-Centric Organizations: Towards Innovations in
Computational Organizational Management Networks....................................................................... 653
Farley Simon Nobre, Federal University of Parana, Brazil
About the Contributors..................................................................................................................... 675
Index.................................................................................................................................................... 688
xii
Foreword
The editors have assembled this book around the topic of innovation, which they define very broadly.
As a happy result of this broad definition, the book comingles the themes of technological innovation,
entrepreneurship, and organizing. Usually, scholars have discussed these themes separately, and this
separation has probably concealed opportunities for fruitful interdependence among the themes.
These are vital themes in economies and in societies more generally, and the themes intertwine.
Technological innovation fosters the emergence of new ways of organizing. Advances in Information
Technology, for instance, have transformed hierarchical, co-located business organizations into geographi-
cally distributed virtual networks. Yesterdays organizations are turning into dense spots in networks of
contracts between sovereign individuals (Davis & Marquis, 2005). People can break supply chains apart
and distribute work to the most efficient producers wherever they are, and can assemble components
wherever customers happen to be located today.
The three themes of technological innovation, entrepreneurship, and organizing share a concern with
the emergence of new things new concepts, new forms, new viewpoints. Emergence remains one of
the persistent mysteries of science. An irony of Darwinian evolutionary theory is that despite the title of
his book, Darwin did not attempt to explain the origin of species. His analyses began with established
populations, and examined how differential survival led to gradual adaptation within these populations.
Contemporary scientists physicists, chemists, biologists, and social scientists alike have generally
followed Darwins example. Scientists avoid studying or even thinking about emergent processes, con-
signing them to the realms of philosophy and spirituality along with other phenomena evoking faith and
magic. However, innovation, entrepreneurship, and organizing are inherently emergent, so scholars who
study these topics find it hard to ignore emergence and the interactions that foster emergence.
The book itself emerged through an evolutionary process that broke through national and disciplinary
boundaries, and drew energy from entrepreneurial editorial activities that extended around the world. The
editors and reviewers subjected manuscripts to careful selection processes and the successful manuscripts
reflect repeated revisions that improved their clarity and relevance.
The editors efforts to enlist diverse authors enhance the books usefulness. The authors come from
many countries. People in different parts of the world see different issues and participate in different
discussions, so distinct research topics and findings emerge all around the globe. A book that embraces a
wide range of societies and perceptions helps readers to distinguish between observations that are more
general and those that are more idiosyncratic. New technologies and organizational forms develop dif-
ferently, and with experimental adventures over time, so their characteristics are disorderly. Efforts to
understand very new technologies and organizational forms have to confront both the heterogeneity of
the systems themselves and the researchers lack of effective filters for distinguishing important stimuli.
xiii
Observations that are more general are possible because some social trends have been widespread.
For instance, throughout the 20th century, the so-called developed countries evolved from agriculture
and manufacture toward services, and the latter part of the 20th century brought mounting emphasis on
services requiring higher education. A large amount of global dispersion of expert services has been
occurring. Companies have not only placed call centers for technical support around the world, they
have located research laboratories and engineering design centers around the world. Knowledge-based
activities have been at least as mobile as physical work. In the short run, this geographic dispersion in-
creases the relative advantage of social skills over technical expertise. In the longer run, such dispersion
undercuts the competitive advantage of knowledge-based activities by making expertise less esoteric.
In addition to intermingling technological innovation, entrepreneurship, and organizing, Professors
Nobre, Walker and Harris have introduced another more contemporary theme sustainability. In the
books Preface, Nobre makes an important distinction between competitive advantage and sustain-
able development. Competitive advantage is a concept based in economic theories about competi-
tive markets; it stresses the value to individual business firms of distinguishing themselves from their
competitors by offering valuable and unusual products or services. However, economists and business
scholars have defined competitive advantages solely in terms of the benefits to individual business firms
and without concern for effects on consumers, communities, nations, societies, or humanity in general.
Nobre introduces the term sustainable development to describe a kind of business development
that maintains a balance between economic and societal goals and between short-run and long-run
goals. This is a timely distinction, since the modern global corporation, a brilliant social innovation that
extended benefits of commerce around the globe, has become the worlds dominant social institution
and is helping to drive every living system on the earth into decline. We live in a time when humans are
at the very peak of our technological power. We are making changes in the earth that will echo through
the centuries. Sustainable development would seek to benefit not only individual firms but also their
societies and the future of humanity.
Alan D. Meyer
University of Oregon, USA
William H. Starbuck
University of Oregon, USA
REFERENCE
Davis, G. F., & Marquis, C. (2005). Prospects for organization theory in the early 21st century: institu-
tional fields and mechanisms. Organization Science, 16(4), 332343.
Alan Meyer is the Charles H. Lundquist Professor of Entrepreneurial Management at the University of Oregon. Using orga-
nizational theory and sociology as theoretical frames, he studies industry emergence, corporate venturing, and technology
entrepreneurship. He is a field researcher who triangulates between archival data and primary data gathered through interviews
and naturalistic observation. Alan has been a continuous National Science Foundation grantee since 1999. He is a Fellow of
xiv
the Academy of Management, he served as the founding chair of the Managerial and Organizational Cognition Division, and
he chaired the Organization and Management Theory Division. Alan has served as Consulting Editor for AMJ and as Associ-
ate Editor-in-Chief for Organization Science, and on the editorial boards of Administrative Science Quarterly, the Academy
of Management Journal, and Strategic Management Journal.
William H. Starbuck is Professor-in-Residence at University of Oregon and professor emeritus at New York University. He
has held faculty positions in economics, sociology, or management at Purdue University, Johns Hopkins University, Cornell
University, University of Wisconsin-Milwaukee, and New York University, as well as visiting positions in England, France,
New Zealand, Norway, Sweden, and the United States. He was also Senior Research Fellow at the International Institute of
Management in Berlin. He edited Administrative Science Quarterly, chaired the screening committee for Fulbright awards in
business management, directed the doctoral program in business administration at New York University, and was President
of the Academy of Management. He has published over 150 articles on accounting, bargaining, business strategy, computer
programming, computer simulation, forecasting, decision making, human-computer interaction, learning, organizational de-
sign, organizational growth and development, perception, scientific methods, and social revolutions. He has also authored two
books and edited 17 books. His latest book, The Production of Knowledge, reflects on lessons from his own academic journey
and on the challenges associated with management and social science research.
xv
Foreword
It is now widely acknowledged that innovation drives the knowledge economy, fuelling productivity
and growth. It is innovation that essentially underpins successful entrepreneurship, creates jobs and
contributes to the sustainable development of economies around the globe. It is not surprising therefore,
that the topic of innovation continues to attract increased attention from academics and politicians alike.
While earlier literatures depict innovation as creative destruction that erodes existing markets and
industries (Schumpeter, 1934), more recent commentators refer to innovation in the form of disruptive,
radical technologies that allow entire markets and industries to emerge, transform or even disappear
(Christensen, et el; 1997). Research has also been growing with regard to innovation in the workplace,
its link to human resource management and how innovation relates to organizational structures (Scott
and Bruce, 2008; West, 2002, as discussed in Foss and Henry, 2010). However, there remains a gap in
the literature with regard to the study of innovation in the context of organizational competence building
and the identification of key creative areas that can create and drive sustainable innovation processes.
In this book the editors have brought together a range of important topics under the heading of
Technological, Managerial and Organizational Core Competencies. Nobre, Walker and Harris discuss
knowledge management, networks, sustainability, marketing, R&D, Information Systems and internation-
alization across a range of geographical contexts and organizational settings. Strategically organized in
nine sections, the editors combine empirically and theoretically based research contributions from leading
commentators around the globe. The diversity of authors providing insights on innovation in different
economies highlights the strong international dimension of the book. However, the unique contribution
of the book undoubtedly lies in its identification of key creative and typically untapped areas within an
organization that can build competencies towards dynamic innovation and sustainable development.
Essentially, this book enhances current understanding of the innovation process and platforms its im-
portance as a driver of 21st century entrepreneurship. The book will be of value to those studying and
researching the broad field of innovation, particularly as it relates to dynamic organizational processes.
The contributions will also be of interest to innovation educators, R&D managers and those working
within the general innovation support system. This timely edited text offers a multidisciplinary perspec-
tive on innovation, reminding us that innovation is dynamic in nature and highly creative in its origins.
Colette Henry
University of London, UK
xvi
REFERENCES
Christensen, C. (1997). The innovators dilemma: When new technologies cause great firms to fail.
Boston, MA: Harvard Business School Press.
Foss, L., & Henry, C. (2010). Gender and innovation: Exploring the hegemonic voice, paper presented
at the Gender Work and Organization (GWO) Conference, Keele University, 20-23 June.
Schumpeter, J. A. (1934). The theory of economic development. Cambridge, MA: Harvard University Press.
Scott, S. G., & Bruce, R. A. (2008). Determinants of innovative behavior: A path model of individual
innovation in the workplace . Academy of Management, 37(3), 580607.
West, M. A. (2002). Sparkling fountains or stagnant ponds? An integrative model of innovation imple-
mentation groups, Applied Psychology: An International Review, 51 (p. 3).
Colette Henry (BA; MBA; PhD; FRSA; FISBE) is the Norbrook Professor of Business & Enterprise at the Royal Veterinary
College (RVC), University of London. She also holds visiting professorships at the Universities of Troms (Norway) and Bir-
mingham City (UK). A Fellow of the Royal Society for the encouragement of Arts, Manufactures & Commerce (RSA), Colette is
also the former President of the Institute for Small Business & Entrepreneurship (ISBE), and was recently awarded a fellowship
in recognition of her work. She has been published widely on the topics of entrepreneurship education & training, programme
evaluation, womens entrepreneurship and the creative industries. Her publications include books, edited collections and ar-
ticles in a range of leading academic journals. Her more recent research focuses on entrepreneurship education and women
in veterinary medicine. Colette is also the editor of the International Journal of Gender & Entrepreneurship (IJGE).
xvii
Preface
THE ROLE OF ORGANIZATIONAL CREATIVE AREAS (OCA) IN DYNAMIC

INNOVATION: FROM COMPETITIVE ADVANTAGE OF INDIVIDUAL RATIONAL
ECONOMICS TOWARDS DEVELOPMENT OF COLLECTIVE SUSTAINABILITY
Genesis and Overview: The Organization as Mediator

between Entrepreneurs and Innovations
This book represents the culmination of an international project to compile multi and inter-disciplinary
research that most contributes to innovation. The books unifying constructs are innovation and the
organization. The organization mediates between entrepreneurs and innovations. This preface presents
a brief overview of developments concerning the organization and innovation.
Organizations have gradually grown in importance throughout human history. They matured after
the Industrial Revolution began in Europe in the 18th century and later spread to the United States of
America in the 19th century. The gradual transition from a non-industrial to an industrial society has
marked the frontiers between periods of evolution and industrial development of organizations. Here,
the term evolution assumes that changes in society are relatively unpredictable, whereas industrial de-
velopment denotes a more predictable sequence of planned modernization (Richter, 1982). Evolution
characterizes processes of organizing in ancient and the Middle Ages civilizations, and the Renaissance
supported development of the Industrial Revolution in Europe.
Many modern principles of organizing emerged during ancient civilizations (5.000 B.C. - 500 A.C). It
is probable that organizing processes began in the family, later extending to the tribe, and finally reaching
formalized political units (Wren, 1987). After the fall of the Roman Empire and the emergence of Feu-
dalism in Europe, new principles of organizing evolved as solutions to economic and political crises. An
increasing record of writings about organizing characterized the Middle Ages. Nevertheless, economies
and societies were essentially static, management practices were still largely antihuman, science was
only a philosophical rather than a technological concern, and political values involved unilateral deci-
sions by central authorities. These conditions were unfavorable for developing an industrialized society.
Crises in Europe during the 14th and 16th centuries brought a revolution in thinking and culture, together
with religious, social, economic and political strife, giving genesis to the Renaissance (Delouche, 2001).
The Renaissance brought a new focus on reason, discovery, exploration and science. Overseas expansion
of Europe between the 15th and 18th centuries strengthened the confrontation and integration of cultures
on different continents and gave birth to Mercantilism. Globalization and a worldwide economy evoked
new technologies and more complex principles of organizing. Additionally, there was increasing need
and call for practices that could bring ethics to individual liberty and to markets. Political philosophers
xviii
began to disseminate new ideas about equality, reason, justice, the rights of citizens, governance by
consent of the people, and decentralized of political power.
In the 18th century, new economic theories challenged Mercantilism and the controlling power of
the landed aristocracy and initiated the Industrial Revolution. In his Wealth of Nations, Adam Smith
(1723-1790) established the classical school of liberal economics and he proposed that only markets
and competition should be the regulators of economic activity. The transition from pre to post-industrial
organizations was gradual. The transition created new social, economic, technological and political
conditions and brought new societal challenges. Continuous advances in science and technology, espe-
cially in electricity, energy and information, made possible large combinations of humans and machines,
giving origin to new kinds of organizations. Principles of organization and management had to be im-
proved and extended to a new and increasingly dynamic environment. Theories of organizations have
developed systematically since the beginning of the 20th century. Organization theorists have advanced
in knowledge through the 20th century (Grusky & Miller, 1981; March, 1965; March & Simon, 1958;
Pugh, 1997; Nobre, Tobias & Walker, 2009: 236-289; Scott, 1998; Simon, 1997).
With advances in capitalism and liberal economics, philosophers, historians, political economists
and sociologists proposed opposing ideologies and models of political, economic and social thought.
Perhaps, Marxism was the most revolutionary political ideology. Marx and Engels supported the idea
that capitalism inevitably produces internal tensions that lead to its collapse or destruction.i This Marxist
process has been called Creative Destruction (Reinert & Reinert, 2006: Chapter 4). Later, the concept of
Creative Destruction was revisited and popularized by Joseph Schumpeter (McCraw, 2007), and became
most associated with his economic development and innovation theory, particularly from his books The
theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle
(1912/1934) and Capitalism, Socialism and Democracy (1942/1950). Despite being sympathetic to
Marxian Doctrines, Schumpeter placed entrepreneurship and innovation at the center of his economic
development theory. He said destruction, transformation, and renewal of a social-economic system are
rooted in entrepreneurs decisions and actions that introduce innovations. Therefore, entrepreneurs, and
innovations, are core elements that can disturb the equilibrium of any social-economic system and that
accelerate economic growth (Schumpeter, 1939).
However, to think about innovation, and especially technological innovation, only as synonymous with
economic growth is to overlook its broad significance for humanity. While innovation and technology
can benefit humans with artifacts that raise living standards (Easterlin, 2000; Johnson, 2000; Tidd, 2006;
Tidd, Bessant & Pavitt, 2005), innovation and technology can also have negative results.ii Innovation
and technology affect political power (Kipnis, 1990; Scarbrough & Corbett, 1992) and power-holders
of innovation and technology can control resources and decisions (Suarez-Villa, 2009).
Strongly influenced by the Corporation (Drucker, 1993) and by the hegemonic power of 20th century
neo-Corporatism (Hagger, 2004; Suarez-Villa, 2009; Wiarda, 1996), society has entered the 21st century
with the strongest desires for capital accumulation ever seen in history. These desires have accelerated
environmental degradation and the destruction of natural resources (Leff, 1995). Egocentrism, indi-
vidualism, and consumerism characterize contemporary society, and a political and economic model of
maximization of production and consumption is generating cultural alienation and intense materialism.
These have, in turn, destroyed environmental resources and eroded the values and social conditions of
humanity (Nobre, Loureno & Fagundes, 2010). Education and innovation stand out as processes that
should be changing human behavior to develop a sustainable future (Dunne & Martin, 2006; Wals, 2009),
xix
and innovation offers a key to sustainability by contributing new alternatives (Hart & Milstein, 2003;
Nidumolu, Prahalad & Rangaswami, 2009; Rainey, 2006).
One day, organizations, nations and executives may be able to perceive and act based on models
grounded in systemic sustainability. These new models will have to reconcile environmental, social and
economic demands (Gladwin, Kennelly & Krause, 1995; Korten, 2006) - the three pillars of sustain-
ability defined by The United Nations General Assembly during the World Summit Outcome, in 2005.
Organizations and their participants, especially entrepreneurs, will have to create dynamic innovation
and competitive advantages without disrupting the balance needed for survival of the human species
(Nobre, Tobias & Walker, 2010:391).
Objectives: What the Book is About
Chapters in this book address many recent theories and practices on innovation. The book contemplates
economic, social, political, educational and environmental facets of innovation through technological,
managerial and organizational perspectives.
More specifically, this book is about innovation in firms, industries, nations and society. It speaks
to professionals and researchers who want to improve their understanding of dynamic innovation and
sustainable development. Chapters contribute answers to questions on:
What are the roles (and contributions) of Sustainability in (for) Innovation?

What are the roles (and contributions) of Organizational Networks in (for) Innovation?
What are the roles (and contributions) of Entrepreneurship in (for) Innovation?
What are the roles (and contributions) of Knowledge Management in (for) Innovation?
What are the roles (and contributions) of R&D&T (Research, Development and Technology)
Management in (for) Innovation?
What are the roles (and contributions) of Marketing in (for) Innovation?
What are the roles (and contributions) of Finance in (for) Innovation?
What are the roles (and contributions) of Internationalization in (for) Innovation?
What are the roles (and contributions) of Information Systems in (for) Innovation?
Key Concepts of the Book
In this book, innovation involves processes, organizational elements (or resourcesiii), and Organizational
Abilities (OA)iv that support the production and transformation of knowledge into new knowledge,
processes, structures, technologies and products, goods and services. At the firm and industry levels of
analysis, innovation can provide organizations with strengths relative to other firms, clusters, and nations
and it is a key source of customer benefits and sustainable development. At the collective and societal
levels of analysis, innovation can provide humanity with economic, social and environmental wealth
through sustainable development.
The uniqueness of this book lies in the participants efforts to identify Organizations Creative Areas
(OCA) that can provide core competencies for the organization in pursuit of dynamic innovation and
sustainable development. In this perspective, innovation is a dynamic system and it is contingent upon
a set of core competencies that couple to each other. Therefore, changing of even one competence can
affect the organizations ability to innovate.
xx
Core competencies develop within Organizations Creative Areas (OCA) that include Sustainability,
Organizational Networks, Entrepreneurship, Knowledge Management, R&D&T (Research, Develop-
ment and Technology) Management, Marketing, Finance, Internationalization, and Information Systems.
Core competencies are valuable and unique from a customers point of view, and also inimitable and
non-substitutable from a competitors point of view (Prahalad & Hamel, 1990). Core competencies can
represent collective knowledge that develops through learning and that provide strengths relative to
other organizations (Nobre, Tobias & Walker, 2010; Nobre & Walker, 2011). The term dynamic refers
to capacity of the organization to create new competencies and to adapt to the changing business envi-
ronment (Teece, 2007).
The concept of competitive advantage refers both to the position that a firm occupies in its competitive
environment and the firms ability to create superior value for its customers and superior profits for itself
(Porter, 1998). The organization can sustain competitive advantage by developing strategic resources
and core competencies (Lei, Hitt & Bettis, 1996). Although some chapters in this book support this eco-
nomic concept of competitive advantage, that concept makes assumptions about economic supremacy
that separate humanity from ecological and social developments. Therefore, this Preface avoids the term
competitive advantage and adopts a more fruitful perspective of sustainable developmentthe process
of achieving human development in an inclusive, connected, equitable, prudent, and secure manner
(Gladwin, Kennelly & Krause, 1995). An inclusive perspective sees traditional competitive advantage as
occupying one extreme, whereas truly sustainable development occupies the opposite extreme. Sustain-
able development must benefit not only the organization and its customers, but also the whole society and
the future of humanity through sustainability.v Most chapters of this book fall between these extremes.
The Dynamic Model
Figure 1 portrays innovation as interacting with the Organizations Creative Areas (OCA). In this
Figure, the Organizations Creative Areas [OCA-(19)] include Sustainability (Sus.), Organizational
Networks (ON), Entrepreneurship (Ent.), Knowledge Management (KM), Research, Development and
Technology (R&D&T) Management, Marketing (Mar.), Finance (Fin), Internationalization (Int.), and
Information Systems (IS).
Figure 2, adapted from (Nobre & Walker, 2011), portrays the organization in pursuit of dynamic
innovation and sustainable development. This models functional processes can be summarized as fol-
lows:
First, the organization interacts with the environment through its Organizations Creative Areas
(OCA) and Organizational Abilities (OA) for acquisition, exchange, processing, creation, storage,
renewal, distribution and employment of resources. By these processes, the organization evolves
and improves its own abilities of cognition, intelligence, autonomy, learning and knowledge
management.
Second, the Organizations Creative Areas (OCA) and Organizational Abilities (OA) manage stra-
tegic resources, and, consequently, develop the organizations core competencies. Improvements
in strategic resources as well as in core competencies can feed back and provide improvements in
the Organizations Creative Areas (OCA) and Organizational Abilities (OA).
Third, internal and external stimuli can affect the Organizations Dynamic Innovation and
Sustainable Development (ODISD), and, consequently, changes in ODISD activate the
xxi
Figure 1. Organizations Creative Areas (OCA)
Figure 2. Dynamic Innovation Model
Organizations Creative Areas (OCA) and Organizational Abilities (OA), thus starting new cycles
of sustainable development.
Processes (1) to (3) repeat continuously to reduce environmental uncertainty and to improve the Orga-
nizations Creative Areas (OCA), Organizational Abilities (OA), strategic resources, core competencies
and the Organizations Dynamic Innovation and Sustainable Development (ODISD).
xxii
Target Audience
This book is most relevant to researchers, students and executives interested in future organizations that
pursue dynamic innovation and sustainable development. The technological, managerial and organiza-
tional background addressed in this book can be applied in different levels of academic and industrial
research, including:
Research programs of undergraduate and post-graduate levels.

Lectures of undergraduate and post-graduate courses.
Industrial and business research projects of firms of any size.
Due to the multidisciplinary scope of this book, the editors are suggesting some schools and courses
where the book can be useful. These are:
Schools of: Business Administration, Management, Information Systems, Organization Theory,

Social Sciences, Economics, Sociology, Philosophy, Education, Technology, and Engineering.
Courses on: Innovation; Organizational, Managerial and Technological Innovation; R&D
and Technology Management; Organizational Theory, Organizational Learning; Knowledge
Management, Information Systems, Finance, Organizational Networks, Internationalization,
Strategic Management, Marketing, Entrepreneurship, and Sustainability.
The book offers readers a multidisciplinary perspective on dynamic innovation, and most importantly,
challenges readers to explore new frontiers between innovation and Sustainability, Organizational Net-
works, Entrepreneurship, Knowledge Management, R&D&T (Research, Development and Technology)
Management, Marketing, Finance, Internationalization, and Information Systems.
Organizations of today confront increasing levels of environmental complexity and uncertainty
(Nobre, Tobias & Walker, 2010) that demand new processes of organizing. Sustainable development,
at the firm, industry, nation and societal levels, depends on new economic, social and environmental
analyses. This book contributes by presenting theoretical and empirical findings for mastering, analyzing
and integrating technological, managerial and organizational perspectives that identify core competen-
cies of future organizations. The subject of dynamic innovation raises new challenges for researchers.
Organizational, managerial and technological principles of the past and present have contributed
successful applications in many areas of organizations and society. However, the world is changing,
new processes of organizing are continuously emerging, and methods that proved successful in the past
may not provide the right tools for addressing problems of the future. Participants in this book hope to
provide readers with very exciting insights about how innovation can create a better future.
Book Structure and Chapters Synopsis
The Editors goal is to foster cross-pollination among researchers. To this aim, the Editors have selected
and assembled chapters that illustrate multidisciplinary theoretical perspectives and empiric results on
innovation and the roles of Sustainability, Organizational Networks, Entrepreneurship, Knowledge
Management, R&D&T (Research, Development and Technology) Management, Marketing, Finance,
xxiii
Internationalization, and Information Systems in the organization that pursues dynamic innovation and
sustainable development. The books structure involves these major sections:
Section 1: Sustainability and Innovation

Section 2: Organizational Networks and Innovation
Section 3: Entrepreneurship and Innovation
Section 4: Knowledge Management and Innovation
Section 5: R&D&T Management and Innovation
Section 6: Marketing and Innovation
Section 7: Finance and Innovation
Section 8: Internationalization and Innovation
Section 9: Information Systems and Innovation
Section 1 on Sustainability and Innovation Subsumes Seven Chapters
In Chapter 1, Environmental Rationality: Innovation in Thinking for Sustainability, Leff proposes

perspectives and concepts for a model of environmental rationality for the construction of a sustainable
society. He argues that rationality of modernity has limited capacities to reestablish the ecological
balance of the planet, while environmental rationality opens new perspectives to sustainability: the
construction of a new economic paradigm based on neguentropic productivity, a politics of difference
and an ethic of otherness. The problem to be approached is that of understanding the unsustainability of
the established, dominant and hegemonic ways of constructing the world we live in: that of economic,
scientific and technological rationality which organizes the actual world order. Humanity needs to think
about the possibilities of deconstructing this dominant rationality, constructing and putting into social
action a new social order: a new agreement with nature based on environmental rationality. In this
prominent treatise, Leff concludes that innovation in thinking is a need, if not a must, for sustainability.
In Chapter 2, A Model for Improving the Adoption of Sustainability in the Context of Globaliza-
tion and Innovation, Rainey presents the foundations of a conceptual model for connecting the key
elements necessary for corporations to adopt sustainability in the context of the global economy and
strategic innovation. He explains while sustainability involves many perspectives, strategies, actions,
and management constructs, the chapter focuses on how global corporations employ strategic innova-
tions in response to the driving forces in the global economy and how they can improve their level of
management sophistication in a turbulent business environment. One of the Raineys conclusions is
that the model provides a framework for creating win-win outcomes that are balanced in terms of the
social, political, economic, technological, environmental and ethical forces.
In Chapter 3, Product-Service Systems as Enabler for Sustainability-Oriented Innovation: The
Case of Osrams Off-Grid Lighting, Groe-Dunker and Hansen emphasize the role of innovation for
addressing sustainability as well as the role of sustainability as a source for innovation, whereas they
propose that Product-Service System (PSS) represents an important approach for both perspectives.
Groe-Dunker and Hansen start by presenting an exploratory research strategy to further investigate the
links between Sustainability-Oriented Innovation (SOI) and Product-Service System (PSS); and they go
through a case study on off-grid lighting in Kenya and analyze the sustainability effects on the product
and Product-Service System (PSS) level.
xxiv
In Chapter 4, Innovation for Sustainability in Aviation: World Challenges and Visions, Nakamura,
Kajikawa, and Suzuki collect and analyze the latest experts talks from four international meetings on
Aviation and the Environment in the period between September 2009 and May 2010. The talks in the
international meetings were led by experts and researchers from Japan, Europe, and North America; and
they had the aim of discussing technological innovation, policies, and economic measures that could
contribute to mitigate the global aviation impact to climate change, such as the adoption of low-carbon
technologies. The authors explain that only 1% of the world population has flown yet and that there will
be a great increasing rate of this percentage in the next years, which makes it very difficult to suppress
the impact of aviation on climate change. Moreover, they suggest future research directions.
In Chapter 5, Diffusion and Adoption of Innovations for Sustainability, Muga and Thomas pri-
marily investigate theory and concepts of sustainability and why they are important to innovation and
vice-versa. They discuss in detail some key reductionist approaches to assessing sustainability such
as Life Cycle Assessment (LCA), Life Cycle Cost Analysis (LCCA), and sustainability indicators and
they also apply these approaches to an engineering infrastructure scenario. The authors explain the
integrated sustainability methods of LCA and LCCA enable a business to assess alternative products
or processes at the planning and design stages. These methods may also be used during the production
stages to assess whether a business needs to use a different raw material to make their products. The
chapter also contributes by explaining the roles of management, social network analysis, and mental
models of individuals in the diffusion and adoption of innovations.
In Chapter 6, Social Innovation, Environmental Innovation, and Their Effect on Competitive Ad-
vantage and Firm Performance, Salvad, Navas-Lpez, and Castro provide special emphasis on the
relationship between businesses and natural environment. They argue that the inclusion of environmental
criteria into business activities can promote the creation of new core competencies, offering a creative and
innovative perspective to the organization that can lead to the achievement of competitive advantages.
In this investigation, the authors analyze the existence of a direct relationship between Environmental
Innovation and Firm Performance and the existence of an indirect relationship between the two, which
highlights the mediating role of the kind of competitive advantage generated. Among the chapters main
findings: 1) the authors explain the nature of Environmental Innovation through the Social Innovation
perspective and therefore they contribute by considering some key aspects of administrative and tech-
nological innovations that have not been taken into account in the academic literature; 2) they analyze
the different types of environmental innovations in order to understand and describe the strategic options
in the environmental field; 3) and they conclude that Environmental Innovation is related to business
performance. Finally, they explain that the practical implications of this previous relation are of great
importance, since it directly influence the choice of the type of environmental strategy, allowing the
company to choose from innovative strategies (based on pollution prevention) or more conservative
strategies (emissions control).
In Chapter 7, Observe, Conceive, Design, Implement and Operate: Innovation for Sustainability,
Carvajal Daz, Ramrez Cajiao, and Hernndez Pealoza present a learning model that can be applied
by academics and professionals in the development of innovations. The model draws upon the engineer-
ing education cycle of Observe, Conceive, Design, Implement and Operate (OCDIO). The authors start
their chapter by reviewing curricula and learning activities in some world-class universities in order to
understand the contribution of state-of-the-art education models for the creation of competences for in-
novation. Afterwards, they introduce the Observe, Conceive, Design, Implement and Operate (OCDIO)
model and explain that sustainability comes from following the OCDIO cycle continuously. In such a
xxv
proposal, the authors argue that the OCDIO model contributes for the sustainability of the innovation,
but not specifically for the creation of solutions and promotion of innovations that subsume the three
pillars of economic, social and environmental sustainability. Nevertheless, the OCDIO model as well
as other leaning cycles such as Problem-Based Learning (PBL) can be followed to reach innovations
which attend such sustainability triple-constraints. Furthermore, the authors use the OCDIO framework
to analyze innovations in Colombia as well as case studies in the Universidad de los Andes.
Section 2 on Organizational Networks and Innovation Subsumes Six Chapters
In Chapter 8, The Integration of Independent Inventors in Open Innovation, Smeilus, Harris, and Pol-
lard explain that whilst current academic literature points to the growing importance of Open Innova-
tion as a means of companies capturing new products from sources other than internal R&D facilities;
the integration of independent inventors, a source of innovative new products, within Open Innovation
has proven challenging. The authors present a series of preliminary Critical Success Factors, driven
by current academic literature, that are intended to contribute to independent inventors becoming more
successful suppliers of new product ideas to businesses, with the intention that adherence to such factors
may have a positive influence on the effectiveness of open innovation. The chapter also provides the
necessary introduction and background to the understanding of the next chapter.
In Chapter 9, An Examination of Independent Inventor Integration in Open Innovation, Smeilus,
Harris, and Pollard take the preliminary critical success factors proposed in the previous chapter and
utilize them as priori constructs as evidence is sought through case study for their presence or non-
presence in a practical context. A case study on the Caparo RightFuel, an automotive device originating
from an independent inventor and commercialized through an Open Innovation model, forms the basis
of the chapter.
In Chapter 10, Firm-Specific Factors and the Degree of Innovation Openness, Lazzarotti, Man-
zini, and Pellegrini investigate the topic of how open innovation is actually implemented by companies,
according to a conceptual approach in which open and closed models of innovation represent the two
extremes of a continuum of different openness degrees; whereas, these are not the only two possible
models. By means of a survey conducted among Italian manufacturing companies, this chapter sheds
light on the many different ways in which companies open their innovation processes. Four main models
emerge from the empirical study and they are investigated in depth in order to understand the relation-
ship between a set of firm-specific factors (such as size, R&D intensity, sector of activity, company
organization) and the specific open innovation model adopted by a company.
In Chapter 11, Effects of Product Development Phases on Innovation Network Relationships,
berg starts by explaining that in the research literature, product development has frequently been as-
sociated with four distinct phases: introduction, growth, maturity, and decline. While these phases have
been related to and used for the study of product life cycle, market strategies and competition, less or no
attention has been given to the subject of Innovation Network Relationships (INRs), and more specifi-
cally, to whether and how INRs are affected by these Product Development Phases (PDPs). Based on a
literature review of Resource Dependence Theory (RDT) and four case studies, this chapter contributes
by discussing how various INRs are affected by PDPs of an innovative firm. Findings include: (i) the
specific needs and resource dependence by the innovative firm during different PDPs affect the status
of the firms INRs, whereas new relationships are built and old ones are finished; (ii) during product
development, the INRs become increasingly complex where network parties become negative resources
xxvi
of the innovative firm through increased uncertainty being introduced into previous relationships; and
(iii) the development of INRs cannot be captured on a dyadic level, but various parties relationships
with one another need to be considered.
In Chapter 12, Maturity in Innovation Network Management, Van Rijnbach, de Boer Endo, and
Leonardi aim to contribute to a better understanding of how innovation networks work and how to de-
velop them. They start by reviewing the concept of network management and by explaining the principal
attributes that impact the formation and optimization of innovation networks, based on the networks
objectives, the combination of the characteristics of the networks participants as well as the networks
organizational format to attract and maintain the partnership. To reach the chapters aim, the authors
present the results of a benchmark study undertaken in Brazil, the United States of America and Europe
between March and June 2009. In this study, they interviewed executives at 24 leading companies known
as innovators in their industry. Findings by the authors showed that some common good practices ex-
ist among companies when it comes to open innovation management. They concluded that, although
some practices partly depend on the companys industry or Research, Development and Innovation
(R&D&I) investment levels, many practices are common and their use depends on the companys level
of maturity regarding open innovation networks. As a result of their investigation, the authors derive and
propose a maturity model for open innovation, based on four dimensions: strategic, relational, support
and organization.
In Chapter 13, Science Parks and their Role in the Innovation Process: A Literature Review for the
Analysis of Science Parks as Catalysts of Organizational Networks, La Rovere and Melo investigate
the contributions of Science Parks (SPs) to innovation. In particular, the authors discuss whether the
literature on innovation and SPs considers the fact that SPs can be catalysts of Organizational Networks
(ONs). The authors consider that ONs are elements of knowledge production and can contribute to the
development of core competencies to pursue dynamic innovation and competitive advantage. The chapter
is based on literature review of scientific papers and theses on SPs and their contributions to innovation,
which are included in indexed databases. Preliminary analysis of the literature shows that SPs have been
mostly studied as part of innovation systems, and that less attention has been given to the role of ONs
and SPs in the processes of technological learning and innovation.
Section 3 on Entrepreneurship and Innovation Subsumes Four Chapters
In Chapter 14, Entrepreneurial Learning and Innovation: Building Entrepreneurial Knowledge from
Career Experience for the Creation of New Ventures, Gabrielsson and Politis explain that the relation
between entrepreneurial learning and innovation has been poorly understood, especially with respect to
how entrepreneurs build up their capability to create new ventures. In this chapter, the authors employ
arguments from theories of experiential learning to examine the extent to which entrepreneurs prior career
experience is associated with entrepreneurial knowledge that can be productively used in the new venture
creation process. They relate entrepreneurial knowledge to two distinct learning outcomes: the ability
to (i) recognize new venture opportunities, and (ii) cope with liabilities of newness. Based on analysis
of data from 291 Swedish entrepreneurs, they provide novel insights into how and why entrepreneurs
differ in their experientially acquired abilities in different phases of the new venture creation process.
In Chapter 15, Innovation and Corporate Reputation: Britains Most Admired Company surveys
1990-2009, Brown and Turner explain that The Britains Most Admired Company surveys into cor-
xxvii
porate reputation includes nine characteristics, one of these is a companys capacity to innovate. They
also explain that, surveys between 1990 and 2009 show that a good reputation for innovation does not
guarantee a good overall reputation; nor does a reputation for innovation lead to business success. How-
ever, where a company has a reputation for innovation and is able to manage other characteristics, there
is a better chance that this company will develop its innovation capability into long-term competitive
advantage and profitability. Central to this conclusion is converting innovation into enhanced processes,
products or services through effective implementation. The chapter also contributes by identifying
key attributes of companies that combine a reputation for innovation, with a good corporate reputation
overall and business success.
In Chapter 16, Natural Resource Dependency and Innovation in the GCC Countries, Andersson
explains that, whether the current strong performance displayed by the Gulf Cooperation Council (GCC)
countries proves sustainable for the long term will cast new light on the extent to which natural resource
abundance can be turned into a blessing, rather than a curse, and then the requirements for that. Anders-
sons chapter synthesizes new evidence on the conditions for innovation in these economies, including
through examination of innovative performances at firm level, collected through the first Community
Innovation Survey (CIS) carried out in the GCC countries. Whereas strengths are recorded in some
respects, e.g., Information and Communication Technology (ICT), education and some conditions for
start-up activity, challenges remain in others, including with regard to governance. The chapter ends
with recommendations what further action is required to enable better conditions for innovation both in
the natural resource sector itself, and broadly in the economy.
In Chapter 17, Innovation in Scenario Building: Methodological Advancements and a Foresight
Study of the Automotive Industry in Brazil, Schneider, Seleme, Rodrigues, de Souza, and de Carvalho
extend and apply a prospective scenario building methodology over a long-range forecasting (up to
2020) for the analysis of market and innovation potentials of the automotive industry of the Metropolitan
Region of Curitiba (MRC); whereas the MRC is located in the state of Paran in southern Brazil and is
home to an automotive sector, which plays a major role in the local and national economy. The sources
of data in the study include literature review, document analysis, direct observation, semi-structured
interviews and two rounds of questionnaires. Results of the study provided the players, stakeholders
and entrepreneurs with a clearer managerial view of the industrys future and also suggested that the
proposed methodology can be applied to other industries in future studies.
Section 4 on Knowledge Management and Innovation Subsumes Four Chapters
In Chapter 18, Toward a More Pragmatic Knowledge Management: Toyotas Experiences in Advancing
Innovation, Cavaleri contributes by examining how pragmatic principles used by Toyota can achieve
superior innovation results. The chapter concludes by explaining why the pragmatic approach delivers
superior performance at lower cost than conventional knowledge management methods.
In Chapter 19, Knowledge and the Politics of Innovation: Insights from a R&D Company, Asi-
makou discusses the relationship between knowledge management and innovation; and specifically,
she examines how knowledge in organizations affects the creation of new knowledge and what the
implications are for innovation management. The chapters core argument is that in a knowledge-based
company, where competition is assessed at the edge of rare expertise and the development of innova-
tions, knowledge, which is always interwoven with power, becomes a precious resource, on the grounds
of which struggles are inevitably enacted over its control. To support such an argument, the chapter
xxviii
discusses two innovation mechanisms in two business groups of a major oil company. The study uses a
set of qualitative techniques for data collection (in-depth interview, participant observation, documen-
tary analysis) and a sample of 41 employees that represent the groups participating in the innovation
game (manager, scientists, assistant scientists, administration staff and students). From the results, the
author concludes that two mainstream innovation management approaches (the rational planning and
the cultural approach) have shaped the understanding and actions of the Business Groups in setting up
the innovation mechanisms; however, power struggles at the individual, group and organizational level
impacted upon the innovation processes to the extent that the latter became passive technical solutions.
In Chapter 20, Innovation and Knowledge Management for Sustainability: Theoretical Perspec-
tives, Jorna and Faber explain that innovation is a special case of knowledge management; it is about
knowledge creation. With economic profit as its driving force, innovation is mostly short term and
commercial, feeding the question whether innovation really can be applied to ecological and social
systems. The problem concerns the goal of innovation: what does it suppose to realize? From such
constraints, the authors propose the study of a combination of Knowledge Management (KM) and in-
novation concepts with sustainability and they argue that as long as the emphasis in innovation is on
profit and not on people and planet (the three Ps of sustainability) there is no guiding mechanism
for innovation, namely the existence of a sustainable future. They also explain that in a sustainable
perspective, innovation becomes an instrument that benefits society at large. Based on these perspec-
tives and literature review, the authors contribute along three lines of thinking: (i) by demonstrating that
innovation is knowledge creation at an individual and collective level; (ii) by explaining that innovation
should be a means and not a goal; (iii) and by offering a perspective to define the relationship between
knowledge, innovation and sustainability. The authors conclude the chapter by introducing concepts on
Knowledge of Sustainability (KoS) and Sustainability of Knowledge (SoK), and they set the outline of
a framework for sustainable innovation.
In Chapter 21, Dynamic Capabilities and Innovation Radicalness: Review and Analysis, Cruz-
Gonzlez, Navas-Lpez, Lpez-Sez, and Delgado-Verde provide theoretical analyses on the determinants
of firms innovation radicalness (the degree of novelty incorporated in an innovation) from a dynamic
capabilities-based view of competitive advantage. The authors start by reviewing the many literature
facets and concepts of dynamic capabilities. From such a review, they argue that dynamic capabilities
(or second order capabilities) arise from the firms orientation or ability for knowledge exploration that
can result in the creation of new organizational capabilities (first order capabilities). By deepening on
this exploratory learning argument, they also suggest that external knowledge acquisition and internal
knowledge combination are key components of dynamic capabilities.
Section 5 on R&D&T (Research, Development and Technology)

Management and Innovation Subsumes Four Chapters
In Chapter 22, Research Profiles: Prolegomena to a New Perspective on Innovation Management,

Jordan, Mote, and Hage explain that despite the increasing importance of the management of research
for innovation, the range of differences among types of research, as well as projects and programs, are
not adequately captured in current theories of either project or organizational innovation. In this chapter,
the authors offer preliminary discussions for a new perspective about alternative styles of management
for different types of research, whether basic, applied, product development, manufacturing, quality
control or marketing. Based on these discussions, the chapter proposes a framework for a new perspec-
xxix
tive of innovation management, called Research Profiles, which is derived from a literature review
and extensive field research. This new perspective delineates four research profiles on the basis of two
dimensions of research objectives and two dimensions of research tasks. In matching the research objec-
tives and tasks, the authors identify inherent dilemmas that managers must address and this developing
perspective suggests appropriate some research management approaches.
In Chapter 23, Determinants and Consequences of R&D Strategy Selection, Filipescu and Czares
explain that nowadays firms are not able to achieve all innovation in-house due to the specific set of
technologies required by most products and processes, obliging firms to access external knowledge.
In this chapter, the authors contribute to the knowledge on firm innovating behavior by: (i) analyzing
the determinants of the selection of the Research and Development (R&D) Strategy (all abbreviated
by RDS), considering the make, buy and make-buy as the three RDS types; (ii) and also analyzing the
consequences that each of the RDS types has on firm innovativeness. Results show that commercial and
organizational resources, jointly with the information sources, influence the selection of the strategy.
As for the second part of the analysis, the authors see that all RDS types have positive effects on firm
innovative performance but these effects are not straightforward and simple since they vary depending
on firms type and on the radicalness of the innovation.
In Chapter 24, Institutional Innovation Practices in Technopoles: An Example in France, Berthinier-
Poncet, Bocquet, Brion, and Mothe contribute by filling a void in the literature on the question on whether
organizational proximity can be fostered within clusters. With the objective to gain new insights into
institutional practices and to evaluate their effects on firms innovation performance, the authors address
a dimension that has received little attention until recently, which is named the local governance struc-
tures of technopoles. They explain that by identifying how geographical and organizational (cognitive
and relational) proximity interrelate in the analysis of cluster forms, the chapter seeks to contribute to
the burgeoning literature on the different types of proximity. For such a purpose, the authors performed
an empirical research that was based on a representative sample of 88 firms implanted within the Savoie
Technolac technopole, in the French Rhne-Alpes region. The results suggest that, even though local
governance contributes to territorial anchoring, only the local labor market has a direct significant impact
on the firms innovation performance. Additionally, it was found that territorial anchoring combined with
the roles played by governance in terms of matchmaking and support for technology transfer signifi-
cantly increased the number of innovation projects. The authors emphasize that these results suggest
that governance has a decisive role in the creation of communication and interaction structures between
firms, which are essential for firm innovation; and that, this research may have important implications
for governance modes, not only in technopoles, but also more generally in clusters.
In Chapter 25, Choosing Locations for Technology and Innovation Support Centers: Methodological
Proposal and Brazilian Studies, Batalha, Santos, Alcntara, and Granemann discuss problem-solving
issues of location of Technology and Innovation Support Centers (TISC) through multi-criteria analyses
in order to identify demand and supply factors of these services. The authors use quantitative and quali-
tative methods to establish a sequence of steps that include a variety of aspects ranging from criteria
preferences to global valuation of the model. Multi-criteria analysis is applied to the choice of geographic
locations for Brazilian Technology Centers; this analysis contributes to identify the most suitable or
preferable regions for the creation of technology centers as well as to reveal particular characteristics
of the dynamics of such services in the regions in question.
xxx
Section 6 on Marketing and Innovation Subsumes Four Chapters
In Chapter 26, Taxonomy of Marketing Core Competencies for Innovation, Viardot argues there is a
lack of taxonomy of the various marketing capabilities that are necessary to achieve the market success
of innovation. Therefore, the author tries to fill this gap by proposing a model that subsumes two classes
of Marketing Core Competencies (MCC) for successful innovative companies. The first category of core
competencies is related to a superior ability of the firm to identify and to connect the actual market needs
with the innovation during the preparation of the new product launching phase. Once the innovation is
on the market, a second group of core competencies is associated with the capacity of the firm to ease
the customers tensions in order to facilitate the acceptance of the innovation and turn it into a market
success through adoption and diffusion. In conclusion, the chapter underlines the importance of the place
of these two categories of Marketing Core Competencies (MCC) in innovative firms.
In Chapter 27, Self Regulation on Innovative Products Choice, Prado, Lucena da Silva, and Korelo
explore how choice goals influence consumers innovativeness in a product category domain. They explain
that intentions to adopt new products are guided by promotion and prevention self-regulation systems.
Therefore, in the investigation of the chapter, two of the choice goals were classified as promotion goals
justifiability and choice confidence and two were classified as prevention goals anticipated regret
and evaluation costs. Two groups emerged from the analysis: one named most innovative and another
called less innovative. The authors explain that when comparing the groups, the results show that
the most innovative cluster demonstrated higher choice confidence, higher justifiability and was more
capable of avoiding a possible choice regret. The differences found in the group analysis highlight the
need of understanding in further detail how consumers behave during the choice process of innovative
products. Therefore, the Regulatory Focus Theory has been shown to be very important for understand-
ing the choice process, especially for the innovation adoption.
In Chapter 28, The New Product Development Process as a Communication Web Part I: Intro-
duction, Concepts and Spanish Context, Fernndez, Varela, Bande and Valmaseda contribute with
the existing literature by analyzing the innovation activities of Spanish companies and by proposing
New Product Development (NPD) as a communication Web. Based on literature reviews, the authors
propose a model that relates the external communication of cross-functional teams to the performance
of NPD programs. The composition of NPD teams and the external communication activities form the
core competencies for companies and they can provide them with major competitive advantages. The
chapter also provides the necessary introduction and background to the understanding of next chapter.
In Chapter 29, The New Product Development Process as a Communication Web Part II: Analysis
of Spanish Firms, Fernndez, Varela, Bande and Valmaseda extend the investigation in the previous
chapter by applying structural equations analysis in order to compare the model to a sample of 136
managers from different functional areas at 121 innovative Spanish firms. The authors explain that the
results indicate that the impact of explanatory variables on new product programme performance dif-
fers according to the measure of performance considered. The cross-functional nature of NPD teams,
the presence of product champions in NPD teams and the gathering of information by all NPD team
members were all shown to positively influence new product performance. Firms should be aware of
the importance of the aforementioned variables.
xxxi
Section 7 on Finance and Innovation Subsumes Two Chapters
In Chapter 30, Innovations and Financing of SMEs - Part I: SME Financing and Credit Rationing [The
Availability of Funds], Walker and Scholz describe various financing options and give rationales for
the credit rating process and credit conditions building the base for financing decisions. Furthermore,
by discussing the topic of Credit Rationing, the authors demonstrate the impact of credit conditions on
management decisions in order to justify the rationing of credits. This chapter also provides the neces-
sary introduction and background to the understanding of next chapter.
In Chapter 31, Innovations and Financing of SMEs - Part II: Case Study of German SMEs in 2010,
Walker and Scholz describe traditional and non-traditional financing opportunities for SMEs in Germany
by focusing on its applicability. They explain that the disclosure of financial business information and
giving a say to an equity financier is a difficult topic for owners of Small and Medium-sized Enter-
prises (SMEs), because these companies are often run as a one-man-show (by a single manager) and
this person identifies itself with the company. The request for external funds is in that perspective still
regarded as a disability of a business to be self-financed. A comparison of the organizational structure
of a SME and that of a Large Scale Enterprise (LSE) reveals the structural weaknesses in terms of re-
search and development (R&D) activities. While LSE have an extra department, budget and procedures
to develop product and process innovations similarly to a knowledge push, in SMEs, innovations are
often originated from customers - similarly to a need pull process. Furthermore, CEOs and customer
contribute to a great extend to innovations in SMEs (BDI, 2010). The results of an online-based survey
presented in the BDI-Mittelstandspanel 2010, show that less than 13% of innovations are originated
by external scientists, R&D organizations and consultants. This proves that external R&D sources (to
compensate missing internal resources and structures) are rarely employed; impeding or slowing down
the development of innovations.
Section 8 on Internationalization and Innovation Subsumes Two Chapters
In Chapter 32, The Recent Internationalization of Brazilian Companies, Arbix and Caseiro explain that
the recent wave of internationalization among Brazilian companies differs from past experiences, in
terms of volume, reach, destination and quality. Brazilian multinationals are not restricting their activities
solely to regional markets, nor are their first steps entirely directed towards South America. In amount
of investment and number of subsidiaries there are signs they prefer assets and activities in advanced
markets including Europe and North America - where they compete on an equal footing with major
conglomerates for a share of these markets. Some Brazilian companies have previous internationalization
experience, and a significant portion had been prepared and initiated outward growth in the 1990s, after
the economy opened up. However, the boom of internationalization that began in 2004 took place in such
unusual conditions as to deserve highlight and special analysis. The authors contribute by discussing
the recent expansion of Brazilian multinationals as a result of: (i) the functioning of a more responsive
and targeted system of financing, (ii) transformation of the Brazilian productive structure, which led to
the emergence of a group of companies seeking internationalization as a strategy, (iii) preference for
seeking more advanced economies as a means to expand access to new markets and suppliers, as well
as to absorb innovations and technology, (iv) the States performance in several dimensions, especially
in financing the implementation of policies that support the creation of large national groups with a
presence in the globalized market.
xxxii
In Chapter 33, R&D Internationalization as Mechanism of Innovation in Global Enterprises: A

Brazilian Case Study, Galina explains that internationalization of Research and Development (R&D)
allows transnational companies (TNC) to access different and important resources overseas, which may
lead to the improvement of their technological innovation. The literature in this field was mostly created
from studies of TNCs coming from developed countries. In this chapter, Galina contributes by present-
ing some of the main topics the literature addresses on R&D internationalization, and which are used
to explore and to verify how companies in developing countries internationalize their R&D activities.
In order to do so, the author conducted a bibliographic review about strategies of internationalization
of TNC operations, as well as motivating factors and management of R&D internationalization. The
chapter finishes presenting a case study about international R&D conducted in a Brazilian TNC. The
results enabled to evidence that, like developed countries TNCs, developing coutries companies also
seem to perform internationalization of R&D activities with very similar characteristics.
Section 9 on Information Systems and Innovation Subsumes Two Chapters
In Chapter 34, Tools That Drive Innovation: The Role of Information Systems in Innovative Organiza-
tions, Caudill examines computer technology as a tool to support innovation and innovative processes.
The author explains that the primary problem addressed in the chapter is the multitude of widely held
misconceptions that seem to exist regarding technology and innovation; whereas technology is not in-
novative in and of itself. The chapter contributes by examining how technology is being successfully
integrated into innovative processes in industry through literature review and case study methods. Spe-
cifically, this chapter focuses on the role of technology in communication and creativity, two of the many
activities found in an innovative process. Findings indicate that while directly connecting technology
use to innovation is difficult, technology can play a substantial role in facilitating the innovative process.
Thus, the author concludes that technology is a qualifier for many innovative processes, a resource that
is necessary for the work of innovation to take place.
In Chapter 35, The Roles of Cognitive Machines in Customer-Centric Organizations: Towards In-
novations in Computational Organizational Management Networks, Nobre proposes innovative features
of future industrial organizations in order to provide them with the capabilities to manage high levels
of environmental complexity in the 21st century. For such a purpose the author introduces the concept
of Computational Organization Management Networks (COMN), which represents new organizations
whose principles of operation are based on the concepts of Hierarchic Cognitive Systems (HCS) along
with those of Telecommunications Management Networks (TMN). Structured with functional layers
and cognitive roles that range from technical and managerial to institutional levels of analysis, and also
equipped with operational, managerial and strategic processes, the concept of Computational Organization
Management Networks (COMN) plays an important part in the developments of future organizations
where cognitive machines and Cognitive Information Systems (CIS) are prominent actors of gover-
nance, automation and control of the whole enterprise. It is in such a context that the new organization
COMN will provide customers and the whole environment with innovations such as immersiveness for
the production of services and goods that are most customer-centric.
xxxiii
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ENDNOTES

i
Just as capitalism replaced feudalism, Marx and Engels believed socialism would, in its turn, replace
capitalism, and lead to a stateless, classless society called pure communism (Baird, 2010).
ii
Consider for instance the expansion of Europe between the 15th and 18th centuries, which was em-
powered by the dominance of the colonizers in navigation and army technologies. Their overseas
discoveries and actions brought about a revolution in the history of humanity, resulting in good,
but also negative and controversial results of political, economic, religious, and social facets for
the new world (Delouche, 2001; Ribeiro, 1970, 2000).
iii
Resources can be associated with tangible and intangible assets that contribute to the production
system in the organization (Hitt, Ireland & Hoskisson, 2008). This book expands this definition
to the perspective that resources are organizational elements that involve social structure, goals,
technology and participants (Scott, 1998: 17-22). These resources can be employed at the techni-
cal, managerial, institutional and worldwide levels (Nobre, Tobias & Walker, 2009: 47-49) by
the organization through the use of the organizational abilities for the development of the core
competencies, and, consequently, for the creation of dynamic innovation and sustenance of the
xxxvi
organizations development. In such a perspective, the organization manages its resources with
basis on its strategy. Moreover, the organization interacts with the environment for the acquisition,
processing, creation, distribution, employment and management of new strategic resources.
iv
Cognition, intelligence, autonomy, learning and knowledge management represent the set of or-
ganizational abilities (Nobre, Tobias & Walker, 2010). These abilities have an important role in
the deployment and management of the organizations strategic resources and they also represent
sources of development of the organizations core competencies (Nobre & Walker, 2011); whereas
this perspective is based on the strategic context of the resource-based view (Wernerfelt, 1995)
along with dynamic capabilities of the firm (Teece, 2007; Teece, Pisano & Shuen, 1997).
v
Sustainability means the ability to meet the needs of the present without compromising the ability
of future generations to meet their needs (WCED, 1987).
xxxvii
Acknowledgment
In the role of Editors (Farley S. Nobre, David S. Walker, and Robert J. Harris), we would like to thank
all the participants in this international book.
The process of invitation and selection of the participants started in January of 2010 and finished
in February of 2011, resulting 35 accepted chapters. We could account about five hundred invitations
approximately! We sent Calls for Proposals and Full Chapters directly to Professors and Graduate Stu-
dents of well-known worldwide Universities, Firms and Institutions as well as to researchers who are
the authors of recent published papers by well-known international journals on the subjects of the book.
The selection process of chapters was characterized as vast and strictly competitive since it was based
on a system of blind-reviews and technical criteria of evaluation.
Therefore, we are very pleased to thank the Authors, the Editorial Advisory Board (EAB) Members,
the Reviewers, and the Publisher for their interest, diligent work and contribution in this international
project.
In particular, we are indebted to Professor William H. Starbuck (University of Oregon and New York
University, USA), Alan Meyer (University of Oregon, USA), and Colette Henry (The Royal Veterinary
College, University of London, UK) due to their contribution in the writing of the Forewords. We also
express an inestimable gratitude for Professor William H. Starbuck who supported Farley S. Nobre in
the constructive discussion and writing of Preface.
We are pleased to acknowledge the authors and EAB members of the book, and in particular to
whom has served this book with distinguished blind-reviews and important recommendations which
most contributed to improve the overall quality of the project.
We also would not forget to acknowledge all the IGI Global staff due to their attention and services
provided in this publication, and specially, we are very grateful to Mr. Joel Gamon who continuously
supported our questions and advised on this publication.
Finally, we are grateful to our affiliation institutions: Federal University of Parana (Brazil), The
University of Birmingham (UK), and The University of Wolverhampton (UK).
Farley Simon Nobre

David Walker
The University of Birmingham Business School, UK
Robert Harris
The University of Wolverhampton Business School, UK
Section 1
Sustainability and Innovation
1
Chapter 1
Environmental Rationality:
Innovation in Thinking for Sustainability
Enrique Leff
Universidad Nacional Autnoma de Mxico, Mexico
ABSTRACT
Renovating our thinking as humankind (rethinking nature, culture and development) is an imperative to
approach the challenges of environmental crisis and to orient the social construction of a sustainable
world. If environmental crisis is a predicament of knowledge, beyond the task of reinventing science,
innovating technology and managing information, we must face the challenge of inventing new ways of
thinking, organizing and acting in the world; of reorienting our ethical principles, modes of production
and social practices for the construction of a sustainable civilization. Innovation for sustainability is
drawn by alternative rationalities. I will argue that rationality of modernity has limited capacities to
reestablish the ecological balance of the planet, while environmental rationality opens new perspectives
to sustainability: the construction of a new economic paradigm based on neguentropic productivity, a
politics of difference and an ethic of otherness. Paramount to this purpose is the contribution of Latin
American Environmental Thinking.
INTRODUCTION and Darwinian biology thought nature as the

evolution of life forms. Innovation became the
Since Antiquity, the cosmic, natural, biological core concept of such emergence in the modern
and social order, have been conceived as an ongo- social order, as a result of the Enlightenment of
ing process of emergence. Thus, metaphysics Reason that intended to brighten the darkness of
thought ontology as the generativity of physis the Middle Ages, to bring transparency to reality
through true knowledge, to make conscious the
DOI: 10.4018/978-1-61350-165-8.ch001 unconscious and to enlighten the human soul. In-
Copyright 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Environmental Rationality
novation is in the heart and at the roots of modern should not only promote innovations in science,
rationality; it is what mobilizes progress as a knowledge management, technological change
self-contained process within the rationality that and behavioural shifts, but we must derive new
produced it. Thus, innovation became a mecanism ways of thinking the world, new ethical prin-
inbuilt in economic rationality for the continuous ciples and new forms of knowing to orient new
renovation of the conditions of production and modes of production and social practices for the
the unlimited expansion of the economy with the construction of a sustainable civilization. That is
purpose of granting to humanity the well being what environmental rationality intends to offer to
promissed by modernity. the world in crisis (Leff, 2001, 2006).
Modernity is thus defined as the era of prog- Innovation of knowledge has been established
ress, of development, of novelty that ages and is in the economic world order and in the social sys-
renewed in unprescedented forms, in an infinite tem as an already in-set mechanism that produces
process that demands unendless creativity and novelties triggered by a mode of thinking that is
that gears the rationalization of social organiza- developed in the way that science is finalized by
tion towards its ends through unlimited growth. technology as the maturing of its theoretical prin-
Thus unquestionned, innovation was inscribed and ciples leading to their technical applications for the
institutionalized in economic rationality; it was solution of socio-economic problems (Bhme et
embodied in our mode of thinking and imbedded al., 1976); or the wy in which Bachelard thought
in our mode of production, until it reached the of the new rationalism as the incorporation of the
limits of nature and of human life. The environ- conditions of the application of a concept in the
mental crisis unveiled the unsustainable trends of sense of the concept itself (Bachelard, 1949). Thus
the economic process: the entropic death of the the real economy is the expression of economic
planet, the erosion of living forms, the degradation rationality: a world system revolving in its same
of life supporting ecosystems and the fading out axis and closed in itself.
of the meaning of life. If knowledge is thus geared and oriented by its
Can this crisis of modernity be solved by the internal motives and the inertia of its trends towards
reflexion of modernity over its theoretical and the growth of the economic system, then, to what
scientific foundations, over its technological and extent can scientific revolutions and technological
instrumental means: by revolutions of science and innovation readapt to the ecological conditions
management of positive knowledge; by innova- imposed by the laws of nature and cultural mean-
tions in technology and developments in social ings to open civilization to a truly sustainable
organization? Is ecological and complex thinking world order? This impasse in the self-reflection of
an emergence that can innovate and ecologysze a modernity over its own matrix of rationality leads
new world order? Is environmental rationality a us to inquire if a change of rationality is needed
new conception of human life on Earth that can and if such a novelty in human history is possible.
guide the social construction of a sustainable We should ask ourselves if a sustainable future
future? can be contained in the dialectical trascendance
The purpose of this chapter is to reflect on the of the present world already inscribed in in the
key importance of innovating in the ways of think- becoming of Being drawn by the destiny of the
ing our place as human beings in our living planet techno-economic rationality that organizes the
(our thinking on nature, culture and development) present world order challenged by environmental
to be able to face the challenges of environmental crisis and unsustainanbility, or if new thinking
crisis and to orient the social construction of a can bring about and open new paths towards the
sustainable world. If environmental crisis is at construction of a sustainable world order.
its origins and its basis a crisis of knowledge, we
2
The problem to be approached is that of under- visions that rule the modes of production
standing the unsustainability of the established, and juridical rules that rationalize de World
dominant and hegemonic ways of constructing the lives of the people.
world we live in: that of economic, scientific and 2. Instrumental and practical rational-
technological rationality that organizes the actual ity (zweckrationalitt), that organizes the
world order; to think the possibilities of decon- methodical pursue of certain practical and
structing this dominant rationality and of thinking, predetermined ends through the precise
putting into social action and constructing a new calculation of efficient means.
social order: a new agreement with nature based 3. Substantive rationality, that organizes social
on environmental rationality. actions based on value principles, which vary
in their internal content, comprehensiveness
and consistence; these values are irreduc-
SUSTAINABILITY, RATIONALITY ible to a scheme of relations between ends
AND THE SELF-REFLECTION and efficient means. Substantive rationality
OF MODERNITY internalizes cultural diversity, axiological
relativity and social conflict in the face of
The transition to sustainability is a social challenge different values and interests (Weber, 1978).
demanding innovative thinking. However, tack-
ling innovation for sustainability implies a clarifi- The challenges of sustainability call for many
cation of concepts. Sustainability has irrupted as different areas of innovation: innovation in theory
an unexpected emergence in our consciousness, and science from where new paradigms are emerg-
our discoursiveness and our ethics; our social ing: environmental and ecological economics,
organization and dayly practices. Sustainability the science of climate change, systems theories,
has become an imperative for survival for the energy saving systems and clean production
reconstruction of the relations of nature with technologies, etc. Dematerialization of produc-
culture and as a search of new meanings for life. tion calls for innovation in production processes
But, how is innovation embedded in rational- through eco-efficiency to optimize the amount
ity? We may define rationality as the complex of matter that enters the productive process and
order of social procceses, as a system of rules is degraded in its throughput; to minimize the
of thought and behaviour established within entropic degradation of energy in the extraction,
economic, political and ideological structures industrial transformation, agricultural produc-
that legitimize and orient social actions and give tion, recycling of waste, and in the consumption
meaning to society as a whole. These rules and processes involved in the overall metabolism of
structures guide social practices and processes nature. Thus, new areas of innovation are emerging
towards certain ends, through socially constructed within the prevailing rationality of modernity, in
means, which in turn reflect in moral norms, cul- what mainstream sociology denominates reflec-
tural beliefs, institutional arrangements and modes tive modernity (Beck, Giddens & Lash, 1997).
of production. Rationality is thus organized in 3 Reflective modernity calls for a reorganization
main orders of rationality: of the social system in order to ensure its stabil-
ity and sustainability: that is for the ecological
1. Formal and theoretical rationality that reestructuring and refunctioning. However, a
organizes the conscious control of reality difference must be established between the vari-
through the construction of abstract concepts ous theoretical and practical areas of innovation
that constitute rational orders and cosmo- activated by reflective modernity for the transi-
3
tion towards sustainability. Here different forms of Innovation most clearly refers to the applica-
creativity are involved, from novelty in live forms tion of knowledge to new ways of reorganizing
emerging from the technological intervention in an already objectified and rationalized world,
biological organization and anthropogenically from the application of its scientific principles
induced environmental changes, to creativity in and technological developments, to process man-
the realm of thought: from scientific paradigm agement and product design, rather than to the
shifts and methodological innovations to cultural breakthrough of ideas of new modes of thinking,
changes and social reorganization. of understanding the creativeness of nature and
Reflective modernity intends to activate and the reinvention of cultural identities. Innovation
make use of different philosophical sources and can be defined as the purposeful organization of
scientific and technological resources to solve knowledge for the production of new means for
the socio-environmental problems generated by the efficient management of processes, guided by
modernity, by the cultural imprint and the eco- the principles of instrumental rationality. Thus,
logical footprint generated by the application of sustainable development, as an emergent social
knowledge within its prevalent rationality. This goal, has triggered a broad array of innovative
reflective process certainly has generated an processes in science and technology.
enormous outburst of innovations: for conserva- Innovation is by essence and definition tech-
tion ecology, energy saving technologies, green nological, managerial and organizational novelties
production systems, economic instruments for brought about by applying knowledge through
environmental management. These innovations creative thinking to new problem-solving areas,
are currently inscribed in a new geopolitics of to make processes more efficient, to use new
sustainable development (Kyoto Protocol, Clean materials, to apply new methods. In this sense,
Development Mechanism, economic valuation sustainable development is a global goal that
of environmental goods and services, including involves and activates changes in scientific and
carbon sinks). technological paradigms, in patterns of production
In the academic litterature, the term innovation and consumption behaviours.
has arisen from the entrepreneural and managerial Knowledge has become a tradable good and
world, as the creative application of knowledge as such, subject to innovation drawn by economic
to production. Novelties in thinking (schools of purposes and not by a pure epistemophilic drive.
thought or philosophical traditions) are seldom Innovation of knowledge became the objective
conceived as innovations. In the field of science, of managing the optimal harmonization of the
changes of paradigms are refered to as scientific productive factors, of guiding entrepreneurship
revolutions, rather than innovations in knowledge for financing and marketing tradable goods where
(Kuhn, 1962). It would seem even more awkward knowledge and information systems have become
to refer to cultural changes as innovations even strategic means of production. Thus, the manage-
those induced by the technoeconomic intervention ment of knowledge has become the basis of the
on nature, such as cultural changes from forced technological, managerial and organizational core
adaptations to climate change; the emergence of competencies of the organization in the pursuit of
new entities (cyborgs), hibrids of organic, tech- dynamic innovation and sustainable competitive
nological and symbolic orders in the reinvention advantage.
of nature (Haraway, 1991); or the reinvention Innovation is the creative processes involved
of identities resulting from cultural strategies to in producing something new, especially something
readapt to the processes of globalization. useful and with economic value. Innovation brings
emergent and even radical and revolutionary
4
changes in production organization: a new good, & Stengers, 1984), the novelties emerging from
a new technology, new production systems and Nature can be distinguished from the discover-
commercialization methods. However, following ies of science and the inventiveness of culture;
Schumpeter (1934), the scholarly literature on from the creativeness of art, the productiveness
innovation distinguishes between invention an of economy, the innovations of technology and
idea made manifest and innovation ideas ap- the originality of design.
plied successfully in practice. Innovation in the Innovations are productions that because of
field of economics implies the production of new their novelty can be registered as property rights.
organizing methods and technologies that increase Although creative thinking is claimed to be uni-
economic value. Innovation leading to increased versal knowledge, with the progress of techno-
productivity, through research and development, is scientific knowledge and its application to the
the fundamental source of wealth in an economy. workings of the economy, these innovations have
Invention is the embodiment of a new idea. It become patented and tradable knowledge, thus
is the outcome of research or practical inventive- distinguishable from scientific and philosophical
ness that can be embodied in a paradigm shift knowledge, as well as other forms of knowledge
that reorganizes knowledge, or a new prototype and wisdom which have a more intrinsic value.
or design that is patentable. Inventions become However, with the over-economization of the
innovations when they are developed and put modern world these traditional or non-marketable
to use effectively in a new social, economic or forms of knowledge are becoming targets of an
commercial reorganization. Innovation involves extended ecological global economy. Thus the
creativity, but not all outputs of human creativity emergence of tradable knowledge over environ-
are innovations. Innovation involves acting on the mental goods and services, or the appropriation of
creative ideas to make some specific and tangible indigenous knowledge by ethno-bio-prospecting
difference in the objectified reality, resulting in carried out by biotechnological enterprises (Bell-
new or altered processes within the economic or- mann, Dutfield & Melndez-Ortiz, 2003).
ganization, or changes in the products and services
provided. Through these varieties of viewpoints,
creativity is seen as the basis for innovation, and INNOVATION FOR
innovation as the successful implementation of DEMATERIALIZATION
creative ideas within an organization.
An innovation can be distinguished from an Undoubtedly, the main driving force that orients
invention or a scientific discovery by the fact innovation processes towards sustainability goals,
that an innovation is defined by an applicative is the geopolitics of economic globalizaton and
perspective. The scientific enterprise intends to sustainable development that has been set-up
discover the internal workings of reality; theory since the UN World Conference on the Human
uncovers the organization of the real. Through Environment in 1972, to the Johanesbourg Summit
theoretical models and empiric experimentation, on Environment and Sustainable Development in
science constructs the laws that rule the functioning 2002, through the Eco-Rio Conference in 1992 and
of the world: reality. Innovation in the economy all their outcomes (Agenda 21, MEAs, Conven-
and in technology is not an act of discovery, but tions on Biodiversity and Climate Change, Kyoto
of application and reordering of available knowl- protocol, Clean Development Mechanism, etc.)
edge of the World to generate a novelty. From the that configure today the dominant vision, strategy
generativity of matter, to epigenesis in the evolu- that rules the World and national environmental
tion of nature, to ordering from chaos (Prigogine policies.
5
Within that scope, one major project that has set ecological economics: (a) The human economy
in motion more specific actions towards techno- must be constrained to function within the limits
economic and managerial innovations has been of the environment and its resources and in such
the one to dematerialize production, set in motion a way that it works with the grain of, rather than
by the Wuppertal Institute in 1993, and followed against, natural laws and processes; (b) We must
by the Factor 10 Institute founded in 1997 fol- adjust our wealth and prosperity-generating
lowed by the International Factor 10 Innovation machine to operate within the guardrails of the
Network in 1998. Ernst Ulrich von Weizscker laws of nature; (c) if too much environmentally
(1997) published his idea of dematerializing by a dangerous material escapes at the back-end of an
Factor 4, advocating a resource strategy founded economy, one should curb the input streams of
on reducing resource use by means of what he natural resources at the front end of the wealth
called efficiency revolution. This idea was machine.
challenged and further developed by Friedrich Schmidt-Bleek thinks it is the rucksack of
Smidt-Bleek, who proposed a tenfold demateri- finished products rather than the process of manu-
alization of western technologies on average as a facturing what determines the overall resource
conditio sine qua non for approaching economic intensity of the economy; he recognizes that life-
sustainability. To achieve that goal, by 2050, the sustaining services of the environment cannot be
worldwide average per capita consumption shall generated by technology at any cost, and that the
not exceed 8 tons of material per year; a per present price situation allows only rather limited
capita ecological footprint of 1.8 has, a per capita dematerialization moves under profitable condi-
consumption of 5-6 yearly tons of non-renewable tions. Yet he affirms that Sustainability is won
material resources and an emission of CO2 not on the market or not at all. (Schmidt-Bleek, p.3).
exceeding 2 tons per year per person. These In practice, dematerialization implied the cal-
sustainable economic conditions could only be culation of the limited materials that the Earth can
reached by increasing the resource productivity offer and the overdose of nature that enters and is
of the industrialized countries (Schmidt-Bleek, consumed by the economic machine. Measured as
2008). If the worldwide consumption of nature Material Input per Service rendered at the micro
had to be reduced by a factor of 2, but up to 8 level (MIPS), total yearly material flows (TAPS)
million people had to grow in order to satisfy and cost per unit service or utility (COPS), the
their basic needs intended by the market economy Factor 10 project intends to reduce material flows
in place, then the industrialized countries had to and increase resource productivity in a service
make the extra effort to dematerialize by a factor oriented economy.
of 10. If the advanced economies are the societies And the work to do was delivered to faith in the
of knowledge of our times, how could they doubt workings of the market economy and technologi-
their capacities to trigger the innovations neces- cal innovation. There is no hint at deconstructing,
sary to reach the desired sustainable economy? but only mending and reshaping the established
Thus, within the prevalent rationality, and with wealth machine. From the fact that the economy
the intent of reestablishing the ecological balance will not listen and adjust to the imperatives of
in the economy, a campaign for eco-innovation nature, that it will not reach by consciousness
was launched1. and planning a steady state that would allow for
The basic assumptions and imperatives upon ecological balance, then the next step has been to
which this intended dematerialization was based call for de-growth and de-coupling the economy
on were no other than the wishful thinking prin- from nature, a step back again to the false pre-
ciples of some of the first and main proponents of tention of having an economy working delinked
6
away from nature. And with more arrogance than SUSTAINABILITY AND INNOVATION:
critical spirit and openness to other thinking, ENVIRONMENTAL RATIONALITY
experiences and practices, he pontificates with AND REVOLUTION OF KNOWLEDGE
Eurocentric pride that
Innovation is the inbuilt mechanism that mobilizes
Europe may be the only region in the world processes within a structured system and drives
where the necessary experiences, both shameful it towards its prescribed and embodied ends. In
and brilliant, have sprung from its history, and economics, innovation occurs as a technological
where the human and technical genius exists change or reorganization of processes that re-
to lead humankind toward a more sustainable news the productive capacities of the system and
future. (Ibid.) expands them for the use of new materials, the
implementation of new instruments, the design
As we will see in what follows, there is some- of new products, the creation of new needs and
thing more to expect of alternative knowledge, the management of the productive forces. But
thinking, experiences and practices from other innovation within the rationality that has cradled
corners and latitudes of the planet that are open- and triggered its potency, does not lead to sustain-
ing new perspectives for the social construction able development. By ignoring and neglecting the
of sustainability. ecological limits and the environmental conditions
From the standpoint of environmental rational- for a sustainable economic process, the innovation
ity and the perspectives to sustainability conceived of productive forces under the prevalent economic
in the South, eco-innovation appears more as a rationality has driven an environmental crisis
will to de-grow the economy than to refurnish and (Leff, 1995, 2009a; Benton, 1996).
remodel it with ecological balances and energy Thus, the question of the contribution of
flow calculations, with ecological footprints and sustainability to innovation or innovation for
economic valuation instruments. The proposal sustainability should be inquired in its twofold
to de-grow the economy is based not only on an relationships but in a new perspective. It is not
increase of resources productivity, efficiency of sustainability, as an emergent objective, which
throughput and recycling and restriction in con- reorients innovation as an end prescribed in the
sumption, but on the innovation of new production tendencies and possibilities of the workings of
processes and consumption patterns (Latouche, modern rationality, those that were set at the insept
2006, 2009). Notwithstanding this broad program of its driving mechanism towards unsustainable
of de-growing, it remains a fatuous will if it is growth, as a way of dialectical transcendence
not based on a new productive paradigm. As in in the reflexivity of modernity. Thus, beyond
order to de-grow, the economy has to deactivate viewing sustainability as a new objective towards
the inbuilt mechanism that triggers growth. And which dynamic innovation should be oriented to
this implies the deconstruction of the established reconstruct an ecologized world order subject to
economic rationality in the global world order the constraints of the dominant economic order,
and the construction and legitimization of a new it should be viewed as a new condition of human
sustainable paradigm of production based on life that reorients innovation toward the purposes
the negentropic productivity of ecosystem local and goals of a sustainable social order founded
economies, and of an environmental rationality in a new environmental rationality.
based on a culture of diversity, a politics of dif- The construction of such environmental
ference and an ethic of otherness (Leff, 2008). rationality implies new thinking and a shift in
scientific theories. In this context, sustainability
7
has become the main attractor in the emergence solving knowledge that imply the articulation of
of interdsiciplinary paradigms of environmental a variety of theoretical paradigms and practical
sciences. These innovations in knowledge imply forms of knowledge. These efforts have brought
new methods of complex thinking, as well as the ar- about novelties in the management and application
ticulation and hibridization of different disciplines of available knowledge and induced innovations
and areas of knowledge, the application of new in research methodologies as those of complex
interdisciplinary methods to complex socioenvi- environmental systems (Garca, 1986, 1994). But
ronmental problems and the elaboration of new seldom do they imply a shift in scientific para-
interscientific objects of science. Thus, environ- digms, a revolution in knowledge or the invention
mental economics has evolved as a new branch of a new rationality by reflective thinking.
of mainstream economics for the crematistic The emergence of the ecological era in our
valuation of nature, extending its arms to embrace times carries with it and is rooted in a new epis-
environmental goods and services (Fisher, 1918; teme; this is not only the rearrangement of already
Pearce, 2002); ecological economics has emerged existing disciplines, but the eruption of a novelty
as a new interdisciplinary paradigm that intends in philosophy, methodology and science that can
to subsume economics as a subsystem in a more be conceived as a breakthrough in knowledge
embracing ecological system, where population and in human thinking. In similar ways as the
processes, technological innovation and changes development of knowledge in social sciences
in human behaviour merge in the remodeling of in modern times led to structuralism (Foucault,
economics (Costanza et al., 1991). 1970), post-structural knowledge is being codi-
In a more critical approach, Nicholas Georges- fied and reordered by an ecological understand-
cu-Roegen (1971) intended to innovate a new ing of the world order. This emergent ecological
economic paradigm that of bioeconomics, episteme influenced the new approaches to the
establishing the intrinsic link between the law of Ecology of the Mind (Bateson, 1972), complex
entropy and the economic process. From the limits thinking (Morin, 1980, 1993), Gaia Theory life
of biospheric resources and the ineluctability of as a self-regulatory systems in equilibrium with its
the law of entropy, sustainability has reflected as environment (Lovelock, 1979), the Web of Life
an imperative to lessen the amount of matter and (Capra, 1999), and autopoiesis governing self-
energy entering the global economic system and organizing processes (Maturana & Varela, 1994).
its metabolic throughput along the transforma- These inquiries have led to new paradigms of
tion of nature and its entropic degradation, today complex thinking on the interrelatedness of onto-
reflected as the threat of global warming and logical and epistemological orders and the creation
climate change. Thus, an imperative of technologi- of new ecological and environmental disciplines:
cal innovation has triggered new efforts towards human ecology, ecological economics, ecological
ecoefficiency, the increase in resource productiv- and environmental anthropology, deep ecology,
ity, a shift to renewable sources of energy and the political ecology, environmental sociology, envi-
recycling of waste (Hinterberger & Seifert, 1995). ronmental law, etc. These scientific disciplines,
The configuration of environmental knowledge discourses and bodies of philosophical thinking
has lead to the development of new scientific fields involve novelties arising from the convergence,
and environmental branches within the established articulation, hybridization of traditional paradigms
scientific paradigms; of new hybrid and interdis- while being ecologized and problematized by an
ciplinary domains of scientific research and new emergent environmental knowledge (Leff, 2001).
horizons of philosophical inquiry. Thus, we have In this process, the differentiation of concepts
seen a display of novel approaches to problem- referred to as novelties in thinking is becom-
8
ing somewhat blurred, once innovations in the In modern rationality, substantive, cultural and
different areas of human being, thinking, cre- scientific rationality have been subordinated to
ativity and intervention on nature have become the imperatives of formal logic, economic value
increasingly intertwined. Sustainability emerges and instrumental rationality that project the po-
in the crossroads of different forms of rationality, tentialities of the Real and the creativeness of the
in the hibridization of nature, culture, economy Symbolic towards the objectification of the World
and technology, of the real and the symbolic, and an unsustainable techno-economic process of
where nature and culture are increasingly being unsustainable growth. Environmental rationality
intervened by technological and economic ratio- is constructed from critical theory and ethical
nality. Thus, creativity in nature through natural principles that reorient the civilization process
evolution has yielded to biotechnology, where new towards sustainability.
forms of biological artifacts are being produced When environmental problems emerged and
by scientific-technological innovations drawn by economic growth and the World economic order
the global market economy. were questioned for their impact on environmental
This outcome of modern civilization is not degradation, back in the late 60s, the economy
the result of the evolution of nature towards an responded by asserting that the environment is
ecologyzed and complex world order. Environ- an externality of the economic system. In its self-
mental complexity (Leff, 2003) has emerged justifying eagerness, the economy confessed its
from the intervention of knowledge in nature, as fundamental flaw in building the economic process
a process of rationalization based on the axis of in a divorce from the natural, ecological, geo-
modern rationality that, by ignoring and external- physical, and thermodynamic order within which
izing nature from the social system, has fueled the it operates; that is to say, by ignoring its conditions
economic system towards unsustainable growth, of sustainability. In this way, an initial idea of the
environmental degradation and the entropic death environment emerged as an epistemological space
of the planet. Thus, sustainability demands new for the reencountering between society and nature,
thinking and the reorientation of the innovation to solve the disjunction between the object and
processes. Here is where environmental rationality the subject of knowledge and the split between
emerges planting its roots in new life territories and natural and social sciences.
viewing new horizons to guide social creativity A more careful investigation of the constitu-
towards the construction of a sustainable future. tion of the sciences as conceptual structures built
around a nucleus-object of knowledge led us to
understand the exclusion of the environment in the
REENCOUNTERING NATURE AND universe of the centred formations of modern
CULTURE: THE ENVIRONMENTAL sciences. From George Canguilhem and Jacques
EPISTEMOLOGICAL CHALLENGE Derrida, an epistemological inquiry unfolded that
was particularly fruitful in forging the epistemo-
Environmental rationality opens new perspectives logical basis of environmental rationality. Follow-
for the social construction of sustainability; it ing the perspectives of French critical rationalism
changes gears for the innovation process towards from Gaston Bachelard to Louis Althusser and
other purposes that depart from the inertial ten- Michel Foucault, an epistemological inquiry
dencies of modernity. Rationality, organized in its led to the positing of the environment not only
main orders of rationality formal and theoretical as a factual territory inhabited by living beings,
rationality; instrumental and practical; substantive but actually as the epistemic space bordering and
and cultural, change their meaning and priorities. surrounding the logocentric spaces of science.
9
Thus, the environment was defined as otherness proaching complex emerging socio-environmental
to dominant scientific rationality, beyond the problems (Leff, 2001).
holistic perspectives that were shaping theoreti- In the realm of theory, from the standpoint of
cal systems and emerging ecological thought. In environmental rationality, a new approach to inter-
this way, it was possible to transcend a merely disciplinarity emerged. Beyond the methodologi-
empirical and functional conception of the envi- cal purpose of articulating the actual paradigms
ronment, as the milieu surrounding a population, of science, the construction of new objects of
the economy and society. Beyond identifying knowledge was proposed. From a critical episte-
economic, political, and social causes tied to an mological perspective that derived from systems
array of socio-environmental problems pollution, theory conception of the environment as an exter-
deforestation, ecological degradation, soil ero- nality of the system, the environment was defined
sion, global warming, this epistemological view as the lack of knowledge of existing sciences, as
transcended the stance of systems theory and the the unknown to the logocentric organization of
holistic visions that led to a will for interdisciplin- science, as the external processes that influence,
ary integration of existing sciences as a method to condition and even determine the processes that
solve the fragmentation of knowledge associated sciences are concerned with, but that have been
to the environmental crisis (Leff, 2001). erradicated from their field of knowledge. An ex-
The environment was not, then, the junction emplary case of this externalization of material
of fragmented disciplines, focused on their own and symbolic processes impringing on a scientific
autonomous objectives of knowledge; it was not paradigm is that of economic theory, where nature
a simple environmental dimension, that could as a condition of sustainable production has been
be internalized within the systemic approaches simply ignored. The response to this fact in the
and planning practices based on the principles of history of science, is the reaction of economics
ecology, cybernetics and general systems theories, to construct a new discipline of environmental
that could be extended to other paradigms of economics by extending its traditional and main-
knowledge or serve as the unifying thread capable steram paradigm to embrace nature ecological
of weaving the transversality of environmental systems, environmental goods and services by
through into the dispersed and dismembered body recodifying nature as natural capital instead of
of knowledge, as suggested and posited by diverse integrating nature as natures Being: the ecological
authors (i.e., Sachs, 1972; von Bertalanffy, 1976; organization of nature; the laws of entropy that
Morin, 1980, 1993). determine the flows and degradation of matter
The environment was formed as a field of ex- and energy in the economic process.
ternality to the logocentrism of science, outside In the perspective of environmental rational-
the system of established scientific theories. From ity, a new economics was proposed. Following
that position, emerging environmental savoir the epistemological indagatories of George
problematizes the normal paradigms of science Canguilhem (1970, 1977) derived from critical
and promotes their transformation in order to rationalism, interdisciplinarity is thought, not
generate environmental branches of knowledge. as the intended articulation, hibridization and
In this sense, environmental epistemology goes blending of existing paradigms (that carry within
beyond those proposals that pretend to integrate themselves their own epistemological obstacles),
natural and social disciplines to generate the much but as the conjunction of different ontological
desired environmental sciences, interdisciplinary orders and disciplines in the construction of a
fields and transdisciplinary methods capable of ap- new scientific object. Thus, instead of recodifying
nature in economic terms, or trying to subsume the
10
established economic order within the limits and Substantive rationality becomes fundamental
conditions of the biospheric ecological system, a to environmental rationality. Environmental ra-
paradigm of sustainable production can be thought tionality is not a model, nor a paradigm to guide
of as the articulation of ecological, technological a new deal State planification for sustainable
and cultural productivity: as an economic process development, nor the scientific management of
based on the potency of nature, of the negentropic nature, but rather the governance of the com-
productivity of photosynthesis and the ecological mons based on cultural institutions (Orstrom,
organization of nature signified and embedded 1990). Environmental rationality is rooted and
in culture (Leff, 1995, 2009a). embodied in different matrixes of cultural ratio-
This new productive paradigm carries within nality. It is from cultural rationality that nature is
itself a complex array of innovative processes: revalued. Culture is the source of meaning and
In the level of theoretical rationality, it implies inventiveness that resignifies the potency of nature,
the deconstruction of the theories (economic, ju- the creativeness that orients the construction of
ridical, social) that became the pilars of modern sustainability through a dialogue of knowledges
rationality. In the field of economics and law, it imbedded in social imaginaries, beyond the sci-
carries the deconstruction of economic value and entific management of nature (Leff, 2006, 2010).
positive law based on the individual as the principle
of economic and juridical actions, of intellectual
property rights, etc., to construct new paradigms BUILDING ENVIRONMENTAL
based on common property rights over the com- RATIONALITY FOR
mon patrimony of nature and culture. SUSTAINABILITY: CREATIVITY
In the level of instrumental and practical ra- IN THINKING, INNOVATIVE
tionality, the technological innovation process is KNOWLEDGE AND
subordinated to the preservation of the productive SOCIOLOGICAL IMAGINATION
potentialities of nature supported by the organi-
zation of ecosystems, neguentropic productivity Environmental rationality does not only reorient
derived from photosynthesis and the ecological innovation towards sustainability but re-signifies
management of the metabolism of material and en- the concept of production. Ideas have always
ergy flows in agricultural and industrial, urban and fed the economy and forged innovations as they
rural, domestic and social systems. Technological entered into the productive processes in what
innovation is not restricted to ecoefficiency Piero Sraffa (1973) named the production of
in the production system dematerialization of commodities by means of commodities. But
production end recycling of waste; ecolabel- even though knowledge has become a commod-
ling and the compliance to environmental rules ity, the innovations of environmental rationality
of trade; new technologies for clean production are novelties brought about in the production of
energy derived from renewable sources: solar, ideas by means of ideas, of thinking by means
eolic, biofuels; it promotes important shifts in of thinking. Following Heidegger (1957/1988),
agronomic production systems agroecology and it is only though thinking that we can reflect on
agroforestry and new strategies for the collective what has previously be thought, to bring about
and sustainable management of water and forests what there is still to be thought. If innovation is
beyond the economic valuation of environmental the process of purposely reorganizing what there
goods and services under the geopolitics of sus- is re-setting reality, rearranging objective reality
tainable development. in the present world, applying available knowledge
to produce a practical novelty, to what extent
11
does thinking that implies an act of no-thing- understanding of present problems and situations
ness thinking on Being and Becoming beyond in our societies. Environmental rationality does
the present reality of things; thinking that guides not emerge as thinking within normal science,
the deconstruction of the objectified world as to as the reflection of knowledge on social structure,
let the Being of nature and of culture be, can be or as the refinement of an already established logic
called an innovation? That is the predicament of (the reworking of what is at hand in the thinking
environmental rationality, of an idea that reori- principles and instruments of modern rationality).
ents creativeness, inventiveness and innovation Environmental rationality is born from the stand-
towards sustainability. If environmental decay point of its transcendence of metaphysical think-
is caused by the counter-ecological workings of ing, its externality to logocentrism of science and
modern rationality, then sustainability cannot be delinking from hegemonic dominant rationality.
constructed by the self-reflection of modernity Thus, the construction of sustainability, viewed
over its own rationality. Innovation for sustain- in the perspective of environmental rationality
ability demands new thinking that transcends any implies the creation of new ways of thinking.
innovation of knowledge within the paradigms Counter-hegemonic globalization demands the
of normal science and leads to the creation of a deconstruction of the one-dimensional oppressive
new rationality. force against diversity, difference and otherness.
Environmental rationality as philosophical The unifying force born from the power of the
thinking emerges from a critical point and mo- One, the Universal, the General, the Absolute Idea,
ment in the evolution of modern civilization: and Systemic Totality, today globalized under the
that of an environmental crisis conceived as a dominance of economic rationality, demands an
turning point in history, triggered by a limiting epistemological decentralization, a Copernican
frontier in the expansion and development of the revolution away from logocentric science the
established rationality. The environmental crisis centrality of thought that insists on placing modern
is conceived as a crisis of knowledge, that is to rationality at the center of the universe of human
say, a crisis brought about by the ways of think- life. This external anchor point is the environment:
ing and the forms of knowledge that guided the environment as an epistemological concept. If
constitution of prevalent economic rationality and environmental rationality must be thought of as
the technological developments brought about by other to the prevailing social rationality, it cannot
scientific and instrumental rationality together emerge from any ontological or epistemological
with the ethical principles and values imbedded in order a cultural territory, untouched by the
such configurations of rationality, that theorized, prevalent world order. Environmental rationality
legalized and legitimized human actions in the is forged in the deconstruction of metaphysical,
building of an unsustainable world. scientific, and postmodern thought in the territori-
As a crisis in knowledge, environmentalism has alization of diversity, difference and otherness on
launched innovative thinking that has impinged the basis of ecological potentialities and cultural
in several different domains of philosophy and knowledges that inhabit these unknown regions of
science. However, environmental rationality the Real that are emerging from the South.
is not ecologysed thinking; it goes beyond the Environmental rationality impinges in knowl-
articulation of disciplines and the blending of edge but is rooted in the field of political ecology
actual current knowledge developed by normal and environmental politics. It is expressed in the
science. As a political philosophy, it goes beyond demands and struggles of peasant and indigenous
the simple adoption or application of philosophi- peoples like the seringueiros (rubber tapers)
cal traditions or post-modern philosophy to the movement of Chico Mendes and the network
12
of community based river and land extractive emancipation in the perspectives of constructing
reserves of the Amazon region in Brazil; it be- alternative sustainable worlds for its peoples.
comes the mobilizing force of many indigenous These reflections stem from a critique to Eurocen-
peoples throughout the Latin American region, trist ideas (from the foundation of metaphysics in
from the Seris in the Northern arid lands of So- Greek philosophy through postmodern thought),
nora, Mexico, to the Mapuches of Argentine and as well as dominant paradigms of scientific
Chile, including the Coordination of Indigenous knowledge and modern technologies continue
Peoples Organizations of the Amazonian Basin to be imposed to our societies, from the times of
(COICA) and the Black communities of the the colonial period, to the era of globalization.
Pacific Coast in Colombia, that are reaffirming The ideas of Enlightenment that colonized our
their identities and reorganizing their productive ways of thinking, our modes of production and
practices for the management of their natural our life-worlds, and have led as a reaction to
and cultural heritage, including their forests and the emergence of an emancipatory knowledge
genetic resources. These social environmental and political culture.
movements go beyond claims against biopiracy, Environmental rationality as strategic knowl-
ecological damages and the distribution of benefits edge, in its purpose to liberate the potentialities
from bioprospecting and ecotourism in the new of nature and culture from the determinations
geopolitics of economic-ecologic globalization, infringed by the relationships of domination,
to demand their rights to re-establish their liveli- exploitation, extermination, inequality and un-
hoods and modes of production with nature (Porto sustainability, turns to the recognition of social
Goncalves, 2001; Leff, 2002; Escobar, 2008). imaginaries, alternative forms of knowledge and
The field of political ecology is becoming traditional life-worlds denied and subjugated by
an emancipation force slowly extending to large dominant paradigms (Leff, 2010). However, this
peasant organizations like the landless move- does not necessarily imply the possibility of de-
ment in Brazil and to peaceful unarmed popular linking and abandoning once and for all Western
movements, as the Zapatistas in Chiapas Mexico thinking. In order for the globalized World-system
and the Green Army of the Indigenous Peoples to be deconstructed and for other possible worlds
of the Ecuadorian Amazonia, that struggle for to be constructed, the reconstruction of knowl-
the preservation of their ecosystems and for a edges and of other rationalities emerging from
sustainable development based on the harmoni- knowledge from the South from cultural
ous coexistence of cultural diversity in a global- knowledge and ecological potentials encounter
ized world. It is a struggle for reappropriation of the established hegemonic economic and epis-
their patrimony of natural and cultural resources temic world order. The emergent environmental
and for the territorialization of an environmental rationality is constructed through a dialogue of
rationality (Leff, 2009a). knowledges with the critical Western thinking
From a critical perspective of the oppression now underway in science, philosophy and ethics.
and dependence of Latin America and the Third Environmental rationality emerges not only from a
World, in relation to the hegemonic power of spirit of emancipation, but from its epistemologi-
the globalized economy as the organizing centre cal standpoint in the margins and the externality
of the world, environmental rationality emerges to logocentric knowledge. Above all, it emerges,
from a reflection on the Coloniality of Knowledge outside the realm of thought, from the ecological
(Lander, 2000), to the construction of Knowledge and cultural roots of a social movement for survival
from the South (Santos, 2008) as an epistemologi- and resignification of human life. It is from this
cal struggle that accompanies social processes of situated critical knowledge that Latin American
13
Environmental Thought contributes an original the dominance of the World economic order: a
outlook to sustainability (Leff, 2011). political ethics for diverse sustainable societies
The epistemological inquiry set forth by that which neither submits to the merchandizing of
critical concept of the environment sowed a seed nature, nor to an ecological order, nor to a general
that fertilized the field of Latin American environ- sense of Being, pretending to unify the views and
mentalism. This led to a new theoretical path that interests of the people, that are differentiated by
stimulated a critical revision of many of the most nature and culture.
important theorists of modernity, from Karl Marx Apart from a hegemonic or dominant rational-
(1965) and Max Weber (1978), to Martin Hei- ity that forces a consensus in a unified knowledge,
degger (1927/1951), Emmanuel Levinas (1977) the solidarities that must be forged to construct
and Jacques Derrida (1989), in order to attract a sustainable future for all peoples in our living
their thoughts and transform them from the roots planet, must recognize their differences, their ir-
of the ecology and the cultures of Latin American reducible otherness to a common sense, their
territories. This epistemological odyssey from being and becoming led by the heterogenesis of
eco-Marxism to political ecology and existential a new world order generated by coevolution of
ontology rooted in ecology and culture did not biocultural diversity and guided by a new envi-
merely imply the influence of European thought ronmental rationality.
on American lands. The theories forged in Europe
were transformed from a critical perspective that
was born from the sources of ecological potentials FUTURE RESEARCH DIRECTION
and the cultural diversity of our continent, that AND BRIEF CONCLUSION
are fertilizing new fields of political ecology in
Latin America. The concept of environment as Theoretical inquiry on environmental rationality
potential; the concepts of difference and other- is an open ongoing process for the construction
ness as cultural diversity rights, are typically of a sustainable future. Most important for this
Latin American. From this epistemological field, goal will be research on the social appropriation
unique proposals about environmental complex- of the categories of environmental rationality in
ity arose beyond complex thought and the sci- the building of a new economy, the dialogue of
ences of complexity that displaced the critique knowledges among all social factors involved and
of interdisciplinary methodologies and systems environmental education for the training of new
theories toward the dialogue of knowledge as an forms of reasoning, modes of thinking and ways
epistemological strategy to construct sustainable of being, to open the paths for a sustainable future.
societies (Leff, 2003, 2006). Several research routes are open for further
The pending debt of environmental rationality theoretical and practical reasearch regarding
is that of building a more plural, direct and close the concept of environmental rationality and its
dialogue with the indigenous savoirs and cultural application for innovation in social organization
knowledges imbedded in the social imaginaries, oriented towards the construction of a sustain-
habitus and practices of the people of the region. able world order. A synthetic list of inquiries and
Only by setting this dialogue into practice can a applications can organize a research programme
political ethic of difference emerge, one that ori- include the following issues:
ents the cultural re-appropriation of the common
heritage of humanity; a democratic and participa- 1. Further research on the theoretical con-
tory management of the commons that challenges sistency of the category of environmental
the totalitarian regime of meaning on nature and rationality following its epistemological,
14
theoretical and ethical principles, and Bellmann, C., Dutfield, G., & Melndez-Ortiz,
contrasting this paradigm with other in- R. (2003). Trading in knowledge. Development
novations in thinking in science, philoso- perspectives on TRIPS, trade and sustainability.
phy, economy, politics and ethics oriented London, UK: ICTSD/Earthscan.
towards the construction of sustainability
Benton, T. (1996). Marxism and natural limits:
2. Further research and action for the construc-
An ecological critique and reconstruction. In
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Benton, T. (Ed.), The greening of Marxism. New
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ENDNOTE
destruccin. Mxico: El Colegio de Mxico.
Santos, B. de Sousa (2008). Conocer desde el Sur.
1
In terms of the EU Eco-innovation panel,
Para una cultura poltica emancipatoria. Buenos eco-innovation means the creation of novel
Aires, Argentina: CLACSO/CIDES-UMSA/ and competitively priced goods, processes,
Plural Editores. systems, services and procedures, that can
satisfy human needs and bring quality of life
Schmidt-Bleek, F. (2008). Future. Beyond climate to all people with a life-cycle-wide minimal
change (Position paper 08/01). Provence, France: use of natural resources (material including
Factor 10 Institute. energy and surface area) per unit output,
and a minimal release of toxic substances.
17
18
Chapter 2
A Model for Improving the
Adoption of Sustainability in
the Context of Globalization
and Innovation
David L. Rainey
Rensselaer Polytechnic Institute, USA
ABSTRACT
This chapter presents the foundations of a conceptual model for connecting the key elements necessary
for corporations to adopt sustainability in the context of the global economy and strategic innovation.
While there are numerous theories and practical methods for managing in a national or even regional
markets, most of them lack the sophistication necessary for leading change in a global business envi-
ronment. With the advent of globalization, the complexities of doing business on a global basis have
increased dramatically over the last two decades. While sustainability involves many perspectives,
strategies, actions, and management constructs, the chapter focuses on how global corporations employ
strategic innovations in response to the driving forces in the global economy and how they can improve
their level of management sophistication in a turbulent business environment. The model incorporates the
concepts of sustainability and sustainable development in creating the solutions, systems and structures
for doing business in the global economy. It focuses on strategic innovations that provide more positive
aspects and fewer negative ones. Sustainability and sustainable development are based on proactive
strategies and actions that exceed expectations and outperform peers and competitors alike. Strategic
innovations are dramatic changes that have the potential to create dramatic new solutions that create
exceptional value and eliminate or reduce negative effects and impacts. Strategic innovations include
radical technological innovations, business model innovations, product developments, and organizational
developments that are game changers.
DOI: 10.4018/978-1-61350-165-8.ch002
A Model for Improving the Adoption of Sustainability in the Context of Globalization and Innovation
INTRODUCTION formulate and implement strategies, policies, and

actions plans to achieve such outcomes.
This chapter presents a model for adopting sus- SD is a critical element of sustainability that
tainability and sustainable development (SD) in focuses on developing and deploying strategic in-
business organizations based on the perspectives novations that exceed the expectations customers,
of globalization and the management constructs stakeholders, and people. SD focuses on protect-
associated with strategic innovation. Globaliza- ing the natural environment and enhancing the
tion involves the development of an integrated social and economic world as well as achieving
global economic system. It is based on fewer superior strategic, market, and financial results by
time and distance constraints, the reduction in the the corporations. SD involves obtaining the best
costs of global communications and logistics, the outcomes possible for the present generation and
removal of trade restrictions, and enhancements ensuring that future generations can realize their
in information flows and currency exchanges. aspirations for social and economic well being in
Today, advanced technologies and sophisticated harmony with the natural world. SD originated
management methods and practices have dramati- in 1987 by the World Commission Environment
cally improved the efficiency, effectiveness, and and Development for the General Assembly of
benefits of international trade. While incredible the United Nations that prepared the Brundtland
improvements have been made over the last Report, entitled Our Common Future. In the report,
decade, there are many more changes necessary SD refers to the notion that it [humankind] meets
to ensure that globalization is a positive force the needs of the present without compromising
resulting in sustainable outcomes for all of the the ability of future generations to meet their own
participants. Given that globalization is still far needs. (The World Commission of Environment
from a true reality, sustainability and SD are es- and Development, 1987, p8)
sential constructs for achieving positive gains and Strategic innovation refers to technological
reducing negative effects and impacts. innovations and high-level product developments
Sustainability involves the quest toward more that have the potential to change the global com-
ideal solutions and sustainable success over petitive landscape based on advancements in the
time. It necessitates more inclusive and innova- benefits provided to customers and stakeholders,
tive approaches for collaboration, cooperation, and significant reductions in the negative effects
integration, and innovativeness in developing and impacts associated with existing technologies
and deploying the best possible solutions for and products. Creating, developing and deploying
enhancing the well being of people, preserving strategic innovations offer bright prospects for an
the natural environment, and ensuring social enhanced global business environment with the
and economic stability. It requires creating new- greater possibilities for more people worldwide
to-the-world solutions that are based on clean to enjoy the solutions provided by businesses.
technologies and innovative products and more Specifying precisely what strategic leaders
efficient, effective, and less polluting systems; must do to achieve sustainability, SD and stra-
ones that provide mostly positive benefits with tegic innovation is an arduous task. Given that
few defects, burdens, problems, and significantly an all-compassing model linking globalization,
less pollution and waste. Sustainability involves a sustainability, SD and strategic innovation may
transformation to higher levels of sophistication not be possible in the short term, developing and
in how business leaders and government officials gaining acceptance of a general model that fits
multinational enterprises (MNEs), transnational
19
corporations, and small and medium sized enter- BACKGROUND

prises (SMEs) may take years to realize. More-
over, as more companies from the developing The business world has changed dramatically over
countries play significant roles in the global busi- the last two decades as the scope of the social,
ness environment, such a model or models have economic, political and environmental forces
to accommodate the social, economic, cultural, impacting businesses has broadened to include not
environmental, technological and ethical realities just those pertaining to the developed countries,
that exist across the globe. Most importantly, a but those affecting developing countries as well.
holistic model pertaining to sustainability and SD While there has been much discussion about a
has to recognize and incorporate the differences in shrinking world due to the incredible innovations
resources, capabilities and sophistication between in new technologies and the linkages between
the MNEs and the SMEs, between the companies businesses and people, it can also be said that
from the developed countries and those from the the business world has expanded multifold with
developing ones, and the between the old line the inclusion of all people living in the developed
corporations and the emerging companies. and developing countries. This profound change
The objective of the chapter is to articulate the has been supported by numerous strategic inno-
basic elements of a holistic model for improving vations including the expansion of the internet,
the adoption of sustainability in the context of the interconnectivity of telecommunications, the
globalization. The model provides broad guide- digitization of many products, and the improve-
lines for what is necessary and beneficial from a ments in affordability. The lowering of the costs of
global perspective. Such guidelines are intended manufactured parts, final products and the related
to provide insights and assistance in developing logistical requirements has made the integration
and implementing the requisite methods and of the global economy possible, especially from
mechanisms. The adoption of the model would an economic perspective. Prior to the fall of the
be voluntary and offer benefits to corporations, Iron Curtain, global corporations generally served
governments, business leaders, political officials, approximately one billion people, those living in
and practitioners alike, since they would have a the developed countries. Today, the business world
sense of the underlying specifications so that they is not only global, but it is richer in scope, scale,
can more easily determine what needs to be done and diversity. Worldwide, there are approximately
going forward. Sustainability and SD involve a 6.9 billion people who play a role in the global
continuum in the formulation and implementation economy. While some are active participants in the
of strategies, solutions, actions and innovations served markets, most are bystanders who might be
that unfold over decades. considered latent customers waiting for the right
The chapter does not provide all of the an- solutions to meet their needs and circumstances.
swers. The discussions herein do not include all Globalization is a complex term that has
of the requisite details to fully articulate how many meanings from a limited view focusing
to develop and implement the model. Trying to mainly on the economic exchanges of the global
prescribe a single pathway to sustainability and economy to the multi-dimensional perspective
SD would require a model that is so intricate and involving an interrelated, interactive, innovative
detailed that it would take several books to spell and more sustainable business world. Regard-
out all of the variations. The intent herein is to less, globalization includes interconnections and
offer insights about what can be done to become interrelationships between business enterprises,
more sustainable in a world full of opportunities national governments, and non-governmental
and challenges. organizations (NGOs) among many others. Most
20
importantly, it is based on the context of all of individuals engaged in or impacted by business

the social, political, economic, technological, transactions, not just customers and stakeholders.
environmental and ethical forces. It implies that participants and non-participants
The limited view of globalization is often stated have to be included in the analysis of what is
in terms of the merging of national economies necessary and appropriate and in the creation
into a regional economy and ultimately into a of sustainable outcomes. It involves creating,
global economy. The European Union (EU) is developing, producing and providing innovative
an example of a regional economy that includes solutions for people based on their context and
27 nation states that have linked their economic not just the objectives, strategies, and actions of
interests and activities to enjoy economies of the global corporations. The multi-dimensional
scale and more open associations. The intent is perspective also includes a longer time horizon.
to enhance free trade based on a transnational While most business leaders, economists, and
economic system. On a global basis, the limited government officials view five to ten years out
view pertains to economic exchanges and activi- to be the long term, the long term in the context
ties as the primary forces that drive international of the multi-dimensional perspective is measured
trade, business investments, and the global eco- in decades. The multi-dimensional perspective
nomic system. In the limited perspective, global includes considerations about future generations
corporations vie to satisfy customer demand and of people as well. Such considerations are an
meet stakeholder expectations based strategic po- integral part of true globalization that has yet to
sitions and global resources and capabilities. The be fully developed.
key factors for achieving success are perceived Globalization without sustainability, SD and
to be cost-effectiveness, high quality products, strategic innovations may be viewed as a continu-
and tailored products and services; ones that ation of the business usual mindset that has
generate advantages and financial rewards for the dominated strategic management thinking over the
entities involved. Economics is perceived to be last half century. The business as usual mindset
the overarching factor and markets and custom- represents the line of strategic thinking, in which
ers are viewed as the main driving forces. The the main focus is on growing and expanding busi-
underpinnings of the limited view are based on nesses without significant concerns about their
free enterprise and market capitalism. social and environmental underpinnings, effects
The multi-dimensional perspective of glo- and impacts. It presumes that such corporations
balization involves sophisticated management and their strategic leaders comply with the exist-
systems, proactive strategies, cutting-edge solu- ing laws and regulations and take due care of
tions, and innovative methods that are developed their specified environmental responsibilities,
and deployed to enhance the positive aspects and but they are not compelled to go beyond such
eliminate the negative aspects of the social, politi- mandates and requirements. The business as
cal, economic, technological, environmental and usual mindset has positives from an economic
ethical forces. It is based on advanced information perspective, but it is generally limited in terms of
and communications technologies, more cost- the social, environmental and ethical aspects. The
effective means and mechanisms for producing time horizon is relatively short, usually five years
and transporting goods from remote locations to or so. Historically, such perspectives resulted in
the markets across the world, sophisticated man- reasonable outcomes in the developed countries,
agement constructs for decision making, and new- especially if the social and economic forces were
to-the-world technologies and products. It is also stable and enduring. However, difficulties and
based on the realization that enduring economic discontinuities often arise in the long term. For
success depends on satisfying all entities and instance, if the effects of oil depletion are the
21
most profound in latter stages of the life cycle Daniel Esty (2006) and Andrew S. Winston in
of petroleum, then the next ten years may be their book, Green to Gold, articulate that suc-
relatively stable in terms of conventional energy cessful, long-lasting companies regularly redefine
sources, but chaotic thereafter. Moreover, with the themselves. Environmental-inspired innovations
addition of many new participants in the global offer companies new and exciting way to find
economy and expanding global energy consump- fresh expressions for their capabilities (p301).
tion, the business world may become less stable In support of sustainability, Bob Willard (2005) in
and secure as conflicts arise over obtaining the his book, The Next Sustainability Wave, suggests
necessary resources. Under such conditions, there that sustainability strategies give corporations the
is a significant possibility that the economic and choice of getting ahead of the curve, defining the
social forces may be overwhelmed by increasing new rules, and being rewarded by their stakehold-
demand for energy; thus, affecting the costs of all ers for behaving responsibly (p1). Sustainability
materials and goods and leading to significant is about leading change to create better outcomes
competition for resources and unsustainable and more enduring business value.
outcomes. Indeed, the current economic recession
may be a harbinger of more challenging times
ahead, especially if strategic leaders maintain the UNDERPINNINGS AND
business as usual mindset. GLOBAL REALITIES
True globalization has to incorporate the con-
cepts of sustainability, SD and strategic innovation. Prevailing Business Situation
They are essential elements in achieving broad-
based globalization and providing successful The current economic crisis, the so-called Great
outcomes for all people. Globalization based on Recession, has shed new light on the many dif-
sustainability, SD and strategic innovation neces- ficulties and problems facing business leaders,
sitates a mindset shift in strategic thinking from politicians, government officials and NGO lead-
exploiting the prevailing situations and selling ers as they try to right the global economy and
the existing products to customers who have the develop new mechanisms for dealing with the
financial wherewithal to developing innovative related challenges. All leaders are being challenged
solutions that fit the needs, expectations and to make dramatic improvements in the ways they
circumstances of people on their basis. Today, manage their responsibilities and achieve desired
many of the strategic leaders focus their efforts on outcomes. Politicians and government officials
the developed countries because people in those focus on setting new policies, providing stimulus,
countries have money and can afford to buy the and allocating resources. Business leaders across
branded products and services. Moreover, many the spectrum of industries and markets try to de-
of the same strategic leaders pay little attention to velop and implement the most effective programs
people in the least developed countries because to maximize benefits and outcomes and minimize
most of the people are poor and seemingly do not the risks and vulnerabilities.
have the necessary disposable income to buy the Today, strategic leaders and senior manage-
existing products. However, such strategic leaders ment of all persuasions have to expand their
should view the creation of solutions based on capabilities and knowledge and adopt innovative
the needs and perspectives of people, especially management approaches that are in line with the
those in the developing countries, as enormous realities of the world. As evidenced by the current
opportunities for translating non-customers into economic crisis with its myriad of causes, effects,
customers. impacts, and consequences, the underpinnings and
22
key elements of the global economy are too compli- income, and well-established infrastructures. To-
cated and intertwined for old school approaches day, many of those assumptions and perspectives
to succeed. A major untangling of the turbulence are questionable, especially on a global basis. The
and new understandings of the global economy economic, social and environmental conditions
are necessary for creating the requisite solutions. and trends are now less predictable and more
C.K. Prahalad (2005) in his book, The Fortune at volatile. Many factors and phenomena play out
the Bottom of the Pyramid, talked about how to on a global scale. The global economy with its
handle the global challenges: What is needed is numerous interconnections and interrelationships
a better approach to help the poor, an approach brings with it many risks and uncertainties. With
that involves partnering with them to innovate and all of the improvements in management science,
achieve sustainable win-win scenarios where the managing global corporations is still an extremely
poor are actively engaged, and at the same time, risky venture.
the companies providing products and service to Globalization requires global corporations
them that are profitable (pp3-4). With all of the to recognize new responsibilities, if they plan
uncertainty, there are incredible opportunities for to create value and enjoy success. Paul Hawken
companies to succeed. The great challenge for (2007) in Blessed Unrest discusses the challenges
strategic leaders is not just to right the mistakes of globalization (p135):
of the past or cut through the turbulence, but to
invent a more sustainable future by creating won- One of the failures of the arguments opposing
derful new solutions for people everywhere and market globalization is the visible lack of an
by eliminating the problems and the underlying alternative economic model that might address
risks and difficulties. Strategic leaders have to the plight of the worlds poor. The failure of those
recognize that they are responsible for assuring making the case for globalized free trade is their
that the best solutions possible are devised and inability to adequately address the results of rapid
implemented. economic change in human and ecological degra-
Unfortunately, most of todays management dation, roughly in equal measure, incomparable
models are not in synch with the new realities of through they may seem.
globalization and the twenty-first century business
world. The world has changed significantly over Hawken clearly points out the problems with
the past two decades, yet many strategic leaders the prevailing business situation. The present
still follow the theories and practices that were form of globalization is not inclusive. It does not
developed during the 1980s and 1990s. While such provide the necessary support for the poor of the
management constructs were innovative methods world nor does it include a scope wide enough to
during the later years of the twentieth century, they assure that solutions are complete.
are based on the realities of the times. Most of the
models viewed the business world in the context Insights about Global
of the developed countries and Western business Realities and Possibilities
philosophies. They were underpinned by many
assumptions that were relevant for the major mar- The global economy includes all of the existing,
kets like those in the US, UK, Germany, France, emerging and potential markets and customers in
Japan, etc. The underlying perspectives were based the world. One of the most significant underlying
on political stability, economic freedom, open approaches in the drive to be more successful is
exchanges, linear increases in market demand, to make products and services more affordable
affluent populations with significant disposable through design innovations and incorporating
23
customers needs and expectations in the solutions. for transforming non-customers into customers.
Such methods have been in play for several de- Moreover, strategic leaders in rapidly industrial-
cades in the developed countries as companies like izing countries have to create positive outcomes
Walmart and Toyota have become global giants without overwhelming the social world and the
and great financial successes through innovations natural environment with pollution and wastes. For
to make their products and services both more af- instance, strategic leaders in China are expanding
fordable and their systems more productive and their industrial outcomes at incredible rates, but
cost-effective. in doing so they are creating wastes streams that
Globalization requires that businesses and gov- may become impossible to mitigate in just a few
ernments become key participants in developing, years. Air and water pollution may be the limiting
supporting and advancing the social, economic, factor in Chinas quest to be a global economic
technological, market, and environmental under- power. Such difficulties are much easier to correct
pinnings of the global community of nations and before the industrial facilities and power plants
people. The underpinnings include assuring that are built. Once the plants have been designed and
the recipients of the solutions, especially the cus- constructed, it is often close to impossible to ret-
tomers, stakeholders, and societies of the world, rofit pollution abatement on a cost-effective basis.
are provided with right products and services that With positive actions, strategic leaders have the
have been designed and delivered from an external opportunity to solve future problems at low invest-
perspective, not just those of business leaders ments that in the long-term are inconsequential
and/or high-level government officials, and that to overall economics of the processes. Failure to
everyones well being is positively enhanced and do so may result in significant long-term costs,
not exploited. expenditures, and possible failures.
The multi-dimensional perspective of global- In Globalization: A Critical Introduction, J.
ization includes the effects and impacts on a much A. Scholte (2000) identifies five categories that
larger scale, including all of the driving forces help to articulate what globalization is as follows
of change. The resulting management constructs (p15-17):
are more complicated because reality and future
requirements have to be examined from multiple Internationalization-the growth of interna-
views involving more intensive analysis of the tional trade and interdependence among
salient forces and more in-depth understandings of countries and participants.
the interactions and interrelationships between the Liberalization-reducing government im-
forces. Moreover, the analyses require exploring posed trade restrictions on the movement
the possibilities as well as the realities, i.e. what of goods between countries.
could be or should be not just what is. Thus, it is Universalization-spreading of concepts
not just a simply matter of obtaining information and experiences to people around the world
and data and discerning what is happening; it also in harmonizing aspirations and outcomes.
involves getting to the underpinnings of reality Modernization- spreading social structures
and trying to ascertain what could be done instead around the world affecting local self-deter-
of just trying to understand what is being done. mination and destroying local cultures.
It involves a mindset shift from exploring what Deterritorialization-reconfiguring geog-
is to what could be. raphy so that social space is mapped out
Strategic leaders have to view human develop- in terms of territorial places, territorial dis-
ments and the elimination of poverty in the least tances, and territorial borders.
developed countries as enormous opportunities
24
Scholtes perspective provides a sense of the Shell Oil, Unilever, and thousands of others.
complexities involved in globalization. Clearly, Emerging companies may use their strategic
globalization involves moving away from just advantages of low-cost labor and positive cash
economic theories about international trade and flow to grow rapidly. They may quickly become
exchanges to the more integrated business world, global players. In this scenario, globalization is
in which all of the driving forces are considered and really a different manifestation of the old world
acted upon from a unified perspective. Moreover, of the economic models of the twentieth century.
there are many positive aspects, but as indicated The main competitors not only seek to dominate
by Scholte, there are many concerns and issues customers and markets, they try to monopolize the
that have to be dealt with, especially those im- essential resources for production through what-
pacting social institutions like the destructions of ever means available. For instance, companies in
ingenious cultures and languages. China are trying to secure sources of raw materials
Globalization today is more than economic around the world from aluminum to zirconium.
forces, political decisions and geography. The Moreover, with the numerous examples of toxic
expanding physical and informational links be- substances being used in producing products
tween distance markets have spawned a better or incorporated in the products, there are great
understanding of cultural and regional similari- concerns that Chinese companies in particular
ties and differences among people. Public policy are not following prescribed protocols or gener-
directives in the developed countries to eliminate ally accepted practices for ensuring safeguards,
historic barriers to trade and commerce contribute consumer protection, proper work standards, and
to common markets and more open communica- environmental protection.
tions and travel. However, the evidence about Globalization must include the whole context
whether globalization is real does not provide a of reality (inclusiveness), involve providing the
compelling answer. Globalization can be viewed best solutions possible (innovativeness), build
as part of the evolutionary track of expanding enduring and trust-based relationships with cus-
opportunities for economic and social activities tomers, stakeholders, partners and people around
and interactions. It may be viewed as simply a the world (connectedness), provide the requisite
linear expansion of the economic power that has information about products, processes and services
migrated from the Western countries, principally to all customers and constituencies (openness),
the G7, to a few new players who are vying for and ultimately, ensure that people are successful
the share in the economic riches. This perspective and that success is enduring over time (effective-
is not a new paradigm for achieving growth and ness). To do this, strategic leaders must embrace
improvements for all people, but one of simply the importance of the social underpinnings, rec-
adding new players to the world elites. The new ognize and respect cultural differences between
powerhouses are China, India, Brazil, and Russia societies, protect and preserve the natural environ-
(BRIC countries). ment, create and deploy the best technologies and
The current form of globalization may lead to products possible, contemplate non-traditional
more intense competition among the key players and countervailing perspectives that reveal ways
without regard for the broader social, economic, of doing business more efficiently and effectively,
and environmental factors. New companies in and understand the needs of the future as well as
the BRIC countries may focus extensively on the expectations of the present.
economic outcomes and try to gain superior posi- Adil Najam, David Runnalls, and Mark Halle
tions against the old line corporations like BMW, (2005) of the International Institute of Sustain-
DuPont, Ford, IBM, Pfizer, Proctor & Gamble, able Development in their article, Environment
25
and Globalization: Five Propositions, identify generated and lacking the capabilities to mitigate,
several challenges and opportunities associated if not eliminate, pollution and hazardous wastes.
with globalization (P10): Failures to resolve such difficulties may limit the
overall economic and market potential. As more
1. The rapid acceleration in global economic ac- people around the world expect and demand
tivity and our dramatically increased demand products and service, the economic realities have
for critical natural resources undermine our to be improved dramatically to satisfy all of the
pursuit of continued economic prosperity. needs and at the same time keep the negative ef-
2. The linked processes of globalization and en- fects and impacts under control and mitigated to
vironmental degradation pose new security the extent possible. The world is more complex
threats to an already insecure world. They and is expected to become more interdependent as
impact the vulnerability of ecosystems and emerging markets take their place in the business
societies. And the least resilient ecosystems. world of the twenty-first century.
The livelihoods of the poorest communities
are most at risk.
3. The newly prosperous and the established A MULTI-DIMENSIONAL MODEL FOR
wealthy will have to come to terms with the THE ADOPTION OF SUSTAINABILITY
limitations of the ecological space in which
both must operate, and also with the needs The Strategic Logic for the
and rights of those who have not been as Adoption of the Model
lucky.
4. Consumption-in both the North and South- External context in the long term drives change
will define the future of globalization as well and the opportunities and challenges facing global
as the global environment. corporations. In the days when most corporations
5. Concerns about the global market and global primarily focused on their home markets, the
environment will become even more inter- scope of their enterprises was relatively small
twined and each will become increasingly even in the case of MNEs. For most of the early
dependent on the other. twentieth century, corporations obtained most
of their revenues and profits from their national
These perceptions are very useful when markets. Most MNEs participated in exporting and
exploring the meaning and future aspects of licensing and the large ones often had subsidiaries
globalization. It is crucial to realize that global- and operations in the other major economies. As
ization is accelerating and that the availability of such corporations expanded internationally during
resources is a significant strategic factor for the the last century, their external context did become
sustainable success of global corporations. For more complicated with a greater geographic scope.
most the twentieth century, competition played They did adapt their business models to recognize
out in the domain of the markets and the drive the additional forces and factors that required atten-
for revenue and profits. Today, the availability tion and actions. However, the complexities of the
of natural resources, especially metal ores, pe- situations were mitigated to a large extent because
troleum and water, is among the most critical there were many similarities between the most
factors for achieving strategic success. Resource advanced national economies. For instance, all
vulnerabilities are becoming worrisome. Such of the G7 countries had relatively stable political,
vulnerabilities are multifaceted. They include social, and economic systems and structures. The
being unable to handle all of the wastes being markets were generally expanding and custom-
26
ers demanded fairly similar products. Variations obtaining efficient and effective operations, and
in demand usually were easily accommodated maximizing profits to more advanced approaches
through product innovations and modifications like achieving market leadership, creating cutting-
in marketing methods. While there were major edge brands that are unique, establishing strategic
differences and culturally based requirements like direction for exceeding expectations, and obtain-
the French preferences for their own wines and ing desirable market shares.
American preferences for fast food, most MNEs The logic behind the transition is not based
accommodated the market-related expectations. on an either-or situation, but a realization that
As discussed earlier, the business world the scope and scale have to become much greater
changed dramatically in the 1990s. Free trade was as a corporation moves from national markets to
expanded with the formalization of the EU and the regional ones. It means that the basic requirements
North American Free Trade Agreement (NAFTA). in serving national markets are still important,
The EU enhanced economic exchanges throughout except that additional perspectives are also critical
most of Western Europe and NAFTA eliminated for achieving success in a much large business
many of the trade restrictions between Canada, environment. It is important to point out that these
Mexico and the US. While the underpinnings and discussions only cover some of the most salient
implications of the EU and NAFTA are profound aspects and that in both cases the requisite models
and beyond the scope of this discussion, such are much more complicated than outlined herein.
changes expanded the prospects for trade and busi- In most cases, global corporations have made the
ness growth by integrating national economies into transition from focusing on national markets to
regional ones. The changes were more compelling regional or more broadly based markets, especially
in the EU than in North America. The difference considering the phenomena in the developed
might be explained by that fact that the national countries. Obviously, some corporations are more
economies of the leading European countries successful than others and that outcomes are de-
(Germany, France, UK and Italy) were more or less pendent on circumstances and the capabilities of
coequal, whereas the US economy overwhelmed the organizations involved. Gary Hamel in The
the economies of Canada and Mexico. Moreover, Future of Management (2007) suggests the theres
US economy was already interconnected with little that can be said with certainty about the future
many other national economies on a global basis. except this; sometimes over the next decade your
Regionalization introduces many more vari- company will be challenged to change in a way
ables to the scope of the business environment. for which it has no precedent (p41).
As the scope expands, strategic leaders of global More recently, many global corporations are
corporations have to modify their perspectives of struggling with the complexities of the global
what is necessary for achieving success and adopt business environment. Globalization has taken
new models for including the essential elements. root, but the means and mechanisms for achiev-
Most importantly, strategic leaders have to shift ing success in the global economy are not well
their strategic thinking from what the company has established. Most strategic leaders are still using
to do to serve its home market to how it can meet management constructs that were developed for
the needs and expectations of more complicated managing in national or regional economies.
market situations. In a nutshell, they have to be- While some of the approaches may be useful in
come market-centric instead of company-centric. the global business environment, many lack the
They have to transition from basic constructs scope and sophistication for assessing, understand-
like improving their competitiveness in markets, ing, and managing the realities impacting global
building a large portfolio of products and services, corporations.
27
Managing in the global economy neces- and expectations in the business environment.
sitates more comprehensive and sophisticated For instance, for more than a decade many stra-
management constructs and models for realizing tegic leaders in the developed countries viewed
extraordinary performance and achieving long- globalization in terms of outsourcing processes
term success. Globalization requires that strategic and activities to lower their cost structures. They
leaders consider, analyze, engage, strategize and were company-centric focused on improving the
execute from the very broad perspectives. While sales and profits of their products and services.
it is impossible to know and manage everything While strategic leaders believed that such strate-
in the world, sophisticated strategic leaders have gies and actions would lead to profound outcomes
to be holistic in their thinking and have inclu- and financial success, such theories were sound
sive strategies, actions and decision making, if in the short term but over time have become less
they except to realize success in a complex and powerful as competitors followed the same line
turbulent reality. In a global setting, global cor- of thinking. Such methods have helped consumers
porations have to become enterprise-centric, not in the developed countries obtain more affordable
just market-centric. They have to recognize that products and services and allowed governments
success depends on more than addressing markets to keep inflation low. However, the hoped for
and satisfying customers and stakeholders. It in- gains in profitability became less and less viable
volves incorporating all of the driving forces and as outsourcing evolved into a global phenom-
facets of the global business environment into the enon. Ultimately, management constructs that
strategic logic of the corporation and the models can be easily copied are subject to being generic
used for decision making. approaches with limited advantages, if any at all.
Globalization necessitates a transformation in Simple methods have the allure of being easy to
management constructs and models from market- understand and implement, but they also have the
based approaches to inclusive and innovative ways risk of being quickly duplicated by competitors.
of realizing sustainable success. The transforma- Table 1 provides some of the salient factors in-
tion to a broader scope using more sophisticated volving the transformation from national market
constructs and models does not mean that the to regional one and then to global perspectives.
traditional constructs and models are no longer The higher level of sophistication identified
appropriate or useful. Some may be embedded under global in Table 1 provides strategic lead-
within the systems and structures of the more con- ers with the prospects of realizing more enduring
temporary models; others can be applied in special performance and success. While very little in the
cases, in which the underpinnings and forces are business world lasts forever, the broader the scope,
less complicated. For instance, Southwest Airlines the more inclusive the model and the more so-
(SWA) is a specialized US airline that successfully phisticated the elements, the more difficult it is
serves small markets. Its model is fine-tuned to for others to emulate the strategies and actions.
the US and its business environment is national Sustainability is the imperative of the twenty-
in scope and nature. While global forces impinge first century. It implies exactly what the term
on all corporations, SWAs strategic leaders have means, i.e. to support from the foundation, to
chosen to focus on a narrow perspective. strengthen the framework, to endure over the
Most strategic leaders realize that their cor- course of time, to keep going regardless of the
porations must be more capable, innovative and challenges, etc. For instance, it is fool-hardy to
responsive. They have made improvements; how- create new products, invest in new capital equip-
ever, in many cases the improvements are simply ment, and develop new ventures among numerous
not good enough to stay ahead of the changes other business initiatives unless they are sustain-
28
Table 1. Salient factors pertaining to national, regional and global markets
Scope National Regional Global
Focus Company Market Business Environment

Imperative Competitiveness Market Leadership Sustainability
Means Products & Services Operations & Cutting Edge Brands Strategic Sustainable Solutions Sustainable
Mechanisms Marketing Process Innovations Planning Development Strategic Innovations
Measures Profitability Product Innovations Sustainable Success
Strategies Competitive Strategies Market Share Preemptive Strategies
Market Strategies
Dimensions Salient Factors of the External Context

Market Customers Customers Customers & Non-customers
Competitors Allies & Partners Contributors & Recipients
National Stakeholders Regional Stakeholders All Stakeholders
Social Communities Civil Society All people
Employees National Identity Cultural Diversity
Shareholders Social systems Social Structure
Economic Production / Consumption Value Proposition Value Creation
Competitive Positions Market Positions Value Maximization
Revenue & Profits Economic Performance Sustainable Success
Technological Products/Services Innovative Products Cutting Edge Solutions
Dominant Technologies Advanced Technologies Clean Technologies
Incremental Innovation Radical Innovation Strategic Innovation
Environmental Regulatory Compliance Beyond Compliance Openness & Transparency
Pollution Prevention Green Management Sustainable Enterprise
Waste Management Waste Minimization Zero Defects & Wastes
Political Legal System Political Economy International Laws and Policies
Political Structure Governmental Structures International Organizations
Regulatory Mandates Directives International Treaties
Ethical Values and ethics World Class Standards Universal Standards
Accepted Principles Axiomatic Principles Global Compact
Established Behaviors Proper Behaviors Profound Respect
able over the long term. Sustainability is about do have sufficient disposable income; therefore,
realizing ongoing success from every dimension, such approaches may not be sustainable. Sustain-
not just the economic or environmental ones. ability requires an integrated model for decisions,
While there are strategic leaders, practitioners and strategies, solutions and actions.
scholars who discuss concepts like environmen- Sustainability is facilitated through sustain-
tal sustainability, sustainability is really about able solutions. It is based on the realization that
integrating the social, economic, environmental, customers and stakeholders really want and
technological, ethical, political, and market forces desire solutions. A sustainable solution is the
and considerations into a holistic perspective complete package of everything that is necessary
(model), in which success is obtained in every to provide the customers and stakeholders with
dimension. For instance, outsourcing of jobs from their own successfully outcomes. It includes the
developed countries to developing countries may products and services, the support mechanisms, the
result in improved cost structures, but in the long complementary products, and all of the short-term
term the consumers in the developed countries and long-term requirements to make the solution
may not be able to afford the products, if they succeed and endure.
29
SD involves the mechanisms that are employed [the company and/or] business units Aggres-
to create sustainable solutions, sustain success, sive does not mean increasing the rivalry among
and advance sustainability. It is underpinned by competitors; it does mean taking every opportunity
strategic innovations. Strategic innovations are to make profound changes that advance the well
particularly powerful when they create extraor- being of customers, the extended enterprise, the
dinary value for all contributors and recipients organization, and all of the key contributors.
and eliminate difficulties and challenges across
the business environment. Preemptive strategies usually involve the full
SD requires preemptive strategies for lead- integration of the whole enterprise into a seam-
ing change. From a sustainability perspective, less and highly assertive value delivery system
strategic leaders have to have the confidence and (holistic management system) that is fully capable
courage to develop new solutions that offer ex- of planning and executing every action at the
traordinary value and new-to-the-world outcomes. highest level of quality and performance. Most im-
In my book, Enterprise-wide Strategic Manage- portantly, preemptive strategies involve strategic
ment: Achieving Sustainable Success through innovations that significantly or radically improve
Leadership, Strategies, and Value Creation, the underlying technologies, products and services-
construct of preemptive strategies is developed the solutions. Such innovations include inventing
and discussed in detail. Preemptive strategies are and validating clean technologies, developing
cutting-edge methods for leapfrogging expecta- and delivering more valuable solutions, enriching
tions and competitors and achieving sustainable and exploiting improved process capabilities, and
success. The following excerpts provide the main reinventing the strategic management system and
perspectives (Rainey, 2010, pp373-376): value delivery system with outstanding intellectual
capital, capabilities and resources. Preemptive
Preemptive strategies are proactive approaches strategies involve transitions and transforma-
for leading change and taking the initiative to ag- tions to the next higher levels of achievements
gressively move on opportunities and challenges and sustainable outcomes
in the business environment before such actions
are expected or become obvious. Preemptive [Preemptive strategies] involve out-of-the-box
strategies necessitate changing and even dis- thinking about how to move closer toward perfec-
rupting industry or market space norms through tion and obtain the best solutions for customers and
fast-paced, hard to duplicate strategic actions that stakeholders, and to build enduring relationships
provide distinctive and sustainable advantages with all of the essential contributors and recipi-
for first mover, fast follower, or strategic change ents. Strategic thinking shifts from the competitive
leaders. Preemptive strategies eschew the notions spaces of the past to preempting the market spaces
of reacting to change or anticipating changes only and creating the business enterprise of the future.
slightly ahead of a necessity for action. Preemp- This includes integrating the extended enterprise
tive strategies imply that strategic leaders seek into a complete system, leading change to secure
out every opportunity to forge positive changes sustainable advantages, and using all of the ca-
and exploit new opportunities before customers pabilities and resources in the most effective and
or competitors understand the implications. least damaging ways.
Preemptive strategies require extremely assertive Sustainability involves applying the most
actions in making dramatic or radical improve- sophisticated management constructs possible to
ments to the external and internal dimensions of attain market leadership and value creation. In the
30
context of globalization, it provides the underlying Where past breakthroughs led to competitive
elements and perspectives that make the concept of advantages that lasted for decades, the effects of
globalization truly global. Sustainability integrates such achievements today are often measured in
of all of the external driving forces into a coherent months. However, with all of the challenges, there
model for creating value and sustainable solutions are also enormous opportunities, opportunities to
for the present and future. Sustainability is more lead change and move beyond the social, economic
than the triple bottom line articulated by John and environmental mandates. Across the world
Elkington (1997, P2). The triple-bottom line people want solutions to the problems they face.
includes social, economic, and environmental The opportunities for providing these solutions
considerations in managing businesses. While range from finding ways to expand health care and
Elkingtons concept is an important contribution obliterate hunger to protecting natural resources
to management theories, preemptive strategies and and eliminating waste streams.
sustainable solutions necessitate dynamic actions The penultimate objective is the quest for great-
to produce sustainable success, especially from ness, the quest for perfection, not perfection itself.
the development and deployment of new-to-the- It is akin to the building of the great cathedrals of
world technologies and products. Europe. The architects and builders recognized
the daunting nature of such projects. They knew
The Model: Sustainability in that it would take many generations of skilled and
the Context of Globalization dedicated people to realize the dreams. Neverthe-
and Strategic Innovation less, they were willing to invest their time and
efforts in the process because they believed in the
Sustainability and SD fit well in the context of vision. They understood that laying the founda-
globalization. They are essential for true global- tion and building solid walls would provide the
ization. However, sustainability is a preeminent means for others to continue building. Moreover,
management construct in its own right with or they realized that the succeeding generations of
without globalization. Moreover, sustainability their relatives and compatriots would enjoy the
and SD are inextirpable linked with strategic in- fruits of their labor and that the structures would
novations. Given the current state of affairs in the provide humankind a lasting testimonial of their
business world, global corporations are a long way contributions and achievements.
from achieving the level of sophistication that is Sustainability requires dedication and ongoing
necessary to achieve a modicum of sustainability development. While continuous improvement was
within a decade or two. In my book, Sustainable one of the main management themes of the late
Business Development: Inventing the Future twentieth century, the pursuit of sustainability and
through Strategy, Innovation and Leadership, SD are the critical perspectives driving global
the important factors for realizing sustainable are corporation in this century. Sustainability is the
detailed. Some of the key underlying concepts relentless pursuit toward perfection through in-
include (Rainey, 2006, pp678-680): novativeness, inclusiveness, and connectedness.
Management across the world is engaged in The requisite model includes the key elements
the relentless struggle to keep pace with tech- for leading change through innovation, managing
nological, social, economic and environmental the systems and structures across the organiza-
changes that seem to accelerate as time moves tion and the extended enterprise, and building
forward. Great strides in competitive advantages enduring relationships with people through social
are marginalized by the gains of peers and com- responsibility. The model provides a framework
petitors, and the changing business environment. pertaining to how the key elements interrelate. The
31
Figure 1. Model for improving the adoption of sustainability in the context of globalization and innovation
model is depicted in Figure 1; it is an adaptation include existing markets, emerging ones,

of the model presented in my book, Enterprise- customers, and non-customers. While
wide Strategic Management: Achieving Sustain- many existing models are either compa-
able Success through Leadership, Strategies and ny-centric based on core competencies or
Value Creation (Rainey, 2010, p160). While the competition-centric based on rivalry, sus-
framework maps out the essential elements, it is tainable success focuses on making people
impossible to articulate all of the details. the center of strategies and actions and
The model offers several exciting perspectives: making them successful.
The underlying aspirations include creat-
The model provides an inclusive, sophisti- ing sustainable solutions and achieving
cated, and broader framework for leading sustainable outcomes through SD and stra-
change in complex business situations, in tegic innovations, not just making short-
which strategic leaders create extraordi- term profits at the expense of long-term
nary value for all. success. Given that people are central to
The focus is on the global business envi- sustainable success, building enduring re-
ronment and market spaces. Market spaces
32
lationships is essential for realizing the ex- The Means: Sustainability and
pected outcomes on an ongoing basis. Sustainable Development
The model has holistic connections with
strategic management and operational Sustainability is the overarching constructs that
constructs. It focuses on integrating the includes the philosophical perspectives, theoreti-
corporations strategies and actions with cal constructs and practical approaches for lead-
the external contributions of the extended ing change in global corporations and managing
enterprise and the needs and expectations their businesses, enterprises, and organizations.
of the market spaces. This represents a The intellectual challenges include determining
quantum leap forward in connecting the the vision and strategic direction and the strate-
systems, structures, processes, and practic- gic leadership philosophies and constructs for
es that facilitate developing and deploying leading change. The simple yet most compelling
the best solutions possible. philosophical perspective is putting the business
environment or external context first before think-
The model addresses perspectives and con- ing about internal context. This fits the concept
structs that are in line with 21st century dynam- of people, planet and profit, (Bergmans, 2006,
ics. It examines the business environment in the pp117-119). It is based on the recognition that
context of the whole global landscape, and stra- people and the natural environment are the over-
tegic leadership and management in the context arching considerations and that profit is important
of sustainability and sustainable development. for sustaining companies, but profit is really a
Indeed, it examines the whole perspective rather derivative of good analysis, decision making,
than focusing on the parts, which is often the strategies and actions.
prevailing methodology. For instance, the model Sustainability is a continuum of strategic
integrates concepts for dealing with customers thinking and actions that is internally driven by
and stakeholders and building relationships rather visionary strategic leadership. Strategic leaders
than just focusing on marketing and selling. It have to have the courage and dedication to take
recognizes that customers want solutions that on incredible challenges, to think about radical
exceed their needs and expectations. It discusses ways of providing solutions, and to use preemptive
solutions in the context of social, economic, strategies for realizing extraordinary outcomes.
technological, ethical, environmental, and market Without direction from strategic leaders, sustain-
space considerations. It explores not only the ability and SD do not get traction. They require
prevailing situation but how innovative solutions concerted efforts and significant investments.
taken from the market perspective can create new Strategic leaders have to provide the resources
opportunities. It includes the systems, structures, and commitments to implement the revolutionary
and processes required for obtaining results. ways to do more good and less bad as Peter Senge
These perspectives are reinforced by the con- discussed in his book, The Necessary Revolution
tributions of C. K. Prahalad and M. S. Krishnan (Senge, 2008, pp33-41))
(2007) in the new age of innovation, in which SD is often conceptually accepted by global
they state that building relationships with external corporations. While the underpinnings and aspira-
contributors are a main source of competitive tions are often clear, it involves a complex array
advantage (p46). of solutions, systems, structures, processes and
techniques. Unlike most of the major initiatives
of the last century like strategic planning and total
quality management, SD cannot be implemented
33
on a project basis, in which significant efforts military situations and organizations of the past,
and funds are allocated to create the systems and strategic leaders are often well prepared to fight
then one can enjoy the results at completion. SD the battles of the past, instead of being proactive
involves a long-term approach for transforming the and contemplating what is necessary for the future.
corporation and its enterprise(s) into an integrated Strategic leaders too often think about what their
and innovative entity. organizations are instead of what they must be.
SD requires an embedded structure that is Understanding the past is important because it
parallel to the salient factors associated with the gives us insights about the social and economic
transition from national and regional markets to dimensions, but transforming the corporation and
global ones as portrayed in Table 1. The key ele- organization to lead change and being ahead of
ments for being successful in national markets are mandates and expectations is the essence of SD.
also necessary for success in the global economy.
As depicted in Figure 1, strategic leaders have to The Mechanism: Strategic
provide the key elements for establishing the basic Innovations
foundation and the strategic direction. They define
the values, principles and ethics of the organiza- The transformation to highly levels of achievement
tion based on the broader social, legal, ethical, and is predicated on strategic innovations. Strategic
environmental responsibilities. Strategic leaders innovations are radical changes to the corporation,
and the directors of the corporation determine the its business units, the extended enterprise, the
governance structure and company policies. They organization, the leadership, relationships, and
must set strategic direction, the missions and the the technologies, products and processes. Strate-
objectives. These elements are translated into gic innovations involve high-level investments
strategies and action plans that are implemented into employees, learning, intellectual property,
by the organization and its enterprise. Strategic know-how, business portfolios, technological
leaders ensure that the capabilities and resources underpinnings, brands, and product lines. They
of the organization are aligned with the strategic also involve the tangibles of developing and
direction. Moreover, strategic leaders allocate the commercializing new products and creating and
resources and provide learning opportunities for building new business ventures and the intangibles
employees and contributors across the enterprise. of enhancing ones reputation and acquiring new
Operational management engages in the imple- knowledge. Strategic innovations make sustain-
mentation and execution. It includes a myriad of ability and SD real for the people who are task
the critical systems and processes that a used to with carrying out the actions.
realize outcomes and achieve success. They in- Strategic innovations are a global corpora-
clude, but are not limited to, marketing, finance, tions answers to how to develop a unique place
quality management, supply chain management, in todays turbulent and complex business world.
environmental management, health and safety Global corporations seek practical approaches
management and waste management. Results are to their quests to be competitive and achieve
accomplished through support systems and struc- ongoing success. While strategic innovations do
tures, programs, protocols, and tactics. While most not always result in significant advancements in
global corporations have well-functioning operat- competitiveness and market success, they do offer
ing systems and reasonably effective processes, a greater probability of achieving game changing
the management constructs are often based on outcomes that are more difficult for competitors
twentieth century requirements rather than on the and would be rivals to emulate. However, strate-
current realities or future ones. Like many of the gic leaders often view strategic innovations, i.e.
34
Table 2. Types of strategic innovations
Categories Main Types Salient Aspects

Solutions Radical technological RTI involves developing new or dramatically improved technologies that change the basis
innovation (RTI) for delivering value. Creating a new-to-the-world solution starts with insights and in-
novativeness. It incorporates the full spectrum of internal and external ingredients to create
exceptional value and realize sustainable success.
Systems Business model in- BMI involves a conceptual combination of all of the entities and the patterns of interre-
novation (BMI) lationships and interfaces that are linked together in formal and informal arrangements to
create and deliver value-producing outcomes that are guided by strategies and actions. It
also involves starting new business units that have superior solutions with new technolo-
gies.
Structures Leadership and orga- LOD is critical for realizing sustainable success. It involves the development of new
nizational develop- competencies and capabilities and the transfer of know-how and management wherewithal
ment (LOD) within the corporation and enterprise and between the generations of leaders and practitio-
ners. Leadership and talent development are crucial for assuring the going commitment to
sustainable success.
radical innovations, as risky and subject to many the value systems and extended enterprise.
perils. While it is clear that strategic innovations Radical technological innovation is a primary
are more challenging, they are not necessarily mechanism for effecting strategic innovation. The
more risky than incremental innovations or doing strategic leaders initiate the development of new
nothing when all factors are considered. While the technologies using the research and development
potential results of incremental innovations are (R&D) programs and projects. While there are
usually more predictable and successful from a many variations, the corporate R&D generally
product or process point of view, the actual busi- involves developing new-to-the-world technolo-
ness outcomes are often less fruitful and enduring. gies and/or products with potentially exceptional
For instance, improving obsolete products may business value.
result in additional sales and revenues in the short Radical technological innovations depend on
term, but the resultant business performance and external context. Exploring the global business
financial outcomes are often unchanged and the environment and the market spaces and deter-
products are eventually replaced or eliminated. mining how the corporation and its enterprise(s)
The investment in incremental innovations may fit the needs and requirements for the future are
be positive, but the business may lose valuable effective ways for initiating the long process of
time and money pursuing marginal outcomes. creating new technologies. Radical technological
Strategic innovations are necessary to assure innovations are based on insights from the business
that global corporations stay ahead of the driving environment and the organizations imagination
forces and expectations in the business environ- about what can be accomplished. Global corpora-
ment. Among the most crucial are strategic in- tions can take a proactive approach and invest into
novations that create unique advantages for the transforming their businesses by developing new
corporation through innovative solutions, systems, technologies that are cleaner and more efficient
and structures and build enduring relationships. and effective. Some of the best opportunities are
Table 2 lists some types of strategic innovations. those involving eliminating the negative side of
Innovative solutions engender outstanding existing technologies. This results in new-to-the-
combinations of value creation, value innovation, world products that have superior attributes and
and value delivery expressed and supported using value. Strategic leaders must allow for risk taking
35
and even failures to occur as the R&D people corporations depend on supply networks, strategic
find new ways of achieving success. Moreover, alliances, and external relationships for sustaining
creating radical innovations that solve problems success. Business model innovation encompasses
for people in emerging markets are also great the whole, both internal and external, and the
opportunities. Antoine van Agtmael (2007) in present and the future. It is inclusive of all of the
his book, The Emerging Markets Century, details essential dimensions in managing and leading an
how many of the emerging companies in BRIC organization. Business model innovation involves
countries, Taiwan, South Korea and Mexico are the convergence of the solution, systems and the
gaining footholds as world-class competitors structure.
through brainpower and innovation. He cites In Leading the Revolution, Gary Hamel (2000)
the incredible progress made by companies like discusses the age of revolution. He suggests that
Embraer of Brazil, Lenovo of China, Samsung it is not knowledge that produces wealth, but
of South Korea, and TSMC of Taiwan. These insights into opportunities for discontinuous in-
companies are vying for their place in the world. novation (p14). Hamels business model includes
Historically, global corporations used simple four major components: core strategy, strategic
business models for managing their businesses. resources, customer interfaces, value networks
The general methodology employed a de-coupled, (p70). He incorporates into the new innovation
hierarchical approach that included operations model the concept of a solution (pp283-313).
management of the value system on the bottom He views innovation as an essential element for
and strategic business management at the top. achieving strategic success.
Traditional business models limited the scope of Given the diversity of the global competitive
the analytical framework to facilitate decision- landscape and the expectations of people and
making and simplify the interactions. Due to the society, the most important part of strategic in-
lack of integration at the operating level, strategic novation is the development of talent. Unlike the
leaders had to play a significant role in resolving business world of the early twentieth century that
difficulties within the system. The strength of the was based on machine-driven methods, twenty-
approach became the weakness. first century corporations are based on intellectual
During the mid-1980s Michael Porters models capital. The core competencies and capabilities of
of the value chain and the value system dramati- the corporations are its true strategic assets. From
cally shifted the management constructs from a strategic management and strategic innovation
vertical organizational approach to a system ap- perspectives, people are the innovative force.
proach with horizontal processes (Porter, 1985, They create the solutions and the systems. Lead-
pp33-35). A higher level of sophistication is neces- ership and organizational development address
sary for incorporating all of the forces impinging the needs of the people in the organization and
on the entire organization and its linkages, partners, how to enhance their knowledge and capabilities
stakeholders, and customers. An effective business through learning and experience. Leadership
model is a comprehensive management construct and organizational development invoke a spirit
that forms the basis for analysis, understanding, to become the best and to build new capabilities
decision-making, continuous improvement, as and competencies for the emerging technologies
well as radical innovation. It is a unifying ap- and practices of the 21st century. It provides the
proach that integrates the people, the processes, means and mechanisms for the organization to
the practices and the programs into a comprehen- acquire the new knowledge and skills to perform
sive management system. Today, fully integrated to the highest standards.
business models are pivotal for success as more
36
CONCLUDING COMMENTS global corporations, the focus shifts from busi-

ness as usual approaches to creating sustainable
Rapid changes in the business world over the solutions and developing holistic systems and
last two decades have made most of the prevail- structures to deploy the solutions.
ing management constructs obsolete. In a global From a strategic perspective, the decision
business environment of limited time and scarce making methodology for strategic innovations has
resources, strategic leaders have to seek and de- to become more comprehensive and farsighted.
velop innovative ways to keep ahead of change. Decision makers have to be proactive. They have
This necessity is especially important for global to use learning and acquire new knowledge to
corporations. Global corporations have to expand obtain a more comprehensive understanding of
their reach and sophistication to create sustainable the realities. They must be thorough in their as-
solutions, integrated systems, and robust structures sessments of context to obtain insights about what
that are proactive and unique. Good is no longer the solutions have to be. Ultimately, they need to
good enough. Global corporations have to lead use their imaginations to envisions how to create
change and become sustainable enterprises. They the best strategies, solutions, and outcomes and
have to incorporate sustainability and SD in their to use the judgments of all of the participants in
models and ensure that they can exceed customer the decision making process. Great decisions are
and stakeholder expectations and outperform based on the collective wisdom and intellectual
competitors. capital of the people involved.
Strategic leaders have to preemptive the market True globalization may only be possible in
and competitive situations through strategic in- the context of sustainability, SD and strategic
novations that open the doors to new possibilities innovation. Otherwise, short-term successes may
and success. They have to think about the whole turn into complex challenges and difficulties that
enterprise and ensure that solutions and systems are limit long-term performance and outcomes. For
fully aligned and providing successful outcomes instance, pollution and wastes are critical factors
for all contributors and recipients. that have to be eliminated via clean technologies
Globalization without a multi-dimensional and new-to-the-world products, if solutions are
perspective is a prescription for enduring ongoing to endure. Future developments may be stymied
problems, challenges, and instability. Solutions because resources have to be allocated for cleaning
have to be multifaceted and holistic. They have up the messes created due to poor decision making
to produce win-win outcomes. They must avoid or simply not available because of resource deple-
creating tensions and conflicts among people tion. It is critical that business leaders, government
across the world. For instance, simply shifting jobs officials and people understand, develop, produce
to low-wage countries to obtain low-cost products and deploy sustainable solutions and achieve sus-
may result in cost-effective products that people tainable success. With true globalization, global
in the developed countries cannot afford to buy corporations have to adopt a more inclusive and
because they lack employment opportunities and comprehensive model of their external and internal
personal income. context, if they aspire to obtain competitive advan-
The model discussed in the chapter provides a tages, achieve outstanding business performance,
framework for creating win-win outcomes that are and enjoy sustainable success. The underpinnings
balanced in terms of the social, political, economic, must focus on protecting future generations of
technological, environmental and ethical forces. people, preserving the natural environment, en-
Good solutions require an integrated approach suring that the economic, social, environmental
with strategic leaders and contributors working and financial interests of businesses and society
together using strategic innovations. For most continue well into the future.
37
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Business Environment: The business environ-
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the positive benefits and minimize the negative
defects, burdens, and impacts. It includes sys-
38
tems, processes, equipment and know-how that significantly improving the solutions, systems
eliminates, reduces or controls pollution and waste and structures. The focus is primarily on leading
streams better than alternates. change and value creation.
Construct: A construct is a theoretical frame- Product Innovation: Product innovation
work or model used to analyze and determine includes the initiatives, methods, techniques, and
strategies, systems, structures, and solutions. A processes for making incremental improvements
construct is intended to be a representation of the to existing products and services. It involves mak-
dimensions and elements of business situations. ing evolutionary changes to the products employ-
It combines information, data and experience ing the prevailing technologies and organizational
with theoretical thinking about how to view the capabilities.
business situation in light of its opportunities, Radical Technological Innovation: Radi-
challenges, and constraints. cal technological innovation involves creating
Context: Context provides the basis for analy- new-to-the-world technology that brings about
sis, understanding and decision making. It includes revolutionary changes. It often creates new in-
the business environment and the management dustry or market structures or involves dramatic
systems of the organization. Context is framed changes to the existing ones. It also involve mak-
based on defining the scope of the analysis and ing substantial changes to the existing strategic
the inclusion or exclusion of variables. The con- management system including developing new
text includes both time and space considerations. customers, new markets, new supply networks,
Extended Enterprise: The extended enter- and other related entities.
prise includes the contributors to the solutions Sustainability: Sustainability implies that all
and recipients who use the solutions. It includes human and business activities are carried out rates
customers, stakeholders, supply networks, stra- equal to or less than the Earths natural carrying
tegic partners, related industries, competition, capacity to renew the resources used and naturally
and infrastructure. It provides a framework for mitigate the waste streams generated.
a descriptive, analytical, and structural under- Sustainable Development: Sustainable devel-
standing of the needs, opportunities, challenges, opment is a holistic management construct that
requirements, specifications, and the strategies includes the entire management business system
and action plans. from the origins of the raw materials to production
Globalization: The notion that the world processes and the customer applications and to the
economies are shifting toward a borderless eco- end-of-life solutions. Sustainable development
nomic structure, in which global corporations involves making dramatic improves and positive
vie to satisfy customer demand on a global basis. changes to the full scope of relationships and
Space and time are compressed and geography linkages of the supply networks, customers and
becomes less of a critical factor. stakeholders, and support service providers for
Preemptive Strategies: Preemptive strategies handling wastes, residuals and impacts.
are intended to gain sustainable advantages by
39
40
Chapter 3
Product-Service Systems as
Enabler for Sustainability-
Oriented Innovation:
The Case of Osrams Off-Grid Lighting
Friedrich Grosse-Dunker
Dark Horse GmbH, Germany
Erik G. Hansen
Leupana University Lneburg, Germany
ABSTRACT
Corporations increasingly subscribe to the principles of corporate sustainability, which is generally de-
scribed as the integration of economic, environmental, and social dimensions. As sustainability presents
a new source of ideas and visions leading to new business opportunities and competitive advantage,
the role of Sustainability-Oriented Innovation (SOI) is ever more emphasized. However, developing
products under the paradigm of SOI is risky: both the products market success and (non-economic)
sustainability effects are uncertain. Product-Service System (PSS) i.e. a combination of products and
services constitutes a significant approach to overcome some of the limitations of SOI and, addition-
ally, can spur the diffusion of SOI. In this chapter, we use an exploratory research strategy to further
investigate the links between SOI and PSS. We present a case study on off-grid lighting in Kenya and
analyze the sustainability effects on the product and PSS level. The complexity of SOI and the sustain-
ability potentials of PSS are illustrated. Moreover, we also emphasize the role of a joint achievement of
sustainability-oriented product innovations and PSS innovations.
DOI: 10.4018/978-1-61350-165-8.ch003
Product-Service Systems as Enabler for Sustainability-Oriented Innovation
INTRODUCTION studies (Baines et al., 2007) and focus on such

as car sharing (Huwer, 2004; Engelhardt et al.,
For the last decade, the prevailing form of doing 2003), ride sharing (Hansen et al., 2010), and on
business has been increasingly challenged by washing machine and power tools service centers
a number of problems such as climate change, (Mont, 2004). Besides few others (Devisscher &
environmental degradation, and social inequali- Mont, 2008; Manzini & Vezzoli, 2000), existing
ties. These challenges culminate in the view that cases predominantly focus on developed nations.
to only focus on economic aspects of business is The cases often evaluate the sustainability impacts
ever more difficult or even impossible as it is es- of PSS (Pawar et al., 2009, Devisscher & Mont,
sentially unsustainable (Hart & Milstein, 2003). 2008). PSS is said to be a concept that aims to
From a business perspective, corporate improve overall system efficiency, along with
sustainability seeks to address these issues by improving efficiency of each system element
transcending the conventional responsibilities of (Mont, 2001, 13). However, most of the case stud-
businesses (i.e. to make profits) to also include ies are limited to studies where existing products
non-economic aspects such as ecological and and technologies are integrated into a PSS, i.e.
social responsibilities (Sharma, 2002; Schaltegger the innovation considers only the servitization
& Burritt, 2005). Scholars have lately emphasized of the unchanged product or technology. There
to put sustainability at the core of the corpora- is virtually no research on cases where the prod-
tion, i.e. its products and services (Hart, 1997; uct innovation joins the introduction of the PSS.
Schaltegger & Wagner, 2010). New regulations, Our research question is thus twofold: (1) how
but also raising consumer demand for socially and can the mechanism of PSS help to introduce a
environmental benign products drive the need for sustainability-oriented product innovation? (2)
more sustainable products and services. The no- Which sustainability effects materialize on the
tion of sustainability-oriented innovations (SOI) product level, which ones at the service level?
thus embraces concepts, criteria, and processes to This chapter addresses this gap with a case
develop more sustainable products and services study approach (Yin, 2003) about a multina-
(Hansen et al., 2009). tional corporation based in Germany that offers
One important lever for SOI is the concept of a product-service system in a developing nation.
product-service systems (PSS) or servitization By concurrently addressing economic, envi-
(Baines et al., 2007; Mont 2001, 2004; Hansen et ronmental, as well as social impacts, the case
al., 2009). Generally, PSS approach represents a highlights the multi-dimensionality of SOIs. We
spectrum between pure products and pure services furthermore emphasize the importance of PSS as
(Baines et al., 2007; Pawar et al., 2009). PSS where being an innovation enabler on a (technological)
the manufacturer remains with the ownership of product level and therefore underline the impor-
the products are especially interesting. In this case, tance of product-service offers in the context of
PSS follows the idea that the environmental burden sustainability.
is dramatically decreased when switching from The remainder of this chapter is structured
selling products to providing solutions through as follows: first, a literature review introduces
product-service combinations. In contrast to mid the concepts of SOI, life-cycle assessments, and
to long-term leasing and performance contracting PSS. Building on this framework, a case study
in the business to business context (Williams, on off-grid lighting in Kenya is presented and its
2006), this chapter focuses on systems of shared sustainability effects are analyzed. The results and
use in business to consumer markets. implications of the case study are then discussed
Current empirical studies on shared use in and future research directions are given.
business to consumer markets are usually case
41
BACKGROUND to sustainability is considered highly complex

(Fichter, 2005).
Sustainability-Oriented Beyond the triple bottom line reflecting eco-
Innovation (SOI) nomic, social, and environmental considerations
(Elkington, 1998), also referred to as the target
There is wide agreement that the challenges of dimension of innovation, two other dimensions
sustainability offer significant potential for prod- life-cycle and innovation type are important
uct and service innovations and related business for assessing sustainability effects of product in-
opportunities. Two arguments support this view. novations. Both dimensions are addressed in the
First, new social and environmental regulations subsequent sections.
and laws increase the pressure for innovativeness
(regulatory push) (Fichter, 2006; Hockerts, Life-Cycle Assessment and SOI
2008; Preuss, 2007). Second, sustainability pres-
ents a new source of ideas and visions leading to The life cycle dimension refers to the physical
new business opportunities through new markets life cycle of a product from resources extraction
and customer segments (market pull or vision to end-of-life treatment. Life-cycle assessment
pull) (Hart, 1997; Day, 1998). Based on these (LCA) has become a major research field in
insights, the importance of SOIs has generally literature (Kloeppfer, 2008; Mont, 2004; Spille-
been acknowledged (e.g. Hansen et al., 2009; maeckers & Vanhoutte, 2006), though it also has
Hart, 1997; Schaltegger & Wagner, 2010). How- some limitations (Schaltegger, 1997). Whilst the
ever, recent studies show that only a minority of emphasis in life-cycle assessment has been on
businesses consider sustainability as a source of environmental considerations, integrated sustain-
innovation (Hockerts & Morsing, 2008). ability analysis has gained research attention as
The reluctance in advancing SOIs can argu- well (Spillemaeckers & Vanhoutte, 2006). Table 1
ably be attributed to the high risks involved in shows a matrix based on the life-cycle dimension
this kind of innovation (Hall, 2002). These risks and the triple-bottom line.
include not only the products economic success
(Cooper, 2001), but also the direction of envi- From Products to Product-Service
ronmental and social sustainability effects of in- Systems (PSS)
novations, i.e. whether they contribute positively
or negatively to sustainability. The latter type of Innovations are commonly classified into the
risk is also termed directional risk (Paech, 2005). categories of product, process, organizational,
For instance, environmental innovations can lead or market innovations (Hausschildt & Salomo,
to negative societal impacts, i.e. to a problem of 2007). The current chapter focuses on product in-
eco justice (Schaltegger & Burritt, 2005), as the novations, and thus on new product development.
case of bio-fuels demonstrates (Klsch & Saling, Within the latter understanding of innovation,
2008; Rennings & Zwick, 2002). On the other people are usually concerned about the technologi-
hand, conventional innovation projects sometimes cal dimension of products (and from a life-cycle
result in innovations with positive sustainability perspective of processes related to manufactur-
effects (Fichter & Arnold, 2003). Due to the ing the product). For instance, products can be
multi-dimensionality of sustainability targets manufactured with improved eco-efficiency (e.g.
(social, environmental, and economic targets) they consume less energy; Schaltegger & Burritt,
and the dispersion of innovation sustainability 2005) or companies shift the product portfolio
effects, the assessment of innovations with respect towards addressing environmental challenges
42
Table 1. Sustainability of products/technologies related to the physical life-cycle (Hansen et al., 2009)
Target dimension Life-cycle phases

Manufacturing Packaging/ Use/ maintenance End of life
distribution
Economic Production efficiency Efficient packaging; (Technical) quality Costs of take-back/
efficient logistics disposal/ landfill
Environmental Use of environmental Reduce packaging Durability; energy Dangerous materials;
friendly materials and resources; minimized consumption recycling, re-make, or
processes transports re-use
Social Occupational health & safety; child work; wages; Customer health & Health threads of
benefits safety; complaint landfills
handling
(e.g. clean technologies) or social challenges (e.g. be distinguished (e.g. Baines et al., 2007; Mont,
adapted products for people from poor communi- 2001): Product-oriented PSS add a service to the
ties/developing countries) (Hart, 1997). Whilst conventional product. For example, the product
these efforts are very important, they alone can- take-back service (end-of-life phase) allows the
not solve some of the overarching sustainability producer to recycle or remake the product and thus
challenges. At least three reasons should be men- contribute to environmental (but also to economic)
tioned: first, the increased aggregated resource value. In an extreme case, product service bundles
consumption related to product manufacturing may turn into pure product-based services based
and ownership, i.e. there mere number of prod- on product leasing and contracting rather than sell-
ucts. Second, though product eco-efficiency can ing. A good example is the case of Interface Inc.
be strongly increased, rebound effects (Dyllick which originally focused on selling carpets, but
& Hockerts, 2002) are responsible for that the later became involved in leasing carpets. Instead
overall consumption increases might exist. For of replacing entire carpets, the company only re-
example, lower maintenance costs entail more places worn tiles. Third, a further increase of the
intense use (e.g. when switching to a more fuel- service factor leads to product-service systems in
efficient car, more kilometres might be driven). a narrower sense (Mont, 2006). These are systems
Third, more sustainable products may be difficult of shared use, i.e. consumers (or users) use the
to introduce and diffuse, simply because the ad- same products either subsequently (e.g. car shar-
ditional environmental and social characteristics ing; public washing machines) or simultaneously
make the products too expensive for consumers. (e.g. ride sharing instead of a private car; Hansen
For all three reasons mentioned, it is important et al., 2010). The current chapter focuses on such
to go beyond the technological level to also con- systems of shared use.
sider the level of the PSSs. A PSS is defined as [] The benefits of PSSs are very thoroughly
a system of products, services, networks of players analyzed in the literature. Pawar et al. (2009)
and supporting infrastructure that continuously differentiates three major streams of literature:
strives to be competitive, satisfy customers needs the first stream of product service systems
and have a lower environmental impact than tradi- highlights the environmental benefits of PSS. The
tional business models (Goedkoop, 1999). This second stream integrated solutions analyses
definition shows that the traditional distinction of financial effects of PSS and the third stream of
products and services is nowadays becoming less experience services highlights benefits created
clear (Wise & Baumgartner, 1999). In general, by consumer interactions and co-created values.
three degrees of product-service combinations can In general, benefits of PSSs result from a shift of
43
risks, responsibilities, and costs to the manufac- CASE STUDY: OFF-GRID LIGHTING
turer, which are associated with the ownership of
products (Baines et al., 2007, Pawar et al., 2009). Research Method
This chapter is especially interested in the
environmental (and more broadly, sustainability) In order to gain a better understanding of the
benefits of PSS, which are described in the follow- relation between SOI and PSS, we subsequently
ing. By increasing the service content of offers, analyze specific sustainability effects within a
value creation and resource consumption can be case study research strategy. We conducted a
decoupled with the effect of creating sustain- single case study about OSRAM, a company
ability effects (Baines et al., 2007; Mont, 2001). providing off-grid lighting in Kenya. OSRAM
For instance, Interface Inc. is now responsible is a company fully owned by Siemens AG, one
for the maintaining, recycling, and disposal of its of the largest multinational corporation based in
carpets and has therefore a high interest in, for Germany. Case study research is a strategy for the
instance, prolonging the life cycle of its carpets systematic production of exemplars (Flyvbjerg,
and recycling old carpets. As a result, providers 2006). It does not follow a strategy of statistical
of PSSs have strong incentives to consider the sampling and thus the number of case studies is
total life cycle and to optimize their offers and not a measure for the quality of this approach.
value chain over the complete PSS life cycle Rather, even a single in-depth case study can
(Aurich et al., 2006). This kind of analysis is also contribute to theory (Flyvbjerg, 2006; Yin, 2003).
referred to as system thinking (Manzini et al., We carefully considered trustworthiness criteria
2001). Furthermore, by retaining the ownership of credibility, transferability, dependability, and
of products, providers of PSS have strong incen- conformability (Lincoln and Guba, 1985; Shah
tives of minimizing their resource input to reduce and Corley, 2006) in our methodology, as will
costs and capital expenditures, while keeping the be further explained in the following paragraphs.
value proposition of their offer on a constant level When selecting the case, we followed a strategy
(Baines et al., 2007, Manzini & Velozzi, 2002) or of extreme cases (Flyvbjerg, 2006), as this is one
to even increase the value proposition. In systems alley for a purposeful theoretical sampling and
of shared use, fewer products are sold and thus thus contributes the trustworthiness criteria of
the number of products in the end-of-life phase dependability (Shah and Corley, 2006). OSRAM
is reduced (Aurich et al., 2006; Mont, 2004). For provides a very unique approach for introducing
instance, car sharing services need less cars in a new PSS, embedding a highly innovative and
action, leading to a significant increase of overall sustainability-oriented technology. The example is
resource efficiency of the service system. Hence, also one of the flag ship programs within the area
PSSs offer the opportunity of dematerializing the of Siemenss corporate sustainability advances,
value creation (Mont, 2006; Ehrenfeld, 2001). and thus it is also well documented. Access to
Bearing those findings in mind, we may state data was another reason for selecting the case
that the higher the service part of a SOI, the higher (Yin, 2003).
the consideration of the products life cycle and, With regard to data collection, we drew on
consequently, its positive sustainability effects. multiple sources of data in order to analyze the
Hence, PSS offer a promising innovation strategy case from multiple perspectives and, hence, to
for SOIs. However, sustainability effects have to increase credibility (Shah and Corley, 2006; Yin,
be assessed carefully, as contradictory effects may 2003). Data collection covered public corporate
arise through PSSs (Manzini & Velozzi, 2002). reports and websites, documents from the public
domain, and media reports. The documents were
44
collected between 2009 and mid 2010 (Table 2). As Background to Off-Grid Lighting
we solely relied on secondary data from explicit
documents and reports, risks with regard to data Lighting is of fundamental value for human beings
recording and management as they are expressed and greatly influences everyday life. For instance,
in the trustworthiness criteria of conformability lighting substantially impacts on security issues,
(Shah and Corley, 2006) were reduced. production (lighting can considerably prolong
The data analysis can be considered abductive working hours), education (lighting enables study-
(Dubois & Gadde, 2002) relying both on an initial ing in the evening) and poverty reduction, to name
(deductive) conceptual framework (life-cycle; only a few. However, around 1.6 billion people in
levels of innovation) and, at the same time, letting sub-Saharan Africa do not have access to power
inductive findings emerge from the data. We used grids (Mills, 2008). Thus, fuel-based (primarily
a content analysis to investigate the various kerosene) lamps are often the only viable lighting
documents presented earlier. The triangulation of source in vast areas within developing countries
data from different sources led to the emergence to this date. After all, kerosene is an affordable
of the overall picture (Yin, 2003). In the sense of energy carrier, and is available even in remote
transferability (Shah and Corley, 2006), the re- rural areas. However, lighting costs can account
search findings contain thick descriptions of for up to 10% of household incomes (Mills,
empirical data related to the abductive categories, 2008). In addition, fuel-based lamps are highly
concepts, and overall structures. We further con- inefficient for lighting purposes and therefore
trolled the criteria of dependability by a critical burden excessive costs on its users. Moreover,
audit of data: whereas the first author collected the practice of kerosene lamps implies additional
the first-order data (mere data) and proposed a fundamental negative impacts, both ecologically
first draft of the second-order findings (theoriz- and socially. Fuel-based lighting leads to the
ing), the second author served as a critical re- emission of roughly 190 million tonnes of CO2
viewer of these processes. per year. Kerosene lamps also emit several toxic
The following findings section provides some gases, which can cause severe health damages
background information on the case setting. Then in the population, especially when used inside
the off-grid lighting PSS is presented and its ef- buildings. Furthermore, kerosene often causes
fects on both the technological and overall PSS pollution of potable water, especially when used
level analyzed. for fishing purposes.
The use of kerosene lamps is extremely
Table 2. Data collection for case study widespread in the Lake Victoria region of Kenya.
This area is inhabited by 30 million people and
Type of Documents studied is characterized by the use of local fishing ves-
data
sels, which mainly fish at night. The fishermen
Public Siemens (2009). Sustainability Report 2008.
use swimming kerosene lamps as lures for fish
corporate Munich, Germany.
reports/data OSRAM website: http://www.osram.com and are therefore highly dependent on lighting.
Global Nature Fund website: http://www. Approximately 75% of their income accounts for
globalnature.org
lighting only.
Reports Esch et al. (2008)
from public Loew et al. (2009)
domain Mills (2008)
Media Rybak, A. (2009)
Zeug, K. (2009)
45
Company Background panels installed on the rooftop of the building. This

service was supported by micro loans to make it
Osram GmbH was established in 1906 and is a affordable to local residents. Hence, this product-
fully-owned subsidiary of Siemens AG. Today, Os- based service promised cheaper, more reliable and
ram is one of the two leading lighting manufacturer ecologically beneficial off-grid lighting.
worldwide, being active in numerous markets, e.g. In the following, the sustainability effects of
general lighting, automotive lighting, ballasts and this solution in the use and end-of-life phases of
luminaries. Osram perceives climate protection the physical life-cycle are analyzed. A simplified
and sustainability issues as one of the major drivers version of the earlier presented Table 1 serves as
in the lighting industry. Hence, Osram is heavily evaluation matrix. The analysis is limited to major
engaging in the development of energy-efficient and well-known effects of the PSS, as they already
products, which in 2008 already generated 66% of provide a good indication of the overall value and
its total revenues. Furthermore, Osrams product effects of the proposed offer. Basic sustainability
portfolio was recently acknowledged with the effects (resource consumption, etc.) and in-depth
German Sustainability Award. analyses (cost structures, eco-balances, working
To sustain its growth potential, Osram is conditions, etc.) are for reasons of clarity not
increasingly seeking market opportunities in explicitly mentioned. Firstly, we focus on the ef-
emerging markets, especially in Africa. In 2009, fects of the product (i.e. the technological level)
88% of its revenues were generated outside of itself. Then the impacts derived from introducing
Germany. The market for off-grid lighting is of the PSS are discussed.
peculiar interest, as its size is estimated to amount
to 50 billion per annum, which is almost twice as Analysis of Technology Level
big as Osrams original lighting market. In order
to further expand its revenues in this market, an From a technological viewpoint, the introduction
innovative product-service system was developed of O-Lamps with energy saving lamps results in
in Kenya, which is described below. several advantages in comparison to the earlier
used kerosene lamps. However, it also poses some
Off-Grid Lighting as a disadvantages and new economic, environmental,
Product-Service System and social risks, which are described in Table 3:
Economic effects: The assessment of effects
In 2004, the Global Nature Fund and a local within the lifecycle of production is generally
Kenyan NGO started to work on an alternative undertaken from a companys point of view. At
to kerosene lamps. Together with OSRAM, a this point, we resign an in-depth comparison of
leading manufacturer of lighting solutions, and different cost structures of O-Lamps and kerosene
SolarWorld, a manufacturer of solar panels, they lamps. Generally speaking, if we assume cost-
developed a new solution tailored to the needs covering business practices of OSRAM, negative
of developing countries. OSRAM manufactured effects for production and recycling exist, but are
portable lamps, which consisted of a rechargeable not higher than accumulated lending revenues per
battery (O-Box) unit and a robust and waterproof lamp. However, considering the maintenance
energy-saving lamp (O-Lamp). Interestingly, OS- phase from a users point of view, we can analyze
RAM did not sell those lamps, but created a PSS by the economic effects of the O-Lamp. By capturing
lending those products to local residents. In order solar energy, the price of charging the batteries is
to do so, an on-site station was established, where around 20% lower than the price of kerosene for
lamps are handed out and recharged by using solar the same amount of lighting. The costs of recycling
46
Table 3. Sustainability effects on the technological level

Use/ maintenance End of life
Economic 20% lower energy costs n/a
Environmental Zero emissions Fewer pollution from kerosene
Fewer pollution from kerosene Risk of mercury
Risk of battery disposal
Social Zero air pollution Risk of mercury
Zero accidents from kerosene lamps Risk of battery disposal
Improved living standards and education
O-Lamps were not known at this point of time, Analysis of the PSS level
but can be considered as negative and moderate.
Environmental effects: Considering the use The off-grid lighting solution depicts an illustra-
phase, the introduction of off-grid lighting leads tive example of a PSS: by lending rechargeable
to a maximum reduction of CO2 and other toxic battery packs, these packs can be used more often
emissions while the lamps are used. It has to and can be maintained more easily. Therefore, the
be noted that the reduction of CO2 is possible assessment of sustainability effects on a PSS level
due to solar energy collected on the roofs of the is of particular interest (Table 4):
recharging stations. Furthermore, environmental Economic effects: As mentioned above, the
pollution from spilled or dumped kerosene is assessment of the production phase is very
removed entirely. However, O-Lamps pose some company-specific and carried out in this case
environmental risks in the end-of-life phase, as study rather generically. The analysis of the use
some hazardous materials are part of the energy phase, however, reveals remarkable effects. By
saving lamps (e.g. mercury) and batteries (e.g. offering a lending service of its product, the
plumb). Hence, these products carry certain risks, product is much more affordable to local residents.
if not recycled properly. This is due to the fact that the actual usage of a
Social effects: Regarding the use phase, the product can be split up in single value-adding
reduction of toxic emissions in houses of the local packages and then sold separately. In contrast, the
users leads to healthier living environments and sales based on transfer of ownership do not allow
less air pollution. Furthermore, accidents with such separation and can only be sold once. Ac-
kerosene lamps, which may lead to severe burns cordingly, while a classical approach of selling
or deaths, can be avoided. Another indirect, but lamps and transferring ownership would impose
noteworthy, effect is the improvement of living a very high economical entry barrier, lending out
and, foremost, learning conditions. Generally, lamps leads to a lower price level per utility unit
young children may only be able to study in and therefore significantly increases the market
the evening, when home from school or work. reach of this product. In fact, in this case study,
However, kerosene lamps are rather improper the introduction of a lending service enables the
due to the poor quality of light. By having ac- access to technological innovations and SOIs in
cess to better and longer lighting, children have the first place. The support of micro loans adds
improved opportunities for education. From an to this fact that lower economical entry barriers
end-of-life perspective, the use of mercury within can be considered as a key achievement of PSS
the O-Lamps and the use of batteries cause health innovations in developing countries. Conse-
risks, when not recycled properly. quently, in developing countries PSS can be re-
47
Table 4. Sustainability effects on the PSS level

Economic Lower economical entry barriers -
Environmental Access to clean and renewable energy Recycling and disposal of lamps and batteries, which
sources include toxic materials
Social Access to improved lighting -
New job possibilities
garded as enabler for SOIs on a technological and life-cycle dimensions of SOIs. Furthermore,
level. our findings lead to several implications which
Environmental effects: Major environmental are discussed in the following.
effects of the overall PSS can be determined
in the use and end-of-life phase. By collecting PSS and its Effects on Sustainability
solar power at the recharging stations, clean and
renewable energy sources can be guaranteed in The effects of PSS on sustainability have been
the use phase. Regarding the end-of-life phase, generally discussed elsewhere with regard to
the collection of battery packs and their recycling developed countries (e.g. Mont, 2004). We could
and disposal is more feasible. identify those effects within this case study again
Social effects: Noteworthy social effects on the to support the following findings: firstly, by in-
level of the PSS are created mostly during the use troducing a PSS (instead of mere product sales),
phase. By lowering the economical entry barriers, the resource efficiency could be significantly
the PSS discloses the accessibility of technology increased (by using the batteries more often).
to the poor and can hence lead to improved liv- Secondly, the PSS leads to an extension of the
ing standards of the population. The operation of responsibilities of the manufacturer. The com-
energy hubs as charging station is an investment pany now owns batteries and lamps and is hence
in local infrastructure and thus may also add job responsible for their recycling and disposal. This
opportunities to local communities. Still, it may is extremely important in the presented case, as
also be considered that such new infrastructure both components incorporate toxic and environ-
and offerings put previous job opportunities (e.g. mentally harmful materials. The case illustrates
kerosene trading) at risk the positive job effect an additional positive effect resulting from the
thus might be outweighed. shift of responsibility: as OSRAM is responsible
In summary, Table 5 gives an overview of all for the recharging of the batteries, it adds to the
effects on the technological level and the PSS level. positive sustainability impacts by integrating solar
power to its system. The use of solar panels is only
feasible by taking advantage from economies of
DISCUSSION AND FUTURE scale at the recharging stations. This finding sup-
RESEARCH DIRECTIONS ports research on PSS, in which the generation
of synergies is explicitly mentioned as a major
The case study exemplifies the multi-dimension- benefit of PSS (Manzini & Velozzi, 2002).
ality of SOIs and demonstrates the importance of More generally, Pawar et al. (2009) identi-
structuring sustainability effects along the target fied the challenge of designing value in order
48
Table 5. Overall assessment of sustainability effects
Target dimension Innovation Life-cycle phases

level
Economic Product ~20% lower energy costs -
PSS Company: lower economical entry barri- -
ers through rental and thus creation of new
markets
Environmental Product Zero emissions Fewer pollution from kerosene
Fewer pollution from kerosene Risk of mercury disposal
Risk of battery disposal
PSS Access to clean and renewable energy sources Recycling and disposal of lamps and
batteries
Social Product Zero air pollution Risk of mercury
Zero accidents from kerosene lamps Risk of battery disposal
Improved living standards and education
PSS Access to improved lighting -
(long-term: new job possibilities)
to successfully implement PSS. Furthermore, oriented product innovations through a PSS can
the need of being able to model a PSS was thus be a good strategy to maximize positive
identified (Baines et al., 2007). The presented sustainability effects (Figure 1). Future research
approach especially the separate evaluation of should thus analyze the role of PSS for successfully
technological and PSS levels may add value introducing radical SOIs, either in niche markets
by providing an in-depth understanding on how or at transition into mass markets.
and where value is created and where additional
value might be created. Hence, the taken approach The Role of SOIs for the
may add to the further understanding of a PSSs Development of PSS
sustainability effects.
Pawar et al. (2009) highlighted the importance
PSS as Enabler for SOIs of simultaneously designing the product, service,
and organization in order to successfully establish
This case study emphasizes another profound a PSS. Our case study underlines this finding by
effect of PSS, which is unveiled in our findings: illustrating a rather different product design of
PSS can function as economic enabler for SOIs OSRAM: by integrating batteries and recharging
and more generally, for product innovations stations, OSRAM designed its offering differ-
(Manzini & Velozzi, 2002). By selling the utility ent to its traditional products of mere selling of
of products, rather than transferring ownership, bulbs. The product itself was adapted to fit in the
the price of using a product for the first time newly developed PSS. This notion emphasizes the
drops significantly, hence minimizing economic interdependencies of the technological and PSS
entry barriers to using products and/or services levels of innovation. Hence, when advancing to
(Mont, 2001, 20). This is extremely important in the layer of PSS, companies have to review their
developing countries where relatively high pur- product innovations and may design them differ-
chasing prices constitute significant barriers to the ently (Pawar et al., 2009).
diffusion of products. Introducing sustainability-
49
Figure 1. Simultaneous innovation at the technological level and PSS (or functional) level
Success Factors for the are lent at full cost which does not correspond
Introduction of PSS with the fluctuation of local demand for off-grid
lighting. This invalidates the general flexibility
General barriers and design features for the intro- benefit of the PSS which would allow for a better
duction of PSS are discussed in literature (Baines et adjustment to customer needs (Cook et al. 2006).
al., 2007, Manzini & Velozzi, 2002). For instance, Ultimately, OSRAMs PSS is not fully suited
the need of incorporating a multi-stakeholder to the needs and usage patterns of its target group
approach is highlighted, when introducing PSS and, hence, could not fully unveil its sustainabil-
(Pawar et al., 2009, Huiten et al., 2001, Mazini & ity potentials. This emphasizes the importance
Velozzi, 2002). Additionally, being sensitive to the of integrating customers into the development
cultural context can be regarded as one of the key of PSS as early as possible (Hansen et al., 2009,
success factors for the integration of PSSs (Wong, Manzini et al., 2001, Huiten et al., 2001). The
2004). By integrating local and international NGOs case may further stress the requirement of new
in the development of its offering, OSRAM pur- methodologies for the design and development
sued this notion fairly well. However, arguably, of user-tailored PSS (Morelli, 2002, Baines et al.,
OSRAM failed to fully integrate its customer into 2007, Manzini & Velozzi, 2002). Further research
the development process. One of the reasons, why should look at processes of open innovation and
the solution is not adopted by the local population customer integration (e.g. Halila & Horte, 2006;
in Kenya so far, can be traced back to its pricing von Hippel, 1988) in order to build more suc-
system: OSRAM charges deposit fees to be able cessful PSS.
to use the system. However, those deposit fees are
considerably high, thereby impeding most of the
potential customers from purchasing the service. CONCLUSION
Additionally, the income of local fishermen is
highly volatile and thus their need for electricity This chapter emphasized the role of innovation
is equally varying. However, OSRAMs offer is for addressing sustainability as well as the role of
rather inflexible, as only fully charged batteries sustainability as a source for innovation. Product-
50
Service System (PSS) represents an important Cook, M., Bhamra, T., & Lemon, M. (2006).
approach for both perspectives. However, as PSSs The transfer and application of product service-
are combinations of products and services and, as systems: From academia to UK manufacturing
they go beyond product ownership, multiple new firms. Journal of Cleaner Production, 14(17),
hurdles and opportunities emerge. The presented 14551465. doi:10.1016/j.jclepro.2006.01.018
case study showed an example of simultaneous
Devisscher, T., & Mont, O. (2008). An analysis
product and PSS innovations and revealed how
of a product service system in Bolivia: Coffee
to assess the various sustainability effects on
in Yungas. International Journal of Innovation
both levels. Beyond established effects of PSS
and Sustainable Development, 3(3/4), 262284.
of saving materials due to fewer products in the
doi:10.1504/IJISD.2008.022229
market (as the same product is used more often
by various customers) the PSS could also be a Dubois, A., & Gadde, L.-E. (2002). System-
beneficial innovation strategy for introducing atic combining: An abductive approach to case
new products/technologies in the market. Future research. Journal of Business Research, 55(7),
research should emphasize this role of PSS in 553560. doi:10.1016/S0148-2963(00)00195-8
market entry strategies also in developed nations.
Dyllick, T., & Hockerts, K. (2002). Beyond the
business case for corporate sustainability. Business
Strategy and the Environment, 11(2), 130141.
ACKNOWLEDGMENT
doi:10.1002/bse.323
We thank Prof. Stefan Schaltegger, head of the Ehrenfeld, J. (2001). Designing sustainable
Centre for Sustainability Management (CSM), product service systems. In Proceedings of the
for providing us with valuable feedback. Further- 2nd International Symposium on Environmentally
more, we thank one unknown reviewer for his/ Conscious Design and Inverse Manufacturing
her constructive suggestions. (pp. 12-23).
Eisenhardt, K. M. (1989). Building theories from
case study research. Academy of Management
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Yin, R. K. (2003). Case study research: Design
products, services, networks of players and sup-
and methods (3. ed.). Applied social research
porting infrastructure that continuously strives to
methods series: Vol. 5. Thousand Oaks, CA: Sage
be competitive, satisfy customers needs and have
(Original work published 1984).
a lower environmental impact than traditional
Zeug, K. (2009). Kein Licht fr Afrika. DIE ZEIT, business models (Goedkoop, 1999).
3, 31, 1.8.2009. Sustainable Development: A development
that meets the needs and aspirations of the pres-
ent generation without compromising the ability
of future generations to meet their needs (World
KEY TERMS AND DEFINITIONS
Commission on Environment and Development,
1987).
Case Study: A case study is a research strategy
Sustainability-Oriented Innovation (SOI):
which focuses on understanding the dynamics
A new development (and commercial introduc-
present within single settings (Eisenhardt, 1989).
tion) of a product, technology, service, process,
Corporate Sustainability: Corporate Sus-
or business model which, in comparison to a prior
tainability can be defined as meeting the needs
version, has a positive net effect on the overall
of a firms direct and indirect stakeholders (such
capital stock (economic, environmental, social),
as shareholders, employees, clients, pressure
whereby tradeoffs between economic capital
groups, communities etc), without compromising
on the one hand and environmental and social
its ability to meet the needs of future stakeholders
capitals on the other are possible only when the
as well (Dyllick & Hockerts, 2002) - which can
reduction of either one side is compensated with
be operationalized by the heuristic, multi-criteria
a sufficiently high increase of the other (Hansen
triple bottom line perspective aiming at the inte-
et al., 2010; Wagner and Llerena, 2008).
gration of economic, environmental, and social
capital through eco-efficiency and effectiveness,
54
55
Chapter 4
Innovation for Sustainability
in Aviation:
World Challenges and Visions
Hiroko Nakamura
The University of Tokyo, Japan
Yuya Kajikawa
Shinji Suzuki
ABSTRACT
In this chapter, the shared visions and the latest activities for sustainability in the aviation sector are
presented and perspectives on the innovations that this sector should achieve are discussed. To do this,
the latest experts talks are collected from four international meetings for aviation and the environment
held around the world between September 2009 and May 2010, which invited experts and researchers
from Japan, Europe, and North America. The expansion of networks between agents of the sector, which
is considered to be essential for the success of innovation transition, is found in the latest projects for
aviation sustainability. To smooth the transition of innovation from sectors initiatives including radi-
cal change such as low-carbon alternative fuels, we emphasize the need for more discussion about new
economic measurements. Finally, we discuss directions for future research, using multi-level perspectives
for a transition management of aviation innovation for sustainability.
INTRODUCTION as sustainability, however air travel also allows

people to meet their friends and families living
Some environmentalists believe that air trans- on other continents, and the chance to buy local
portation is evil because it is energy consuming, products of another hemisphere in their own
extravagant, and polluting. Aircrafts fly using towns. The aviation and a sustainable future
fossil fuels, which emits various problems such is very complicated issue socially and economi-
cally. Furthermore, aviation connects countries.
DOI: 10.4018/978-1-61350-165-8.ch004
Innovation for Sustainability in Aviation
No single country has full control of international of NOx effects to ozone production and methane
flights, which indicates that the management of reduction and the potentially grave effect of con-
aviation in the future can not be achieved without trails are still uncertain (Szodruch, 2009).
international negotiations and challenges.
In this chapter, we investigate how the sector
is going to control the flight for sustainability in BACKGROUND
such a difficult weather. Over a hundred years after
the Wright brothers flights, aviation has achieved Research into Innovation and
countless technological and system innovations in Sustainable Development
the area of fuel efficiency, noise, air quality, speed
and safety. The main agents of the aviation sector Recent social science research into innovation and
are listed as follows: airlines, aircraft manufac- sustainable development can be classified into two
turers, engine manufacturers, research institutes, groups: cleaner technology and systems innova-
researchers, air control services, airports, and gov- tion (Smith, 2006). The latter is important since
ernmental and non-governmental organizations. cleaner technologies are often not adopted without
Geel (2006) pointed out that the networks within some transformation of socio-technical systems
the socio-technical system for aviation were one (ex. technology, policy, users, industry structure,
of the keys to success in precedent innovations. markets, culture, infrastructure, science) (Weber
With successful experience in innovations, the et al., 1999). Researchers of systems innovation
aviation sector is now tightening and widening have been developing many theories and tools to
the networks between various agents to challenge promote the transitions required to make it possible
the climate-change issue. Last year, for example, to move innovations from laboratories to market.
the sector produced the first globally harmonized One prominent school of thought in recent
agreement on reducing the sectors impact on cli- systems innovation debates is called Strategic
mate change (ICAO, 2009), the details of which Niche Management (SNM). Here niche is used
will be described in the next section. to describe an emerging and innovative technol-
This chapter is organized as follows: the ogy or system, and is vulnerable at the infancy.
second section explains the theory we use for Studying the history of technology innovations,
the analysis of experts talks and the background SNM scholars have analyzed processes to try to
of the aviation and the environment issues. The determine what is the best for successful develop-
third section presents the data sources which ment of niche. They have identified some strategic
the analysis is based on, and the sectors shared factors; broad and deep social networks, robust
visions toward aviation for sustainability. The expectation shared between actors of a niche, and
fourth section discusses the technological and learning processes at multiple stages where the
system innovation trends, network expansions actors related to the niche learn about the design,
of agents of the aviation sector and perspectives user needs, cultural and political acceptability, and
for achieving the sectors responsibility toward a other aspects of the niche (Schot & Rip, 1996,
carbon-neutral society. The fifth section proposes Hoogma et al., 2002).
future innovation management directions. And the SNM researchers have taken a lot of case
sixth section concludes our findings. studies of the transition mechanism of various
Finally, in this chapter, we treat CO2 emission domains; products such as organic food, eco-
reduction as the main solution for aviation impact efficient house etc., or public services such as
reduction for climate change, while the balance biogas energy plant, waste water plants and so on
56
(e.g. Smith, 2006; Raven & Geel, 2010; Dries et however, has been caught between two opposite
al., 2007). There are a few studies about aviation principals; UNFCCCs principle on common,
(Haan & Mulder, 2002; Kivits et al., 2010). More but differentiated responsibilities (CBDR), and
studies are expected to accelerate both the SNM aviations Chicago Convention principle of non-
research and the aviation sustainability, because discrimination and equal and fair opportunities to
systems innovation in the aviation sector is very develop international aviation. In other words, to
difficult due to the long product lifecycle and huge achieve a consensus in the ICAO, a consensus both
sunk costs (Kivits et al., 2010). Furthermore, the of countries which ratified the Kyoto Protocol and
development requires a lot of investment and gov- those countries which did not. Consideration on
ernment supports, which causes WTO subsidies the two principles of the CBDR and the Chicago
disputes. How the aviation sector will bring niches Convention caused very slow progress in the
up is very interesting to the researchers of SNM. discussions.
A continuous increase in world fear about
Aviation for Sustainability climate change and the absence of a central force
in the ICAO consequently called to fore the sector
The impact of air transport on the atmosphere agents awareness of their responsibility to work on
and the climate was estimated as 3.5%~4.9% of climate change issues and their ambitious to take
current anthropogenic radioactive forcing (Lee, leadership in aviation development towards sus-
2009) with a high uncertainty due to emission tainability. A number of activities, which vary from
at high altitudes (Szodruch, 2009). This number R&D projects in manufacturing to international
itself doesnt tell us whether the impact is small, initiatives for air transport management (ATM)
significant or fair (Randles & Bows, 2009) systems are now organized around the world, but
because aviation also brings a number of social especially in North America and Europe.
and economical benefits. The sector has achieved
significant improvements in environmental per-
formance, for example, 90% noise reduction and VISIONS AND TECHNOLOGY
70% CO2 reduction (or fuel-efficiency increase) DIRECTIONS OF THE
compared to the 1950s (Blackner, 2010). It must AVIATION SECTOR
be remembered, however, that a stable increase of
traffic is forecasted. Boeing estimated an average In this section, visions shared widely among the
5.2% to 5.9% growth of worldwide passenger aviation sector and directions of technology devel-
traffic and cargo traffic, respectively, over the opment are discussed on the basis of the experts
next 20 years (Boeing 2010). talks gathered from four international meetings
The Kyoto Protocol to the United Nations for aviation and the environment. The meetings
Framework Convention on Climate Change were held between September 2009 and May
(UNFCCC) asked the International Civil Avia- 2010 by 2 major international organizations that
tion Organization (ICAO) to pursue limitation are connected strongly with European and North
or reduction of greenhouse gas (GHG) emissions American leading industries and institutes and by
from international flights (Conference of the Par- authors. The brief summary of each organizations
ties, 1997). ICAO formed the Group on Interna- and the meetings are as follows. It is interesting to
tional Aviation and Climate Change (GIACC) to note that, in each meeting, we can find the increase
develop an ICAO program of Action in January of the sectors interest on the environment issue.
2008. The ICAOs discussion on climate change,
57
The American Institute of Aeronautics and Most speakers came from the Europe, but one
Astronautics (AIAA), which is the worlds larg- speakers was from the U.S. All of the presentation
est technical society for aerospace, held Inside documents from this 2009 meeting in Amsterdam
Aerospace, an annual international forum for can be downloaded from the ICAS homepage.
aviation and space leaders. While the themes of The Centre for Aviation Innovation Research
recent meetings were about the aerospace work- (CAIR) is an inter-disciplinary organization
force, the meetings held on the 11th and 12th, within the University of Tokyo, established in
May, 2010, at Arlington, in Washington D.C, August, 2009. CAIRs main objectives are to
were dedicated to a candid discussion of how to research aviation innovation from a wide range of
make aviation more energy efficient and green views, including aeronautics, aviation policy, and
and how to effectively use aerospace technology economics, and to help promote and design the
to understand and limit climate change (AIAA aviation industry as one of the leading industries
homepage). The AIAA invited key speakers in Japan. One concrete objective is to contribute
from government, airlines, aircraft and engine to realize maximum utilization of airspace by de-
manufacturers, oil companies, academia, research veloping a set of policy recommendations. CAIR
institutes, non-governmental organizations, and held an International Seminar on Aviation and
even the Air Forces. Most speakers came from Climate Change on February 18th, 2010, and
North America, but some speakers were also from an Aviation Environment Workshop on May
Europe. Some of presentation documents can be 19th, 2010. The former seminar invited experts
downloaded from the AIAA homepage. and researchers from Japan and Europe to discuss
The International Council of the Aeronautical the technological feasibility of attaining emission
Science (ICAS) is the sole global organization for reduction targets as well as future research direc-
a free international exchange of information on tions on the issue. The latter workshop organized
aeronautical science and engineering. The Council by CAIR and the Boeing Company invited experts
holds an International Congress in the fields of from the U.S. and Japan to share their knowledge
Aeronautical Sciences every two years (ICAS of technologies that have enabled significant re-
homepage) and receives hundreds of aeronauti- ductions in aircraft noise and emissions to date.
cal researchers and student participants. It also Technologies being developed for further reduc-
holds an International Workshop biennially for tion in aviations environmental footprint were
international experts in the field to exchange discussed. The workshop was initially planned as
views and to identify further areas of potential a workshop for noise issues, but in the course of
cooperation. In 2005, the theme for the interna- preparation, the theme was replaced with wider
tional workshop was, Towards a Global Vision environmental issues, which also included the
on Aviation Safety and Security, in 2007, the subject of emissions. This fact implies also the
theme was UAV-Airworthiness, certification and recent increase in the sectors attention to the cli-
access to the airspace, and in 2009, Aviation mate change. Both meetings invited governments,
and Environment. It was not until recently that airlines, aircraft and engine manufacturers, oil
environmental themes were considered important companies, academia, and research institutes. Half
enough to discuss as a main theme. On the 28th of of the speakers came from Japan and the others
September 2009, in Amsterdam, the Netherlands, from Europe and the U.S. Some of presentation
the workshop was organized with invited speakers documents can be downloaded from the CAIR
from government, airlines, aircraft manufacturers, homepage.
academia, and non-governmental organizations.
58
Table 1. World aviation goals
Organization Vision Title CO2 and other aviation environmental performance targets
ICAO Programme of -2% annual fuel efficiency improvement up to 2050
Action -Further discussion on more ambitious goal
IATA Carbon Neutral -1.5% annual fuel efficiency improvement from 2009 until 2020
Growth from 2020 -Carbon neutral growth from 2020
-50% carbon emission reduction by 2050 compared to 2005 levels
ACARE (Europe) A Vision for 2020 -50% CO2 reduction
-80% NOx reduction
-50% noise reduction compared with 2000
NASA (USA) NASA subsonic Conventional configurations relative to 1998 single aisle (N+1=2015***)
transport system -32dB below Stage4 for Noise reduction
level goals -60% below CAEP6 for LTO NOx emissions reduction
-33% aircraft fuel burn reduction**
Unconventional configurations relative to 1997 single aisle (N+2=2020***)
-42dB below Stage4 for Noise reduction
-75% below CAEP6 for LTO NOx emissions reduction
-50% aircraft fuel burn reduction**
Conventional configurations relative to 1998 single aisle (N+3=2025***)
-71dB below Stage4 for Noise reduction
-75% below CAEP6 for LTO NOx emissions reduction
-Better than 70% aircraft fuel burn reduction** with Exploit metro-plex*concepts
***Technology Readiness Level for key technologies = 4-6
** Recently Updated. Additional gains may be possible through operational improve-
ments
* Concepts that enable optimal use of runways at multiple airports within the metropoli-
tan area
Visions for the Future of Aviation ICAO: (1) CO2 efficiency by 1.5 per cent per an-
num from 2009 until 2020, (2) carbon neutral
Before discussing the major activities of the avia- growth from 2020, and (3) reduction of carbon
tion sector for sustainability, we would like to emissions by 50 per cent by 2050 compared to
present visions and strategies besides the Kyoto the 2005 levels in June 2009.
Protocol, which serve as a frame for each of the The Next Generation Air Transportation Sys-
activities. These strategies are summarized in tem (NextGen) is an air transport management
Table 1. concept for the year 2025 and beyond, which
The International Air Transport Association meets US future air transportation safety, security,
(IATA), which represents some 230 airlines mobility, and environmental needs. The NextGen
comprising 93% of scheduled international air concept was enacted in 2003 by the Congress of
traffic, created and have been promoting a four- the United States. An important benefit of Next-
pillar strategy since 2007 to achieve a vision of Gen is to provide environmental protection (FAA
carbon-neutral growth in the mid-term and to homepage). NextGen uses a five-pillar strategy of
build a zero emission commercial aircraft within advances in science and modeling, operational
the next 50 years (IATA homepage). The four- improvements, new technologies, renewable
pillar strategy, Improved technology, Effective fuels and policy initiatives including the envi-
operations, Efficient infrastructure and Positive ronmental management system (EMS) to address
economic measures is comprehensive (Haag, environmental impacts. On the other hand, the
2009). The IATA, as a representative of the airline National Aeronautics and Space Administration
industry, set three goals as follows prior to the (NASA) in November 2007, presented the tech-
59
nological goals for future-generation aircraft that Technical Development Directions

should be in service from 2030 to 2035 (NASA
homepage). Through observation of the current sectors
European Aeronautics: A Vision for 2020 movement toward sustainable aviation, we found
and the Strategic Research Agendas (SRA1, that various levels of innovative ideas have been
SRA2, Addendum) of the Advisory Council for proposed and developed. There are two main di-
Aeronautics Research in Europe (ACARE) exist rections: One direction of innovation is to reduce
to better serve societies needs while becoming fuel use by (1) lighter weight, (2) low air resistance
global leaders in the field of aeronautics. The aircraft design, (3) lean combustion and a high
challenges for the European aviation industry bypass engine, (4) an optimized electric system
include quality & affordability, the environment, and (5) optimized flight routes Another direction
safety, and the efficiency of the air transport system is to replace fossil fuel by 6) biofuels. We discuss
and security. The ambitious environmental goals each innovation from (1) to (5), while considering
are 50% CO2 reduction, 80% NOx reduction, and (6) as a separate direction below:
50% noise reduction compared with 2000 levels
(ACARE homepage). 1. Light weighting of aircraft: Weight is as
Japan does not have a clear shared vision critical as cost in aircraft development, and
throughout the national aviation industry. A tar- resistance to the severe environments of
get for domestic aviation, however, has arisen heat, load, and fire is required aircraft mate-
from the national sector-based approach under rial. Replacement of metal by Carbon Fiber
the Kyoto Protocol Target Attainment plan. The Reinforced Plastics (CFRP) is expected in
target is 15% improvement in energy efficiency this sector. According to the panel discus-
(fuel consumption per pax-km performed). sions of the CAIR seminar in Feb 2010,
With the UNFCCC Conference of the Parties however, simple replacement by CFRP wont
(COP) 15 close at hand, ICAO finally reached bring enough reduction of weight because
the first globally harmonized agreement on re- a drastic change of structural design is also
ducing the sectors impact on climate change at needed to benefit from the use of CFRP.
the High-level Meeting on International Aviation NASA is currently investigating a fail-
and Climate Change in Oct 2009 (ICAO, 2009). safe structure design instead of safe-life
The ICAO Programme of Action on International for lightweight composite structures in its
Aviation and Climate Change has a 2% annual research project, Pultruded Rod Stitched
fuel efficiency target for improvement up to 2050 Efficient Unitzed Structure (PRESEUS)
and further discussions are expected on even more (Collier 2010).
ambitious goals. 2. Lowering air resistance of the aircraft:
These high targets are well shared and stimu- NASA is now conducting research about a
late integrated development approaches between Blended Wing Body (BWB), which can con-
agents. There are dozens of technical and op- tribute to the reduction of both aircraft weight
erational innovation proposals which include and air resistance by integrating the wings
what could not be expected from development and the fuselage. In Boeings newest prod-
approaches by a single agent, such as open rotor uct, innovation in aerodynamics is achieved
engines. through state-of-the-art Computational Fluid
Dynamics (CFD) technology and advanc-
60
ing wing technologies like multi-function cause an increase of aircraft weight due to
ailerons and high-aspect ratio wings with the weight of the battery. In fact, there is an
CFRP (Blackner, 2010). inbalance of supply and demand in electric
3. Improving fuel efficiency of the engine: power generation. During the take off and
Improvement of fuel efficiency is pursued climb, the engines generate a lot of power. On
in two directions, improvement of propul- the other hand, during the cruise, the cabin
sive efficiency and thermal efficiency. A requires a lot of electricity for air condition-
higher bypass ratio, of the air that passes ing, meal preparation, etc. Research is being
around the engine to the air that passes conducted to minimize the inbalance and to
through the engine, is effective in improv- effectively use the engine output by genera-
ing the propulsive efficiency by reducing tion and storage of electricity. Furthermore,
the passed air flow speed. A higher bypass the Japan Aerospace Exploration Agency
ratio, however, confronts the problem of (JAXA) is conducting hydrogen and fuel
the hypersonic rotation of blades and en- cell hybrid engine research with which an
gine size. Mitsubishi announced the use of aircraft can cruise with fuel cell power and
a geared turbo fan (GTF) engine made by then use a hydrogen gas turbine engine when
Pratt & Whitney in the Mitsubishi Regional the fuel cell power is not enough.
Jet (MRJ). Pratt & Whitney has developed 5. Optimizing the flight route: Currently,
a speed reduction gear which can improve aircrafts fly to their destination in zigzag
propulsive efficiency with very high bypass for various reasons such as political and
ratio. The open rotor engine which allows a technological issues. While many political
very high bypass ratio is now under devel- efforts to encourage effective use of airspace
opment in many institutes and companies. with airlines, military operators, business
The development of the open rotor must and general aviations of different countries
challenge safety and mounting issues. For are being made globally, a new air traffic
thermal efficiency, the main issue has been management system which can optimize the
how to make higher pressure and temperature route according to the airports particular
in a combustion room possible without NOx environments and latest climate reports, are
increase. In Europe, a unique alternative being developed and are under international
cycle process with an intercooler system agreement negotiation. The Federal Aviation
is now under investigation on a long-term Administrations (FAAs) Performance-
basis. Based Navigation (PBN) system, which
4. Optimizing the electric system: The output allows aircrafts to take preferred routing and
from jet engines are used not only for pro- trajectories, is an example of an innovative
pulsive purposes, but also for electric power development. Test flights of PBN conducted
generation and the power of the hydraulic and have shown a significant reduction of
and heating systems. GE and Boeing have fuel consumption as well as other benefits
developed a non-engine-bleed system in the like optimal use of air space, reduction of
787, which replaces the bleed air heating and pilot/ controller voice transmission, etc..
de-icing system by changing the engines The major technological challenge is how
output to an electric signal. The replacement to manage plural operations safely without
can remove a lot of weight from the hydrau- an additional load of works on operators and
lic system. An idea to store electricity, will navigators.
61
6. Development of Biofuels: Airlines still grown on soil or in water that is otherwise

have few choices when it comes to jet fuels unsuitable for food production (Sustainable
(kerosene) because jet fuels for aircraft are Aviation, 2010, Ito, 2010). Many test flights
strictly controlled by international standards. have been completed by Boeing, Airbus, and
Any compound change in fuels, even without many research institutes (Blackner, 2010,
combustion characteristics change, need Szodruch, 2009). According to Shell (Ito,
to be approved for safety and reliancy. On 2010, Bauldreay, 2010), the cost of produc-
the other hand, relying only on kerosene is tion due to the longer refining routes, and
a menace to the airlines in terms of future the cost of feedstock and poor yields are
energy security and high prices. For energy the big obstacles when the biofuels try to
diversity generally, the fuel candidate must replace the kerosene.
be handled like oil so that XTL such as
Gas to Liquid (GTL), Coal to Liquid, and PERSPECTIVES ON AVIATION
Biomass to Liquid (BLT) have been chal- FOR SUSTAINABILITY
lenged. For alternative aviation, too, drop-
in fuel which can replace current jet fuels In this section, we are going to investigate, on
without change to aircrafts has been actively the basis of SNM findings, whether current avia-
investigated (Okai, 2010). The use of XTL tion sectors activities toward sustainability can
products produced by new industry pro- be implemented successfully. According to the
cesses, which have been developed for more findings from SNM research, development of a
than thirty years, have been approved by the broad network including actors from dominant
American Society For Testing and Materials regimes such as policy makers, users, suppliers,
(ASTM), an international standards for knowledge institutes and also new actors such
aviation. Synthetic gas from natural gas, as small innovative firms, is very important. For
coal, or biomass are being processed in the the success of the project, SNM also emphasizes
Fisher-Tropsch process to log chain paraf- the importance of high expectations to the vision
fins and are finished in hydroprocessing and by all of the actors and of internal and external
separated into final XTL products. ASTM learning cycles on technologies, infrastructures,
D7566, a standard for Aviation Turbine and policies (Van der Laak et al., 2007).
Fuel Containing Synthesized Hydrocarbons,
which was issued in Sep. 2009, accom- Active Networks
modates up to 50% blends of conventional
aviation turbine fuel with synthesized Table 2 shows some examples of active networks
hydrocarbon blend components produced found among agents in the aviation projects for
from coal, natural gas, or biomass using the sustainability. A close relationship among agents
Fischer-Tropsch process. For low carbon jet has supported a number of innovations since the
fuel, experts say that biofuel is technically Wright brothers.
feasible. While 1st generation biofuels often Aviation is an integrated multi-technology
produced from seeds or grains such as wheat, system. Aircraft development and operation in-
are criticized for their strong adverse effects volve thousands of people all over the world.
regarding food shortage in developing na- During the development of a new aircraft, such
tions (Hansen et al., 2009, Schaltegger et al., as the Boeing 787, or the Mitsubishi MRJ, the
2005), 3rd generation biofuels derived from aircraft manufacturer works together with not
algae avoid this criticism since they can be only engine manufacture and other suppliers but
62
Table 2. Landscape of aviation activities for sustainability
Airlines Engine Research Airports Others (fuel

Aircraft/ Governments
Manufacturers institutes suppliers)
Avionics /Air control
Projects, Activities, /
Manufacturers services
Technologies Academia Data Sources*
IATA four-pillar strategies; Improved technology
Boeing 787 Dreamliner ANA Boeing GE& NASA FAA Blackner (Boeing) CAIR-
- 20% reduction in fuel and CO2 (Rela- Rolls-Royce MAY
tive to the 767)

Mitsubishi MRJ Sakura (Mitsubishi) CAIR-
- 70% lower CO2 emissions from ICAO Feb
CAEP6 requirements ANA Mitsubishi P&W JAXA FAA, JCAB Parakeh (P&W) Inside
- Pratt & Whitney PurePower
PW1000G: 12~15% fuel efficient
NASA Environmentally Responsible Collier (NASA) CAIR-May

Aviation (ERA) Project
Contracts Contracts NASA
- Focus on NASA N+2 goal
- 50% fuel burn reduction
FAA Continuous Lower Energy and Federal Hanlon (FAA) CAIR-May
Noise (CLEEN) Project Boeing, Honey- Aviation Ad-
P&W, GE, R-R
- Focus on NASA N+1 goal well ministration
- 33% fuel burn reduction (FAA)
EU Clean Sky Programme 20 small Wetzel (Federal Environ-
15 instit. European
- 6 integrated technology demonstrators 54 industries 54 industries and medium mental Agency) CAIR-May
+ 17 univ. Commission
- 40% CO2 reduction enterprises
Sustainable biofuel viability JAL, Blackner (Boeing) CAIR-
COA, May
Boeing P&W, R-R, GE UOP etc.
ANZ,
VJM
Commercial Aviation Alternative Fuels Airports Young (ATA) Inside
Initiative (CAAFI) Council Maurice (CAAFI) Inside
Air Trans-
- Environmental team Aerospace Interna- Baudreay (Shell) Inside
port As-
- R&D team Industries Asso- AIA tional FAA Shell
sociation
- Certification-Qualification team ciation (AIA) North
(ATA)
- Business & Economics team America
(ACI-NA)
continued on following page
63
64
Table 2. Continued
Airlines Engine Research Airports Others (fuel

Aircraft/ Governments
Manufacturers institutes suppliers)
Avionics /Air control
Projects, Activities, /
Manufacturers services
Technologies Academia Data Sources*
IATA four-pillar strategies; Effective operations and Efficient infrastructure
Asia and Pacific Initiative to Reduce JAL, AU, NZ, Air service of Funai, JAL, CAIR-Feb
Emissions (ASPIRE) ANZ, SG, JP AU, Hanlon, FAA, CAIR-May
QFA, US Air- NZ, SG, JP
UAL, SIA ports US
Performance Based Navigation (Next Hanlon, FAA, CAIR-Feb
Gen)
US Air-
- Radar Navigation (RNAV) FAA
ports
- Required Navigation Performance
(RNP)
IATA four-pillar strategies; Positive economic measures
JAPAN Shimizu (JCAB) CAIR-
- Corporation tax and property tax May
Japan Civil
reduction to promote new efficient
Aviation Bu-
aircraft
reau (JCAB)
- Application of Act on the rational use
of energy for large airlines
EU-ETS Anger-Kraavi (Cambridge
- All airlines operating in territory of the Uni) CAIR-Feb
EU from 2012
EU
- CO2 will be capped at the 97% level
of average emissions for 2004-2006 and
will be lowered to 95% from 2013
also with airlines and government agencies. Administration (FAA), Airports Council Inter-
Among various projects, the Asia and Pacific national North America (ACI-NA), Aerospace
Initiative to Reduce Emissions (ASPIRE) and the Industries Association (AIA) and the Air Transport
Commercial Aviation Alternative Fuels Initiative Association of America (ATA). The coalition of
(CAAFI) are especially interesting because the airlines, aircraft and engine manufacturers, energy
networks found in the former project are interna- producers, researchers, international participants,
tional, and the later project involves more differ- and U.S. government agencies has accelerated
ent agents than in most other aviation projects preparation for alternative fuel introduction (Mau-
(Table 2). rice, 2010). For example, any slight change to a jet
ASPIRE: ASPIRE was created in 2008 as a fuel needs a certification approval because of the
joint partnership between air navigation service strict priority to safety in this sector, and this ap-
providers Airservices Australia, Airways New proval is usually a long procedure. ASTM D7566,
Zealand, and the FAA to demonstrate optimized which is a specification for Aviation Turbine Fuel
operational procedures to reduce fuel burn with Containing Synthesized Hydrocarbons accommo-
current best practices and existing technology. dates up to 50% blends of conventional aviation
The Japan Civil Aviation Bureau (JCAB) and the turbine fuel with synthesized hydrocarbon blend
Civil Aviation Authority of Singapore (CAAS) components produced from coal, natural gas, or
joined in the ASPIRE partnership in 2009, and biomass using the Fischer-Tropsch process, was
2010, respectively. To date ASPIRE has conducted approved in 2009 with an exceptionally fast pro-
five flight demonstrations with Air New Zealand cedural speed because of supports to evaluation
Qantas, United Airlines, Japan Airlines (JAL), and and qualification of alternative fuels by CAAFI
Singapore Airlines on oceanic routes. The oceanic and other agencies (Rumizen, 2009). In CAAFI,
routes have a culture which accepts changes, and the FAA leads the Environmental team and the
has the most modern aircraft fleet, as well as many Certification-Qualification team, AIA leads the
advanced ocean ground automation systems. The R&D Team, and ATA and ACI-NA comprise
five flights demonstrated the maximum potential the Business & Economic team. Shell, which
for environmental efficiency. For example, JAL has contributed to the fuel readiness level of the
flight J077 from Honolulu, U.S. to Kansai, Japan, Fischer-Tropsch process and other alternative
on the 10th of October 2009 succeeded in a 4,825kg fuels, is an active member of CAAFI, as well
fuel consumption reduction; in other words, a as various international aviation alternative fuel
15,247kg CO2 emission reduction (Funai, 2010). projects: FAA-PARTNER, ASTM, CRC, IATA
The flight was fueled with the latest on-board loads & EU programs SWAFEA and Alfa-Bird (Boul-
data, used the closest runway, followed shorter dreay, 2010).
departure routes adjusted by the U.S. Air Force, * Inside stands for Inside Aerospace held by
took a User Preferred Route for the oceanic phase AIAA on the 11th and 12th, May, 2010. CAIR-
of the flight with a dynamic airborne re-route pro- Feb and May stand for International Seminar on
cedure instead of a route determined by 24-hours Aviation and Climate Change on February 18th,
old climate data, arrived with Continue Descended 2010, and an Aviation Environment Workshop
Approach, and optimized a flap/ undercarriage/ on May 19th, 2010 held by Authors.
thrust-reverse operation. In addition to the projects in the Table 2, there
CAFFI: CAAFI has been working to lead is an interesting initiative within UK, Sustainable
development and deployment of alternative jet Aviation, which brings together the UKs leading
fuels for commercial aviation since 2006 under the airlines, airports, aerospace manufacturers and air
leadership and sponsorship of the Federal Aviation navigation service providers. The sorts of agents
65
involved in the initiative is typical as for aviation tion. The expectations of the airlines themselves
but the aim of this initiative is broad. The initiative are especially important because it is the airlines
sets a series of eight goals and 34 commitments that finally decide whether or not to modernize
relating to economic, environmental and social their fleets (e.g., Lufthansas fleet modernization
aspects of aviation. The initiative is for the long programme of 170 aircrafts with a list-order price
term sustainability of the UK aviation industry but of 16 billion euros (Haag, 2009)). Airlines open
provides interesting and important reports about the window of opportunity for technological and
alternative fuels, CO2 efficient airport operation system innovations to spread in actual operations.
etc. through its homepage (Sustainable Aviation Nonetheless, the aviation industry still needs more
homepage). The initiative is strong and leads the discussions about the stage where CO2 emissions
government (Sunetra, 2010). reduction is not equal to cost reduction any more.
Drop in biofuels, are one of the most feasible
A Forked Expectation candidates for low carbon alternative fuel. In terms
of cost, however biofuels are not competitive
Governments and other non-profit organizations against current jet fuel (Ito, 2010). Even though
expect suppression of greenhouse gas effects in many airlines are open to development in various
the aviation sector for innovations presented in alternative fuel projects such as CAAFI for ex-
the previous section. On the other hand, in actual- ample, the main expectation of airlines to biofuel
ity, the expectation from airlines for innovations programs is energy security and corporate social
is heterogeneous. Airlines, which are the main responsibility. So even if biofuels can be used
customers and users of new technology and sys- technically, the positive participation of airlines
tems, look for cost reduction before reduction of to the development does not promise the posi-
greenhouse gases. However, in many presentation tive use of the low carbon alternative fuels if the
documents of the four meetings, a slide with the current kerosene jet fuel is still available and less
equation: Fuel reduction = CO2 emission reduc- expensive than alternatives. In order to introduce
tion is shown. technological and system innovations and the use
This equation amplifies the driving force be- of low carbon fuels to achieve a carbon-neutral
hind innovation. In the new aircraft development environment, we need a new mechanism to keep
phase, fuel efficiency is a critical factor in addition such different expectations to the same direction.
to speed, load capacity, and aircraft range without From the discussions in the four meetings,
any trade-offs in safety and security. This prior- however, a lack of ideas about positive economic
ity among fuel efficiency, speed, load capacity measurements, the 4th pillar of IATA strategies,
and aircraft range changes, however, depending seemed to stand out. The cap-and-trade scheme is
on the business and social environment for op- considered by many politicians and economists to
erators such as airlines and sometimes airports. be one of the most effective methods for realizing
Recent soaring fuel prices and the expectation a low GHG society (Duval, 2009). The cap-and-
from governments to operators to reduce CO2 trade scheme can add more value to low-carbon
emissions raise the need for fuel efficiency in the technologies so that these technologies can enter
priority competition. Governments and airlines, the market. In the U.S., which didnt ratify the
manufacturers and research institutes expect Kyoto-protocol, or pass national legislation for
technological breakthroughs for technological cap-and-trade, many regional initiatives have
and operational innovations. Therefore, Fuel been established with the aim of reducing GHG
reduction = CO2 emission reduction, accelerates from particular regions and most initiatives are
the sectors activities on sustainability innova- preparing a cap-and-trade scheme, although the
66
aviation industry is not yet included in the scheme or the complexity of the international aviation
(McCann, 2010). The EU emission trading system agreements. There is another option, which is not
(EU-ETS) is one of a few propositions made to the a positive economic measure nor a market-based
aviation sector as a positive economic measure. approach but a regulatory approach. The ICAO
From 2012, the EU will begin an emissions trad- is now investigating a CO2 standard similar to
ing system (EU-ETS) for all airlines operating in noise and NOx. In aviation operation, strict noise
the territory of the EU. CO2 will be capped at the standard, such as ICAO chapter, or on the U.S.
97% level of average emissions for 2004-2006 stage, plays a significant role to reduce noisy
and will be lowered to 95% from 2013. aircrafts. If an aircraft doesnt satisfy the noise
While the cap-and-trade scheme can be ex- standard, the aircraft can not operate. The standard
pected to evaluate the cost benefits of low-carbon has proven its big effect on airline fleet strategies.
technology for aircraft, this scheme still has the
problem of reducing airline business rather than
replacing conventional fleets with innovative FUTURE RESEARCH DIRECTIONS
low-carbon technology. The reduction of airline
business causes a reduction of mobility. Stopping In previous sections, we have seen that there are
the significant increase of traffic is actually one various projects of aviation sustainability and we
of the purposes of EU-ETS supporters. However, have analyzed the perspectives of these projects.
secure of mobility is also important in a different While we found growing networks, we recognized
frame, for example, in the regional economic gap that the driving forces from markets are within the
issue. Because when airlines need to reduce the limits of expectation on cost-efficiency. Besides
business, they may start the reduction from aban- of these facts, we must note the IATAs report,
donment of the routes to developing regions. Even which warns that even we implement all of the
though cap-and-trade is a positive mechanism technology and operational innovations (a) lighter
urgently needed in the implementation of aviation weight, (b) low air resistance aircraft design, (c)
for sustainability, long discussions are still neces- lean combustion and a high bypass engine, (d)
sary before putting such a scheme into effect. For an optimized electric system and (e) optimized
example, the EU-ETS was sued recently by the flight routes), it is not achievable to bring avia-
US Air Transport Association of America (ATA)
to halt and is assumed not to be able to start from
Figure 1. Schematic roadmap of aviation CO2
2012 (Young, 2010).
emissions under the effect of reduction measures
We need, therefore, other measures to compli-
(Adapted from IATA, 2009)
ment the time gap from now until the introduction
of the cap-and-trade scheme to the aviation sector.
Daley and Preston (2009) assessed market-based
policy options, which is similar to IATAs 4th
piller of, Positive economic measures, for the
mitigation of aviation impact to climate change.
The authors listed environmental taxes, emission
charges, subsidies and tradable permits as market-
based policy options. The authors assessed that any
of these options confront problems of uncertainty
in aviations impact on climate change, distortions
of international airlines or manufacturing markets,
67
tion to CO2 carbon neutral emissions (Figure 1). tas. But according to Green, using an aircraft of
Regime changing innovations are expected for 5000km range capacity with stops of lubrications
Carbon Neutral Growth from 2020. We need at airports can be about 40% more fuel efficient
to discuss how to manage a radical technology than carrying the same number of passengers
or system change. And we think it is important along a 15000km distance using an aircraft of
to understand the driving force in the aviation 15000km range capacity. This difference is due
socio-technical system in multi-level perspectives. to the weight of fuel, which covers all of the
Multi-Level Perspectives (MLP) is a useful flight. In other words, for carrying fuels, a long
approach to understanding transition pathways of distance flight consumes nearly half of the fuel.
an innovative idea to integrate in the main stream Greens short-range aircraft idea is an effective
of a system or a society. It comes from SNM solution for the reduction of CO2 emissions, but
researches and has a complementary relationship it is considered unrealistic. Customers will not
with SNM (Schot & Geel, 2008). The MLP dis- accept the trouble of stopping in several airports
tinguishes three levels (niche, regime and land- once they have taken a non-stop flight. Although
scape) in a system. Niches are a level of emerging there is the idea of air-to-air refuelling, this type
innovations and are situated at the margin of the of refuelling is risky in terms of safety. For such
regime. Regimes are a level of the main or exist- a socially challenging issues, MLP approach will
ing streams and create stability of the system. be useful to list the problems to solve and organize
Landscapes are the macro-level of society as a the learning process.
whole. The interplay between dynamics at mul- Some of MLP researchers study the interaction
tiple levels leads transitions. See Geels (2006) for of different niches or regimes. There are several
further explication. In brief, Geels concluded that options for the future aviation system. Many
co-evolution at the regime level was clearly vis- stakeholders wish aviation for sustainability.
ible in his case studies of past technology or On the other hand, there are some options that
system replacements. There was a strong interac- may go opposite direction of sustainability.
tion between technology and markets. Transitions Supersonic transportation attracts some of airlines
are not caused by a change in a single aspect, but and business travellers. Cohen (2010) detected
by the interplay of many aspects and actors. the small but strong human desires for personal
A MLP approach may help Greens (2002, aeromobility pushing back the force for sustain-
2006) radical idea of flight with short-range ability. Each innovative aviation scenario includ-
aircraft with several refuelings before arriving ing sustainability has opposite and favourable
at their destination. A lot of technical papers and driving forces and may not able to be realized by
significant benefit have been proposed, but this itself. If we could combine the favourable driving
idea doesnt appear in a roadmap of this sector. forces, we might be able to obtain sustainability
Greens idea is against the development of long- and even further ideals for the sector. For example,
range aircraft, or of aircraft technology itself. we may be able to load low-carbon technologies
The development of longer-range flights is often on personal aircraft in the same way as Toyota
described in the first slides of manufacturers and obtained technology and cost supremacy in the
airline presentations. For example, development hybrid engine mark by mounting the hybrid engine
of aircraft technology reduced the number of in the compact size car and pursuing low profit
stops of the London-Sydney flight from 32 stops but high volume. Even though the requirements
and 10 days in 1939 by Flying Boat, 2 stops and for safety and security will not change between
26 hours in 1990 by 747-400 to 0 stops and 19.5 small and large aircraft, small aircraft might have
hours in 2006 by 777-200LR, according to Qan- advantages in terms of the difficulty of develop-
68
ment because of the strength and complexities need a specific remedy before a trade scheme is
of the system as well as the scale of the market. finally put into effect after many more necessary
Manufacturers may be able to innovate their long discussions.
technology development from small aircraft, Finally, we have presented future research di-
which has fewer constraints, and transform these rections using a multi-level perspective approach,
technological developments in big aircraft much which is useful in discussing how to bring inno-
earlier than in direct development to big aircraft. vations to practice. The aviation sector has had
Therefore, we propose management of the sectors a number of innovative successes. Sustainability
future options in multi-level perspectives as a issues, however, may need a paradigm shift due
future research directions for sustainable aviation. to the higher overall complexity of issues.
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71
KEY TERMS AND DEFINITIONS Multi-Level Perspectives (MLP): MLP is

a useful approach to understanding transition
Carbon Neutral Growth: Airlines are the first pathways of an innovative idea to integrate in
global industry, which committed their growth the main stream of a system or a society (Schot
without increase the carbon emission from 2020. and Geel, 2008).
IATA 4 Pillars Strategies: The International Strong Air Traffic Growth: The growth of air
Air Transport Association (IATA), created and traffic is statistically faster than economic, GDP
have been promoting a four-pillar strategy, growth and eventually has canceled the recent
Improved technology, Effective operations, effort of fuel-efficient improvement (Szodruch,
Efficient infrastructure and Positive economic 2009).
measures, since 2007 to achieve a vision of Sustainable System Innovation: Researchers
carbon-neutral growth in the mid-term and to of systems innovation have been recently devel-
build a zero emission commercial aircraft within oping many theories and tools to promote the
the next 50 years (IATA homepage). transitions required to make it possible to move
innovations from laboratories to market.
72
73
Chapter 5
Diffusion and Adoption of
Innovations for Sustainability
Helen E. Muga
University of Mount Union, USA
Ken D. Thomas
Auburn University, USA
ABTRACT
The primary focus of this chapter is on the theory and concepts of sustainability and why they are im-
portant to innovation and vice-versa. Key reductionist approaches to assessing sustainability such life
cycle assessment (LCA), life cycle cost analysis (LCCA), and sustainability indicators are discussed
in detail and applied to an engineering infrastructure scenario. The integrated sustainability methods
of life cycle assessment and life cycle cost analysis enable a business to assess alternative products
or processes at the planning and design stages. They may also be used during the production stages
to assess whether a business needs to use a different raw material to make their products. The role of
management, social network analysis, and mental models of individuals in the diffusion and adoption
of innovations are also explored.
INTRODUCTION land, loss of tropical rain forest and woodland, and

nitrogen flux to coastal zones have also increased
Over the centuries, energy consumption has in- over time. Population increased from 600 million
creased from 10 quadrillion BTU (10.055 x 1018 in year 1750 to 6 billion in year 2000. Carbon
joules) in year 1800 to 500 quadrillion BTU (5000 dioxide emissions increased from 250 ppmv in
x 1018 joules) in year 2000 (UN Environment year 1800 to 360 ppmv in year 2000. Water use
Programme, 2007). Population, carbon dioxide increased from 200 km3/year in 1900 to 5000
emissions, water use, amounted of domesticated km3/yr in 2000 and nitrogen fluxes increased
from 0.25x1012 moles/year in year 1850 to 9x1012
DOI: 10.4018/978-1-61350-165-8.ch005 moles/year in 2000 (Crutzen, 2005). Unsustainable
Diffusion and Adoption of Innovations for Sustainability
practices such as excess consumption, unsustain- energy. Over three billion tons per year of global
able management practices exacerbate current raw materials (40%) are consumed in the United
global problems. These global challenges/issues States (U.S. Green Building Council, 2005). Com-
are intricately linked to one another. Figure 1 mercial and residential buildings consume around
shows the interaction between population, natural 36% of energy and over 65% of electricity in the
resources and services, energy, emissions, and U.S. (U.S Green Building Council, 2005). Fur-
climate change. ther, construction, renovation, and demolition of
The introduction, and the diffusion and adop- buildings contribute a significant amount to total
tion of sustainability concepts and theory to a solid waste in the U.S. and around the world. In
large extent attempts to address current global 1997 alone, construction and demolition waste
challenges that society and future generations face amounted to 65% of all solid waste in the U.S
by reducing excess consumption, promoting ef- (U.S.EPA, 2000).
ficient management and use of natural resources, We also focus on the role of management in
and reducing consumption of energy sources that the diffusion and adoption of innovative strategies
contribute to climate change The term sustain- that contribute to sustainability and drive it over
ability has different meanings to different people. the tipping point- defined as the point at which
One of the definitions of sustainability is that it an object is displaced from its current state (of
is development that meets the needs of the pres- trajectory) into a new state (of trajectory). Of
ent without compromising the ability of future great importance are the types of strategies that
generations to meet their own needs (Brundtland, businesses and various entities adopt and their
1987). At the business level, sustainability is impact on sustainability. For example, do the
defined as, meeting the needs of a firms direct innovative strategies that are adopted drive the
and indirect stakeholders (such as shareholders, business toward sustainability or away from it?
employees, clients, pressure groups, communities A great deal of emphasis is given to the role of
etc), without compromising its ability to meet the learning and its impact on the change in mental
needs of future stakeholders as well (Dyllick & models of individuals as these play a critical role
Hockerts, 2002). in the adoption and diffusion of innovation.
In this chapter, we focus on the theory and
concepts of sustainability (life cycle assessment,
life cycle cost analysis, and indicators) and their OVERVIEW OF SUSTAINABILITY
application to the built environment. In this AND SUSTAINABLE DEVELOPMENT
chapter, we focus on the theory and concepts of
sustainability (life cycle assessment, life cycle cost While there are varying definitions of sustain-
analysis, and indicators) and their application to the ability from different sectors of industry, what
built environment. The built environment includes is important is that it strives for protection of the
all of the physical structures engineered and built environment, prudent use of natural resources,
by peoplethe places where we live, work, and equitable social progress, and maintenance of
play. These edifices include homes, workplaces, economic well-being without compromising the
schools, parks, and transit arrangements (Dearry, environment and society. Figure 1 shows the three
2004). They also include roads, power generation dimensions of sustainability. Long-term strategies
facilities, harbors, treatment plants, bike paths, towards achieving sustainability should consider
and storm-water management systems. These all three aspects (i.e. the whole or complex sys-
engineered structures sustain and support human tem), either at the decision stage or during the
activity and continuity. The built environment is operational stage.
one of the largest consumers of raw materials and
74
Figure 1. Linkages between population, resources, consumption, emissions, and climate change. Popu-
lation growth requires significant amount of natural resources and energy to sustain and support, with
positive and negative impacts. An increase in population, leads to an increase in energy and natural
resources (+). This subsequently contributes to increase in emissions (+) which in turn contribute to
climate change (+). A decrease in population leads to a decrease in energy and resource consumption
(-). The adoption of sustainable practices by the public and in the energy sector also contributes to a
decrease in energy consumption (-).
The three core pillars of sustainability (Figure the triple bottom line in decision-making, brought
2) or the triple bottom-line (i.e. People. Planet about by a change in mental model of the decision-
and Prosperity) are inter-connected and hence maker towards sustainability, has the potential to
may influence each other in multiple ways. Un- significantly reduce/mitigate the upward trend in
derstanding the inter-connectedness and employ- carbon dioxide emissions, energy consumption,
ing strategies that consider all three dimensions water use and nitrogen fluxes in waterways. Adop-
is critical to achieving sustainability. Strategies tion and diffusion of sustainable strategies (sus-
that concentrate on short-term gains often focus tainable management practices, education, tech-
on one aspect of the triple bottom line. Ongoing nology) is key to controlling, reducing, mitigating
research and development in the field of sustain- the upward trend unsustainable practices.
ability science has expanded those 3 core pillars According to Mihelcic et al. (2003), sustain-
to 5 pillars of sustainability: environment, culture, able development is the design and use of human
politics, society and economy (McConville & and industrial systems to ensure that humankinds
Mihelcic, 2007). use of natural resources and cycles do not lead
Inclusion of environmental and societal aspects to diminished quality of life due either to losses
in addition to economic aspect into long-term in future economic opportunities or to adverse
strategies enables a company/firm or other entities impacts on social conditions, human health and
to meet the needs of the present without compro- the environment. According to the United Nations
mising the needs of the future. It also gives the Educational, Scientific and Cultural Organization
entity a competitive advantage over its competi- (UNESCO), sustainable development is a vision
tors as the public and society become socially and of development that encompasses populations,
environmentally conscious. Further inclusion of animal and plant species, ecosystems, natural
75
Figure 2. The three interconnected pillars of

Recognition of emerging risks and or con-
sustainability consist primarily of the environ-
flictive issues, thus allowing prevention;
mental (planet), economic (prosperity), and social
Detection of impacts to allow for timely
(people) dimensions with emerging dimensions of
remedial action when needed;
culture and politics
Performance measurement of the imple-
mentation of development plans and man-
agement actions;
Reduced risk of planning mistakes;
Reduced public liability; and
Regular monitoring which can lead to roll-
ing improvement.
According to the Organization for Economic

Cooperation and Development, there are different
kinds of indicators, each with different purposes
for decision makers:
Early warning indicators (e.g., decline in

product sales and number of customers
who intend to return);
resources and that integrates concerns such as Indicators of stresses on the system (e.g.,
the fight against poverty, gender equality, human raw material shortages);
rights, education for all, health, human security, Measures of the current state of the indus-
intercultural dialogue, etc. try that the product primarily serves;
In the context of sustainable development, Measures of the impact of product devel-
indicators are information sets which are formally opment and production on the biophysical
selected to measure changes in assets and issues and socio-economic environments (e.g. in-
that are key for the product development and dices of the level of deforestation, changes
management. Indicators are measures expressed of consumption patterns and income levels
in single numbers, percentage or ratios, qualitative in local communities);
descriptions or existence/non-existence of certain Measures of management efforts; and
elements concerning environmental, social and Measures of management effect, results or
economic issues (OECD, 1993). They are signals performance.
of current issues, emerging situations or problems,
need for action and results of actions. Sustainabil-
ity indicators should be easy to comprehend, as SUSTAINBILITY THEORY
well as be economically and technically feasible AND CONCEPTS
to measure for them to be classified as good
(OECD, 2003). Benefits from good indicators Sustainability, as defined by The Brundtland
include (adapted from OECD, 2003): Commission, strives to achieve the following: (1)
maintenance of economic well-being, (2) social
Better decision making in order to lower progress, and (3) environmental protection for
risks or costs; the present and future generation through the
use of various assessment methods such as life
76
cycle assessment, life cycle cost analysis, and Power generating facilities enable human activ-
sustainability indicators. These various inte- ity, industrial processes, and transportation to be
grated methods of assessment attempt to evalu- possible and also sustain society. Transportation
ate the impacts of various processes, products, systems including roads, bridges are the veins or
and activities over a set lifetime. They are also conduits that provide accessibility to goods and
used to compare alternatives from a systematic, services from the natural and built environment
holistic perspective. Results from such a study and maintain and/or improve human well-being.
that utilizes integrated assessment methods to They also enable dynamic interaction of human
gauge the environmental, economic and societal activity (e.g., economic activity), human wellbe-
impacts of competing alternatives may be used ing, and the natural environment with each other
as a guide to aid in decision-making in selecting and other infrastructure that makes up the built
and implementing the most appropriate strategy. environment. These civil infrastructures are part
Such integrated assessment methods can also of the considered human system.
be used in determining where improvements/in- Engineering projects that build these infrastruc-
novative strategies can be made. The following tures are always hinged on a single reductionist
paragraphs cover the basic concepts and theories assessment method, e.g. economic approach to
of sustainability including the methods of various evaluating the project across all life cycle stages
methods of assessment and how such methods (planning, design, to construction, to operation
lead to innovation. The concepts of sustainability and maintenance and demolition/retrofitting).
as covered in the Introduction section are applied The piece of the puzzle that is often not con-
to the built environment as a system. nected in practice is that the built environment
also encompasses socio-cultural activities and
human interaction with the physical infrastructure
SUSTAINABILITY ASSESSMENT and with the natural environment. Hence social
METHODS APPLIED TO THE and environmental assessment methods are also
BUILT ENVIRONMENT critical. Human activity influences behavior of
the built environment components in unexpected
The built environment and urban systems are ways. When these interactions are not considered
a complex interaction between human activity the analysis remains incomplete. In order to as-
(economy), human well-being (social), and the sess the impacts of various projects, a holistic,
natural systems (air, land, water) with each other systematic approach that considers the triple bot-
and with the civil infrastructures and the interface tom line is essential for long-term and possible
at which they converge. short-term planning.
The built environment is a system that consists We can evaluate the impacts of process, prod-
of all types of buildings such as houses, shops, ucts, and activities in the built environment using a
together with engineering works such as roads, single-method approach, Table 1. Or alternatively,
treatment plants, storm-water management sys- we can reduce the problem into smaller problems
tems, bridges, power generation facilities, and and evaluate them separately, then appropriately
other civil infrastructures that support and en- reconnect them within a systems context a sum
able human activity and urbanization. Water and of all the parts approach. Once weve reduced
wastewater treatment facilities and storm-water the problem to smaller problems we can then ap-
management systems are design to protect human ply a systematic analysis to each of the specific
lives, other civil infrastructures, and the environ- problems or component. For example in the built
ment by removing and or reducing contaminants. environment, we can study buildings and we can
77
Table 1. Reductionist and systematic approaches to addressing sustainability (adapted from Muga, 2009)
Reductionist Approach to Identifying Systematic Approach to Identifying

Problem Problem
Reductionist Approach to Assessing Economic assessment, such as cost-benefit
Sustainability analysis and life cycle cost analysis. Tradi-
tional methods of assessment, where cost
was the only factor taken into consider-
ation.
Systematic Approach to Economic (life cycle cost analysis), Economic (life cycle cost analysis), Envi-
Assessing Sustainability Environmental (life cycle assessment), and ronmental (life cycle assessment), Societal
Societal (societal indicators). Integrated (risk assessment), triple bottom line. This
methods of assessment that attempt to is where we would like to be. However
address the three pillars of sustainability: uncertainty of data and lack of data make
economic, environment, and society. getting to this stage challenging.
study pavements/roads separately then reconnect sessment, one that incorporates the triple bottom
them to a systems context. line (societal, economic, and environmental as-
According to General Systems Theory, reduc- sessment) can then be applied to each part. Each
tionist approaches are best applied in the study of these parts may be put together to gauge the
of sub-systems whereas the systems approach overall sustainability of the system. With such a
looks at whole systems (Checkland, 1993). There- complex system as the built environment, a reduc-
fore the reductionist approach is used to attempt tionist approach to identifying a problem along
to solve problems within a system while the with the application of a systematic approach to
complex systems approach is used to thereafter assessment is often the best option. Such an op-
to frame and define the issues (Checkland, 1993; tion is also best suited when long-term strategies
Greenwood, 2006; Muga, 2009). The various are concerned.
reductionist approaches to addressing sustain- A systematic methods approach such as an inte-
ability can be seen in Table 1. As an example, a grated framework of life cycle assessment (LCA),
company may focus on the economic aspect by life cycle cost analysis (LCCA), and indicators are
reducing costs in order to achieve short-term gain necessary to evaluate these component-specific
often times at the detriment of environmental and impacts from a sustainability perspective. Life
social dimensions (i.e. a reductionist or sub- cycle assessment (LCA), Economic-Input Output
system approach). Strategies that are top-down Model (EIO-LCA), and Simapro are tools that can
and/or bottom-up approach have the potential to be used to evaluate the environmental impacts of a
move a company or entity towards sustainability given product, process, activity/service at various
or away from it. life stages (raw material extraction, manufactur-
Applying reductionist approach to the built ing, distribution, use, and disposal, Figure 3).
environment, the system can be divided into With LCA/EIO-LCA/Simapro we can determine
smaller parts that inherently are connected and the environmental outputs for, for example raw
support its overall function. Some of the critical materials that are used to build a commercial
components or parts of the built environment property. We can also use these tools to evaluate
include buildings/structural support, transporta- the outputs from various energy sources used dur-
tion systems, services, gas and water lines, water ing the operation of the facility. LCA/EIO-LCA/
reservoirs, information systems, etc. Once each Simapro enables us to identify what stage of a
part is identified, a systematic approach to as- products or process life significant environment
78
Figure 3. Life cycle stages involved in the manufacture of a product. Integrated assessment methods such
as LCA and LCCA may be used at the planning and design stage to evaluate the impacts of alternative
materials, processes, and end of life uses of a product before a project begins. These methods may also
be used to evaluate the operation and maintenance stages when it is in progress.
emissions occur and where improvements can be ing waste material that might otherwise be land-
made. They are useful tools in aiding decision- filled. In the use stage it might be, an innovation
making. might be re-designing and manufacturing the
While the integrated assessment methods for products so that they have long-lives. In the end-
sustainability enable us to compare alternatives of-life stage, an innovation might be to re-use of
processes, and technologies with the least negative the product in another process, or recycle the
impacts, they also enable us to identify, pro- product in order to make a completely different
cesses, technologies, and pathways where innova- product, hence avoiding land-fill.
tion can take place further reducing undesirable When it comes innovating and designing
outcomes or increasing desirable outcomes. The sustainably, it pays to think light. Products made
life cycle stages, Figure 3, of various competing with less material have less negative impact all
alternatives can be compared using LCA, LCCA the way from production to disposal, often mak-
or other assessment methods, to determine the ing them cheaper to produce. It is clear how a
alternative with the least environmental, eco- light-weight truck can save energy as it takes less
nomic and societal impacts. Innovation can also fuel to operate. But for any product that is made
take place when performing an LCA or LCCA lighter it affects the entire LCA since it reduces
over the different life cycle stages. For example costs from materials required to shipping of raw
in Figure 3, in the extraction stage, an innovation materials and final products. Thus this whole
might be what kind of equipments do we use and system thinking or systems approach to innovat-
how do we carry out the extraction so that have ing sustainably has been captured by the Rock
minimal impacts. In the processing and manufac- Mountain Institute in the following principles to
turing stages, an innovation might be re-designing be considered for sustainable integrative design,
a process so that less energy is consumed, or innovation and engineering:
capturing heat for in-house energy use, or utiliz-
79
Define the shared and aggressive goals planet. Innovative energy systems are a tremen-
Collaborate across disciplines dous business opportunity for companies. Under-
Design nonlinearly standing these emerging energy systems, what
Reward desired outcomes materials works best, how to increase their life
Define the end-use span spurs further innovation. Competing busi-
Optimize over time and space nesses emerging with similar, product possibly
Establish baseline parametric values of a higher quality and increased life span yet
Establish the minimum energy or resource spurs further innovation. Where innovations are
theoretically required, then identify and concerned, there is a need for calculated and
minimize constraints to achieving that strategic management of resources; particularly
minimum in practice human resources. This is one key area where the
Start with a clean sheet application of Social Network Analysis (SNA)
Use measures data and explicit analysis, can assist; in the development of the best innova-
not assumptions and rules tion network to ensure a business has the best
Start downstream competitive advantage possible. SNA is used
Seek radical simplicity widely in the social and behavioral sciences, as
Tunnel through the cost barrier well as in economics, marketing, and somewhat
Wring multiple benefits from single for project management in industrial engineering
expenditures (Taagepera, 2008). The social network perspective
Meet minimized peak demand; optimize focuses on relationships among social entities and
over integrated demand is an important addition to standard social and
Include feedback in the design behavioral research, which is primarily concerned
with attributes of the social units (Wasserman &
Faust, 1994). Management, of any kind, refers to
INNOVATION AND SUSTAINABILITY the use of people (i.e. social units), in some level
of seniority to others, to control some commod-
Innovation and sustainability go hand in hand. ity. According to some measuring indices of SNA,
Innovations and the development of new technol- characteristics of each actors interaction or man-
ogy provide a way for humans to improve their agement activities will affect the holistic manage-
lives (social progress) through better, smarter ment of assets in terms of sustainability and
ways of conducting their activities. According structure (Li & Chen, 2006). Thus an understand-
to Nidumolu, Prahalad and Rangaswami (2009), ing of the actual and perceived managerial struc-
sustainability is now the key driver of innovation. ture for arriving at innovations will allow for
These authors say that contemporary innovation, altering the social network to reduce processing
with sustainability at the core, takes on a cyclical time for innovative product development. This
process with evaluation of sustainability chal- reshuffling of human resources for optimum yield
lenges, competencies and opportunities for any of innovative throughput necessitates continuous
given business. Their key findings are highlighted monitoring of internal social networks through
in Figure 4. the calculation of key SNA indices such as cen-
Energy systems (photovoltaic cells, biomass, trality, adjacency, relationship, reachability, net-
geothermal) are one of the innovative technologies work density, boundary spanners, betweeness and
that provide clean, renewable energy to humans, closeness. Table 2 describes these in some depth.
thereby reducing carbon dioxide emissions from Innovation needs to be influenced by a popu-
fossil fuel use and contributing to a sustainable lations current mental model with regards to any
80
Figure 4. Sustainability challenges, competencies and opportunities in relation to innovation (adapted

from Nidumolu, Prahalad & Rangaswami, 2009)
product expected to be developed for use within Within this assessment key understanding of the
this population. Thus there is a need for develop- populations knowledge, beliefs and notion of
ers to be connected with the population for which complexity should be revealed for consideration
the innovation is intended. So as a major pre- of what the innovated product needs to appease.
innovation step, a needs assessment of the popu- This is key to the sustainability of the innovation.
lation should be done and used as the driving force During the innovation development process this
of the innovation research and development. is where the proponent of the innovation has the
81
Table 2. Quantitative measures and relational characteristics of strength of management in SNA (adapted
from Freeman, White & Romney, 1989; Hassan, 2009; Outhwaite & Turner, 2007)
Numerical Definition
measure
SNA matrices Adjacency - Adjacency tells us whether there is a direct connection from one actor to another (or between 2 actors
for un-directed data).
Relationship This matrix shows the relations between actors using integers that represent the strength of the rela-
tion between 2 actors. The resulting matrix represents the sum of frequencies or the frequency of contact required
between 2 actors.
Reachability Reachability is a measure of path distance, the length or number of unique walks between actors.
The reachability matrix is the product of the adjacency matrix with itself and it uncovers the number of paths that
an actor can be reached. To determine path distances of more than one, the adjacency matrix is multiplied by itself
as many times as the path requires. Reachability tells us whether two actors are connected or not by way of either a
direct or an indirect pathways of any length.
Centrality ratio This ratio is the ratio of the aggregate relations involving the actor over all relations in the management structure.
(Ci) The centrality can be found from:
(z ij
+ z ji)
C
j =1
i
= N N
where Ci is the centrality of the ith actor; Zij is the value of a relation from the ith actor
Z ij
i =1 j =1
directed to the jth actor in the kth network. Note that i j and N is the number of actors in the network.
Network density This is a measure of the percentage of all the possible ties present and varies from 0 to 1. This gives a ready index of
the degree of dyadic connection in a population. For binary data this is simply the ratio of the number of adjacencies
that are present divided by the number of pairs i.e. the proportion of possible dyadic connections actually present.
Simply put it is the proportion of ties present to the maximum number of ties possible. It can be calculated by:
T
Network density =
N ( N 1) / 2
where T is the number of ties present; N is the number of actors in the network.
Betweenness This refers to the extent to which an actor acts as a broker or gatekeeper in the network.
Closeness An actor is considered to be close when it has the shortest paths to all others. This means that actor can avoid the
potential control of others.
Boundary span- A boundary spanner refers to an actor that has access to other networks.
ners
Centrality Centrality identifies the most important actors in a social network, which are usually nodes located in strategic
locations within the network. The centrality value of the actors in asset management will therefore depend on the
frequency of contact of an actor relative to that of other actors.
overarching power to infuse sustainability into sustainability should be considered, in tandem

the design of the product/technology/strategy. For with the pre-innovation mental models of the
example, the innovation developer should con- population, in achieving an innovative product
sider the life cycle analysis (LCA) of the mate- that attains the companys triple bottom line. The
rial chosen with regards to where the raw materi- post-innovation sustainability hinges upon ac-
als come from through to how the materials can ceptance of the product by the target population
impact the environment at the end of life (i.e. a through a change in their mental models. This
cradle to grave analysis). Here all the pillars of necessitates aggressive strategic marketing (i.e.
82
diffusion) to lead the population to adoption of MENTAL MODELS AND DIFFUSION

the product. AND ADOPTION OF INNOVATIONS
In addition, once a strategy or an innovative
technology that addresses sustainability has been The mental model of an individual is critical to
developed/identified, decision-making be it from adoption of an innovative strategy that contrib-
the top-down or bottom-up is critical to its diffu- utes to sustainability. Adoption describes the
sion and adoption within an organization and into acceptance of a new product, idea or technology
mainstream. The mental models of individuals according to the demographic and psychological
play a critical function on how they weigh the characteristics of defined adopter groups (Rog-
alternatives, what they weigh their alternative ers, 2003).
on, and their eventual decision. The high cost of Adoption of an innovation or green thinking
photovoltaic cells and lack of governmental incen- by an individual is due to a shift in their mental
tives mean that companies and individuals will models, caused by interactions in their professional
not adopt it even though it is sustainable, because networks. Craik (1943) suggested that the mind
it is not economically viable compared to other constructs small-scale models of reality that it
alternatives such as fossil fuel. In the preceding uses to anticipate events (Johnson-Laird & Byrne,
paragraphs we discussed key parameters that link 2000). Such models are conceptualizations of the
innovation to diffusion and adoption to achieve world that the mind builds by incorporating the
sustainability. These include mental models of individuals views of the world, of themselves, of
individuals that lead to diffusion and adoption, their own capabilities and of the tasks that they
social networks, and the role management. are required to perform (Norman, 1983) and are
Social Network theory and methods of SNA referred to as mental models. Individuals construct
are being increasingly used to study real-world mental models of themselves and the environ-
networks in order to support knowledge management that they are required to interact with from
ment and decision making in organizations (Hu, perception, imagination, the comprehension of
2009). SNA has been used since the early 1970s discourse, and use them in their decision-making.
as the theoretical basis for the examination of An individuals mental model of innovation/
general social and behavioral science communities green technology and sustainability reflects their
(Wasserman & Faust, 1994). The importance of awareness and perception of how it improves for
SNA is highlighted by the demonstration that an example the organization that they work for and
individuals behavior can often times be catego- its operations, their clear comprehension of the
rized by their relations with others. According to discourse on sustainability, and intention to in-
Rogers (2003), social network research can range volve innovation that contribute to green thinking/
from small-scale studies (i.e. micro level) of a sustainability in their decision-making process.
persons intimate social network to system stud- Individuals interacting with their immediate en-
ies (i.e. macro level) focusing on larger societal vironment are exposed to new ideas, and learning
and community organizational structure. SNA is which results in a shift in their mental models.
inherently based on the underlying premise that The ability for an individual in an organization
the structure of relations among actors and the to adopt an innovative idea is largely dependent
location of individual actors in the network have on their interactions in social networks and its
important behavioral, perceptual, and attitudinal influence on the diffusion of the innovative idea.
consequences both for the individual units and for A change in mental model of an individual can
the system as a whole (Knoke & Kuklinski, 1982). impact or infect others in their network to adopt
83
an idea. This gives rise to social network analysis Management plays an important role in the
(SNA), defined as the mapping and measur- diffusion and adoption of an innovative strategy
ing of relationships and flows between people, that addresses sustainability. Transposing the
groups, organizations, computers, web sites, and idea of social network to a management struc-
other information/knowledge processing entities ture, diffusion and adoption is a function of the
(Wasserman & Faust, 1994). Figure 4 shows how strength of a management structure of a firm or
diffusion spreads through a social network of an company, the ties between the individuals within
individual over time. The social network in Figure the structure, and the key individual connectors
4 is comprised of two individuals. A faster diffu- who enable transmission of the innovative idea
sion and change in mental model (Adoption Curve and/or policies between the different hierarchies.
1, Figure 5) of an individual leads to a quicker From organizational theory of management, two
adoption rate (steep inflection point) and a rapid way ties between individuals (ab) are more
spread of the infection within the individuals important than one-way time (a b). Two way ties
immediate social network with the innovative idea. represent transfer of crucial information among
A rapid change in mental model, diffusion/ lateral and/or lower rank individuals to a lateral/
adoption rate, and spread of the infection or higher rank managerial individual.
innovative idea is crucial to achieving sustain-
ability (reducing carbon dioxide emissions, excess
consumption, etc). The adoption of an innovative FUTURE RESEARCH DIRECTION
idea becomes self-sustaining when the tipping AND CONCLUSIONS
point is reached. Critical mass or the tipping
point (Figure 5), is the point at which enough The primary focus of this chapter was on the theory
individuals in a system have adopted an innova- and concepts of sustainability, how they can be
tion so that the informations further rate of adop- applied to a business, and why they important
tion becomes self-sustaining (Rogers, 2003) to innovation and vice-versa. Sustainability as-
Figure 5. The dynamics of diffusion and adoption of innovation over time due to change in mental models
of individuals (adapted from Mukherjee & Muga, 2010)
84
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87
KEY TERMS AND DEFINITIONS Social Network Analysis (SNA): Mapping

and measuring of relationships and flows between
Adoption: The acceptance of a new product, people, groups, organizations, computers, web
idea or technology according to the demographic sites, and other information/knowledge processing
and psychological characteristics of defined entities (Wasserman & Faust, 1994).
adopter groups (Rogers, 2003). Sustainability Indicators: Information sets
Built Environment: All of the physical struc- which are formally selected to measure changes in
tures engineered and built by peoplethe places assets and issues that are key for the product devel-
where we live, work, and play (examples: homes, opment and management. Indicators are measures
workplaces, schools, parks, and transit arrange- expressed in single numbers, percentage or ratios,
ments) (Dearry, 2004). qualitative descriptions or existence/non-existence
Diffusion: The spread of new product, idea of certain elements concerning environmental,
or technology (Rogers, 2003). social and economic issues (OECD, 1993).
Mental Model: Conceptualizations of the Sustainability: Development that meets the
world that the mind builds by incorporating the needs of the present without compromising the
individuals views of the world, of themselves, of ability of future generations to meet their own
their own capabilities and of the tasks that they needs (Brundtland, 1987).
are required to perform (Norman, 1983). Tipping Point: Point at which enough indi-
Reductionist and Systems Approach: Reduc- viduals in a system have adopted an innovation
tionist approaches are best applied in the study of so that the informations further rate of adoption
sub-systems whereas the systems approach looks becomes self-sustaining (Rogers, 2003).
at whole systems (Checkland, 1993).
88
89
Chapter 6
Social Innovation,
Environmental Innovation,
and Their Effect on
Competitive Advantage
and Firm Performance
Javier Amores Salvad
Universidad Complutense de Madrid, Spain
Jos Emilio Navas Lpez

Gregorio Martn de Castro

ABSTRACT
The proposal below provides a special emphasis on the relationship between businesses and natural
environment. It is argued that the inclusion of environmental criteria to business activities promotes the
creation of new core competencies, offering a creative and innovative perspective to the organization
that can lead to the achievement of sustainable competitive advantages. More specifically, we analyze
both the existence of a direct relationship between Environmental Innovation and Firm Performance
and the existence of an indirect relationship between the two, which highlights the mediating role of
the kind of competitive advantage generated. It also provides an innovative approach, as it explains
the Environmental Innovation from the literature on Social Innovation, considering Environmental
Innovation as an expression of Social Innovation through the incorporation of ethical arguments to
products, processes and organizational modes of the company. The main contributions of this work can
be summarized as follows: (1) It explains the nature of Environmental Innovation through the Social
Innovation literature, which allows consideration of some key aspects of administrative and technologi-
cal innovations that have not been taken into account the academic literature. (2) The different types
DOI: 10.4018/978-1-61350-165-8.ch006
Social Innovation, Environmental Innovation, and Their Effect on Competitive Advantage
of environmental innovations are analyzed as a necessary step to understand the strategic options in
the environmental field. (3) Environmental Innovation is related to business performance. The practi-
cal implications of the relationship between environmental innovation and performance are of great
importance, since it directly influence the type of environmental strategy chosen, allowing the company
to choose from innovative strategies (based on pollution prevention) or more conservative strategies
(emissions control).
INTRODUCTION technologies that are more efficient than current

and inclusive business models that facilitate the
The concept of Social Innovation is directly linked creation and distribution of wealth more evenly.
to the idea of change. The systemic changes offer According to these arguments, in this chapter
many opportunities for Social Innovation and the we will analyze the role of the Environmental In-
societies at large are immersed in learning new novation (understood as an expression of Social
habits and rules. New forms of efficiency and Innovation) in achieving business results. Taking
new ways of seeing and doing things are discov- Social Innovation as starting point, throughout
ered. The connection between Social Innovation the chapter the nature, determinants and types
and changing environments is confirmed by the of environmental innovations will be shown in
words of the Nobel Prize Simon Kuznets (Pol & order to show a complete picture of the topic.
Ville, 2009). According to Kuznets, without the More specifically, both the existence of a direct
existence of firms and banks (both defined as relationship between Environmental Innovation
social innovations), the industrial revolution had and Firm Performance and the existence of an
not taken place, and also would have been much indirect relationship between the two will be
more difficult the development of railways if they analyzed, highlighting the mediating role of the
had not also developed securities markets. kind of competitive advantage generated.
Nowadays, our society is experiencing a time A broad concept of Social Innovation is used,
of change, the paradigm shift towards Sustain- which allows consideration of some key aspects
able Development, defined by the Brundtland of administrative and technological innovations
Commission (World Commission on Economic that have not been taken into account the academic
Development, 1987) in its report to the United literature. Furthermore, the practical implications
Nations as the kind of development that meets of the relationship between Environmental Inno-
the needs of present without compromising the vation and performance are of great importance,
needs of future generations (Sharma & Vreden- since it directly influences the type of environ-
burg, 1998). Although industrial development of mental strategy chosen, allowing the company
the last two hundred years has brought prosperity to choose from innovative strategies (based on
and wealth, it has unintentionally caused environ- the creation of new core competencies via pollu-
mental degradation as well (Shrivastava, 1995). tion prevention) or more conservative strategies
Industrial activity has grown to such an extent (emissions control).
that has already produced irreversible effects on The remainder of the chapter will be structured
our global environment, including impacts on as follows: The first section discusses the concept
climate, biodiversity and ecosystems. of Social Innovation. A review of the major con-
For these reasons, companies must be able tributions made by the literature regarding the
to reduce their emissions and their levels of term is carried out. Additionally, a definition in
consumption of materials, developing new clean line with the concept of Environmental Innova-
90
Figure 1. Social innovation as mission and change
tion is proposed. The second section examines the al., 2010), two basic directions can be identified in
concept of Environmental Innovation emphasiz- the existing definitions in Social Innovation litera-
ing its nature, determinants and typology, and the ture as shown by the four quadrants of Figure 1.
third section highlights the relationship between On the one hand, companies can be seen as
Environmental Innovation with the economic profit-maximizing businesses, and on the other,
performance of the company. Finally, the main non-profit organizations exist to fulfill social
conclusions will be provided. objectives. In between, we can find social busi-
nesses that at the same time have to cover opera-
tions cost but also are more cause-driven than
SOCIAL INNOVATION profit-driven. Both, companies and social busi-
nesses have the potential to act as change agents
Social Innovation is an emerging field that remains for the world and also be economically viable.
under-researched (Social Innovation Exchange On the contrary, not for profit organizations, usu-
and Young Foundation, 2010). Very few are the ally, are not economically viable, and their objec-
efforts to classify and organize the various con- tives are more aimed to meet the social needs of
tributions. In this sense, is very interesting the those more disadvantaged than to create a global
contribution carried out by Pol and Ville (2009), change.
which discusses some of the definitions given to The distinction outlined above fits perfectly
the concept of Social Innovation elaborating a four with the two main streams on the literature on
group classification (understanding the concept as Social Innovation. Thus, as Pol and Ville (2009)
linked to institutional change, to social purposes, pointed out, some authors associate the term
to the public good or to the satisfaction of needs Social Innovation with the idea of institutional
not covered by the market). and social change (Lewin, 1947; Scherhorn et
On this first contribution, and taking as refer- al., 1997; Duchin, 1999; Mumford, 2002; Martin,
ence the characterization of the different types of 2006; Hamalainen & Heiscala, 2007; Centre for
businesses proposed by Professor Yunus (Yunus et Social Innovation, 2008). This approach provides
91
Table 1. Social innovation as change
AUTHOR DEFINITION
Lewin (1947) Researcher as a strategist for Social Innovation.
Scherhorn et al. (1997) Social Innovations as the changes in lifestyles or behavior of consumers.
Duchin (1999) Social Innovation as new technologies and new lifestyle dynamics.
Social Innovation as the generation and implementation of new ideas about how people should organize their
Mumford (2002)
interpersonal activities or social interactions to get one or more common goals.
Martin (2006) Social Innovation associated with social experimentation.
Hamalainen and Heis- Social Innovation as the changes in social structures that enhance the social and economic performance and
cala (2007) the collective power of resources.
Centre for Social In- Those new ideas that address current economic, social, cultural and environmental challenges to benefit the
novation (2008) planet and the people who inhabit it.
Yunus, Moingeon and Building social innovation models require two additional specificities: (i) favoring social profit-oriented
Lehmann-Ortega (2010) shareholders; and (ii)clearly specifying the social profit objective.
Social Innovations are triggered by an interest in improving the well-being of people in society. Its aim to
Dawson, Daniel and improve the welfare of groups and communities, as such they may: seek to further the social conditions of
Farmer (2010) work; hope to provide socially useful solutions to ongoing community problems; or provide improvements in
well-being for remote or socially isolated communities.
a wide-ranging concept, since it does not focus needs are met, even if this does not mean a broader
only on meeting specific social needs but also social change. This emphasis on the social aspect
understands the term as a necessary instrument of the term, place it near from philanthropic
that accompanies the change in values, ways of activities and away from the idea of economic
acting and thinking and institutions. Understand- benefit. Within this category can be included
ing the company as an agent of social change (Bies those activities carried out by nongovernmental
et al., 2007), one can see that this conception of organizations (NGOs), most of which are not
Social Innovation is perfectly compatible with the created to recover the full cost of their operations
entrepreneurial phenomenon. Following Yunus et (Yunus et al., 2010). (Figure 1, bottom left).
al., (2010), within this category can be included Once exposed the different approaches given
some businesses whose objective is to maximize to the term, this chapter will focus on the devel-
the economic benefits such as those based on the opment of the former. That is, starting from the
use of green technologies or social businesses idea of Social Innovation and change we will try
in general (understanding these as those that to reconcile the achievement of economic returns
maximize social benefit and are also financially with the Sustainable Development paradigm
sustainable). (Figure 1, top and bottom right). through Environmental Innovation.
In contrast, other authors, in defining Social The authors that associate the term Social In-
Innovation emphasize its social mission (Taylor, novation with the idea of institutional and social
1970; Gabor, 1970; Forum on Social Innovation change, provide different definitions of the concept
(OECD); Mulgan, 2006; Phills et al., 2008, Pol (Table 1). Lewin (1947) conceives the researcher
and Ville, 2009). So, they argue that Social Inno- as a strategist for Social Innovation and demands
vations mission is to satisfy unmet social needs. the production of theories for the transformation
This conception does not explicitly links Social of society.
Innovation with the idea of change, meaning that From another point of view, changes in life-
the Social Innovation fulfill its mission if social styles or behavior of consumers are often defined
92
as Social Innovations (Scherhorn et al., 1997). potential to promote social change. This social
Duchin (1999) argues that the idea of Social In- change is expressed through the incorporation of
novation is new and requires not only new tech- ethical arguments to the products, processes and
nologies but also new lifestyle dynamics. organizational modes of the company and results
In the same vein, Mumford (2002) consid- in changes in consumer behavior, changes within
ers the Social Innovation as the generation and the enterprise and changes in the companys rela-
implementation of new ideas about how people tionship with the social and natural environment.
should organize their interpersonal activities or
social interactions to get one or more common
goals. It adds that the Social Innovation can lead ENVIRONMENTAL INNOVATION:
to the development of new business practices, NATURE, DETERMINANTS
processes and procedures. AND TYPES
This view is consistent with Martin (2006) who
stresses that social experimentation is beneficial As a Social Innovation, Environmental Innova-
for Social Innovation and claims that the biggest tion incorporates ethical arguments to products,
obstacle for Social Innovation is the drag created processes and organizational modes of the com-
by entrenched interests. pany. This statement, however, lacks specificity.
Also emphasizing the idea of change, (Ha- Therefore, its necessary to specify in more detail
malainen & Heiscala, 2007) understand Social its nature, its determinants and the different types of
Innovation as the changes in social structures that environmental innovations in order to understand
enhance the social and economic performance and the strategic options in the environmental field.
the collective power of resources. Also, on the Some academics suggest that Environmental
same line, mention must be made to the definition Innovation have different natures (Rennings,
given by the Centre for Social Innovation, that 2000). Thus, its nature can be technological, or-
trying to define the concept, understands as Social ganizational, institutional or social. Technological
Innovations those new ideas that address current nature can be seen in environmental technologies
economic, social, cultural and environmental chal- for the prevention of environmental pollution or
lenges to benefit the planet and the people who for the control of the same, commonly called end
inhabit it. Thus, authentic Social Innovations are of pipe. In relation to its organizational nature it
the ones that change the system by altering the includes environmental management tools such
perceptions, behaviors and structures (Centre for as ISO 14001 or EMAS. Institutional and social
Social Innovation, 2008). nature can be seen in the environmental institutions
As mentioned above, this orientation is typi- such as the intergovernmental panel on climate
cal of companies that understand the changes as change and in changes in styles and dynamics of
business opportunities. It is therefore considered life and consumption respectively.
that the fact of adding a social dimension to the However, arguing that Environmental In-
value proposition of the company offers a new novation has different natures implies, from our
frontier in competitive positioning (Porter & point of view, to assume a very limited concept of
Kramer, 2006). Social Innovation. Accordingly, the social nature
Therefore, after consideration of the literature of Environmental Innovation would be restricted
on Social Innovation and the various proposals exclusively to changes in lifestyles and consump-
that are encompassed within it, we understand tion habits, leaving out those changes in behavior
Social Innovation as the combination of innova- and relationships of individuals as a result of the
tive activities carried out by the company with the emergence of administrative and technological
93
environmental innovations such as environmental environmental management systems or green

management systems or recycling of materials teams. Note that this definition encompasses
for re-entry into the production process. In other technological environmental innovations as well
words, under that limited scope of the social (regarding the changes in behavior and relation-
nature of the Environmental Innovation, we are ships that occur inside the business technological
not considering the changes (in behavior and re- environmental innovations are implemented) as
lationships) that occur inside the business when we have highlighted before.
administrative or technological environmental Regarding the determinants of Environmental
innovations are implemented. Innovation, the literature suggests that these are
We believe, therefore, from Business Strategy, supply factors, demand factors and institutional
that is more appropriate to use a broad definition and political influences (Horbach, 2008). From
of Social Innovation. A broader definition of the the supply side, the Environmental Innovations
concept is needed in order to be able to classify (as many innovations) are conditioned by the
as environmental innovations the changes (in available technological possibilities of the firm
behavior and relationships) that occur inside the and by the return appropriation of the innovation
business when administrative or technological activities. At this regard, the double externality
environmental innovations are implemented. problem must be highlighted. Environmental In-
Environmental Innovations have been defined novations, besides the positive externalities from
from different points of view. Thus, according spillovers which are common to all innovations,
to Chen et al., (2006), Green Innovations are are characterized by the fact that while the whole
hardware or software innovations related to green society benefits from a technical environmental
products or processes, including the innovation in innovation, the cost have to be borne by a single
technologies that are involved in energy-saving, firm (Rennings, 2000).
pollution prevention, waste recycling, green From the demand side, both the potential
product design or corporate environmental man- market demand and the social awareness can
agement. Kemp et al., (2001, in Horbach, 2008) determine the posture of the firm regarding the
argues that Environmental Innovations consist of Environmental Innovations. Thus, through the
new or modified processes, techniques, systems Environmental Innovation, firms may have ac-
and products to avoid or reduce environmental cess to those segments of the market willing to
damage, and according to Rennings (2000), pay a premium for green products (Miles et al.,
Environmental Innovations can be defined as 1997) and also create a green reputation (Chen,
the measures of relevant actors consisting in the 2008). Furthermore, companies can leverage their
development, application or introduction of new reputation for environmental innovation to gain
ideas, behaviors, products and processes that con- preferential access to new and lucrative businesses
tributes to a reduction of environmental burdens like waste management, recycling services and
or to ecologically specified sustainability targets. environmental impact analysis among others
In line with the extensive concept of Social (Nidumolu et al., 2009).
Innovation that we are using in this chapter, In relation to the institutional and political in-
Renningss definition is the one that fits better to fluences, the role of the environmental regulation
our purposes since it refers not only to environ- should be noted. First, environmental regulation
mental product and process innovation but also may force firms to realize economically benign
to ideas and behaviors, which, from our point of Environmental Innovation, and second, firms may
view, are particularly important to understand find early movers advantages from adapting to
environmental organizational innovations like
94
Figure 2. Types of environmental innovations
regulation before than their rivals (Porter & Van in those businesses where they could be useful
der Linde, 1995; Horbach, 2008). (Porter & Van der Linde, 1995). Among environ-
Finally, in addition to the nature and determi- mental process innovations we can include the
nants of environmental innovations, we must refer reductions in air or water emissions, improvements
to the environmental innovation types in order in resource and energy efficiency, reductions in
to show a complete picture of the topic. Thus, water consumption and switching fossils fuels to
following the OECD (1997) Guidelines, we can bioenergy (Kivimaa & Kautto, 2010).
distinguish between technical and organizational Environmental process innovations can be
innovations. Thus, technical environmental in- subdivided into innovations in end-of-pipe tech-
novations are specific kinds of innovations that nologies and innovations in integrated technolo-
consist of new or modified products and processes gies (also called cleaner production technologies).
to avoid or reduce the environmental burden, and While end-of pipe technologies are oriented to
environmental organizational innovations include comply with the environmental regulation (waste
the re-organization of processes and responsibili- disposal, water protection, noise abatement or air
ties within the firm with the objective to reduce quality control technologies), cleaner production
environmental impacts (Rennings et al., 2006). technologies emphasize continuous improvement
(Figure 2) and cost minimization. Examples of cleaner
Among technical environmental innovations production technologies are the recirculation
we can find environmental process innovations of materials, the use of environmental friendly
and environmental product innovations. As pro- materials and the modification of the combustion
cess innovations we can include those aimed at chamber design. Some authors, adding more detail
reducing energy consumption during the produc- to the technological environmental innovations
tion process or those that convert waste into new typology, distinguish between end-of-pipe inte-
ways of creating value, both through its reuse grated (preventive) and end-of-pipe non integrated
within the enterprise or outside, selling the waste (control) depending whether these technologies
95
are integrated in the production process or not Russo and Fouts (1995), referring to dif-
Hartie (1990, in Hemmelskamp, 1997). ferent environmental strategies as mentioned
On the other hand, among the environmental by Hart (1995), emphasize that companies that
product innovations we have to mention product carry out pollution prevention strategies (beyond
design innovations like those responding to the compliance with the law) focusing on process
concept of design for disassembly, which is environmental innovation, have a resource base
based on creating products that are designed for that enhances their ability to generate profits
easy recovery, dismantling and recycling, thus and also makes them able to protect themselves
extending the life of each of the components against future risk arising from resource depletion
(Shrivastava, 1995b), improvements in the dura- or fluctuating cost of energy (Shrivastava, 1995).
bility of the products, raw materials reductions, Dechant and Altman (1994, in Karagozoglu &
selection of environmentally less harmful raw Lindell, 2000), in the same vein, argue that en-
materials and removal of hazardous substances vironmental innovations enables companies to
(Kivimaa & Kautto, 2010). position themselves ahead of their competitors
Environmental organizational innovations, in meeting environmental regulations, which in
in turn, can be supporting factors for technical turn helps them to protect their markets
environmental innovations. Among them, we can Therefore, the importance of incorporating
mention as one of the most prominent initiatives the environmental considerations in strategic decision
utilization of environmental management systems making is increasing (Sharma and Vredenburg,
(EMS) like EMAS (Environmental Management 1998). Thus, through environmental innovations
and Auditing Scheme) or ISO 14001 and the the firm can improve its efficiency, achieve sig-
green teams which are composed of members nificant cost reductions and meet the demands
of the organization from various departments and of those consumers especially sensitive to the
levels of responsibility whose job is to advise the environmental factor.
company on the impact of their activities on the Firms can save costs through a better use of
environment. This advisory work covers all areas raw materials and energy, selling the surpluses
of business activities and includes the develop- of the production process or reducing the control
ment of programs for waste management, energy and waste treatment cost (Murillo et al., 2008),
and resources conservation or renewable energy idea that is shared by Berrone and Gmez-Meja
sources exploration (Shrivastava & Hart, 1995). (2009, in Lpez Gamero et al., 2009) for whom
proactive environmental management, character-
Environmental Innovation and ized by innovation, can minimize waste disposal
Firm Performance: An Approach costs, reduce unnecessary steps and optimize the
to Direct and Indirect Effects use of inputs in the production process. Klassen
and Whybark (1999) relate pollution prevention
The environmental factor provides opportunities technologies to the existence of greater opportuni-
to foster innovation and develop technologies to ties for innovation and improvement in production
improve efficiency. According to Hart and Milstein efficiency. In the same line, Wagner (2005) shows
(2003), problems associated to industrialization that environmental strategies based on pollution
like material consumption, waste and emissions prevention (as opposed to the additive and control
represent an opportunity for companies to develop strategies or end of pipe) result in improved
skills and capabilities in the fields of pollution economic performance of the company. Rennings
prevention and ecological efficiency (Nidumolu et al., (2006) show evidence of the relationship
et al., 2009). between Environmental Innovation and increased
96
Figure 3. Environmental innovation: Direct and indirect effects
turnover of the plant, while according to Radonjic effects between Environmental Innovation and
and Tominc (2007), the new, cleaner technologies firm performance.
lead to the optimization processes and result in However, if technical and organizational pos-
increased productivity. sibilities for sustainable businesses are available
Therefore, with appropriate skill sets and for all the firms in the market, the achievement of
capabilities, companies that carry out prevention some degree of cost reduction, improved efficiency
strategies and reduce waste emissions are able or product differentiation may not be enough to
to reduce costs and increase profits (Sharma & obtain a significant improvement in the economic
Vredenburg, 1998; Christmann, 2000). performance of the firm. Therefore, it may be
In addition, besides the cost factor, the respect necessary the existence of competitive advantage
for the environment can also be a key element to in terms of cost or differentiation. In this sense,
meet the demands of those conscious customers competitive advantage can play a mediating role
who specially value the environmental perfor- in the achievement of business results and better
mance of products, packaging and sustainable firm performance. In short, attention must be paid
forms of business management. These customers to what we call the indirect effects (Figure 3).
will be willing to pay and additional price for such According to Christmann (2000), Environ-
environmental features (Sharma et al., 1999). mental Innovation practices can result in different
Although by 2001, Hamschmidt and Dyllick types of competitive advantage. In the same line,
argued that the market for environmentally in- Chen et al., (2006) argues that environmental
novative products was reduced, the development innovation in both product and process is posi-
of new products more green or sustainable has tively related to the achievement of competitive
been also studied by the researchers. Among the advantage.
beneficial effects of designing new and more Thus, starting from the distinction of Porter
sustainable products we can mention increases (1980) between differentiation and cost leader-
in sales and corporate image enhancement (Tien ship and in line with the relationship between
et al., 2005; Chen, 2007), increased market share strategy and competitive environmental strategy
(Cleff & Rennings,1999) and company growth (Shrivastava, 1995), cost advantage can result from
(Chen et al., 2006). Likewise, environmental incorporating best environmental practices on the
marketing activities positively affect the busi- production process (Hart, 1995). These process
ness performance of companies (Fraj-Andrs oriented environmental innovations include the
et al., 2009). These are what we call the direct redesign of production processes or the use of
97
productive inputs that are less polluting and re- 2006). Some authors doubt about the potential of
cycling of byproducts of processes, among other environmental management systems to produce
measures (Hart, 1995; Porter & Van der Linde, differentiation because not all markets are familiar
1995). Other broader approaches to environmental with and value these certifications and it is also
management also contribute to the cost advantage. controversial the fact that eco efficient activities
Such is the case of the Sustainable Management are a way to gain cost advantages because firms
of Product Life Cycle (Hart, 1995, 1997), Eco- arent punished in proportion to the damage
centric Management (Shrivastava, 1995), Design caused (Aragn-Correa & Rubio-Lpez, 2007).
for Disassembly (Shrivastava, 1995) or Design In a similar vein, according to Frondel et al.,
for the Environment (Hart, 1997). (2008) there is a negative relationship between
In regard to environmental differentiation, cost reductions and the adoption of environmental
innovations related to the packaging design or management systems.
environmentally friendly product development
must be mentioned. Raw materials utilization and
business process modifications can be used as FUTURE RESEARCH DIRECTIONS
differentiation factors when selling products and
services on the market (Murillo et al., 2008). As As can be seen, the debate on the economic effects
pointed out by Reinhardt (1998) through environ- of environmental innovation is still open. Direct
mental innovations seeking product differentiation links between Environmental Innovation and firm
is that consumers pay a higher price because of performance may be valid in some cases but not
the ecological attributes of the products sold. Also in others. Therefore, future studies should analyze
playing an important role in terms of differentia- more in detail the moderating factors in the rela-
tion we can find the environmental management tionship between Environmental Innovation and
systems like ISO 14001 or EMAS. According to business performance. In particular, the role of the
Johnstone and Labonne (2009), environmental environmental management systems is not clear
management systems are very important to send yet. According to Nawrocka and Parker (2009), the
signals to regulators and play a role in differentia- study of the influence of environmental manage-
tion against other competitors from the market. ment systems on environmental performance of
This argument is consistent with what has been companies yields inconclusive results. Thus, the
described by Fombrun and Shanley (1990), for casual link between environmental management
which the fact of producing according to criteria systems and Environmental Innovation is not
of social responsibility (in our case by providing resolved by the literature and there is no consen-
an environmental argument to products and pro- sus on whether the environmental management
cesses) may contribute to product differentiation systems are key determinants of Environmental
and enhanced reputation, though, according to Innovation (Ziegler & Rennings, 2004; Rennings
Barin and Dirk (2008), also should be noted that et al., 2006), are factors that help the emergence
this kind of product differentiation will be effec- of environmental innovations (Wagner, 2007;
tive if is adopted by the value chain as a whole. Rehfeld et al., 2007) (playing a moderating role),
However, there are also more critical perspec- or on the contrary, do not affect at all to the emer-
tives in relation to Environmental Innovation in gence of environmental innovations (Frondell et
terms of differentiation and cost. Some studies al., 2008).
find no relationship between the certification of Likewise, other factors such as environmental
environmental management systems and eco- capacity building (Aragn-Correa & Rubio-
nomic performance of companies (Link & Naveh, Lpez, 2007), the complementary deployment of
98
environmental capabilities, firm size (Ziegler & 3. conjuncin

Nogareda, 2009; Iraldo et al, 2009; Wagner, 2007; a. else
Chen, 2008; Cleff and Rennings, 1999) or industry
(Horbach, 2008; Darnall et al., 2008; Frondel et Demand factors like environmentally con-
al., 2008) among others are also relevant and must scious consumers or general environmental con-
be taken into account in future research. cern, supply factors arising from the technological
capabilities of enterprises in relation to environ-
mental innovations, and institutional factors such
CONCLUSION as regulatory pressure are taken into account.
This chapter takes a new perspective in the study of Escuchar

Environmental Innovation. Thus, it is considered Leer fonticamente
that Environmental Innovation can be explained Diccionario - Ver diccionario detallado
from the theory of Social Innovation. This ap- 1. preposicin
proach is justified on the grounds that Environ- a. in spite of
mental Innovation is a way of introducing ethical 2. conjuncin
arguments to the activities of the company within a. however
a general context of change towards sustainable b. nevertheless
development. Therefore, according to our view, c. notwithstanding
Environmental Innovation is considered as a kind d. nonetheless
of Social Innovation. Contrary to other authors,
that suggest the existence of different natures for Also, a typology of environmental innovations
Environmental Innovation, (Rennings, 2000), we in line with OECD guidelines (1997) is presented.
argue that, Environmental Innovation is a Social Providing examples of the most cited environ-
Innovation in nature, which is very important to mental innovations (organizational, product and
classify as environmental innovations the changes process) and differentiating environmental pro-
(in behavior and relationships) that occur inside cess innovations between Innovations in End-of
the business when administrative or technologi- -pipe Technologies and Innovations in Cleaner
cal environmental innovations are implemented. Production Technologies, a complete picture of
Additionally, it provides an analysis of En- environmental innovations is offered.
vironmental Innovation, taking into account its Finally, the relationship between Environ-
nature, determinants, types and the relationship mental Innovation and business performance is
between environmental innovations and the eco- examined. We argue that Environmental Innova-
nomic performance of the firms. tion represents an opportunity for companies,
promoting the creation of new core competencies
Escuchar and offering a creative and innovative perspective
Leer fonticamente to the organization that can lead to the achievement
Diccionario - Ver diccionario detallado of sustainable competitive advantages. However,
1. adverbio in order to exploit the full potential of Environmen-
a. even tal Innovation, further investigation is needed. In
2. preposicin this regard, the importance of other factors such
a. with as size, environmental capacity or industry, this,
b. by among many others, may be useful to advance
c. cum the study of the field. Empirical research regard-
d. in spite of ing these aspects is of great importance for the
99
determination of environmental strategies. Thus, Chen, Y., Lai, S., & Wen, C. (2006). The influence
if environmental innovation results in business of green innovation performance on corporate
benefits, companies will devote more resources advantage in Taiwan. Journal of Business Ethics,
to pollution prevention strategies (based on in- 67, 331339. doi:10.1007/s10551-006-9025-5
novation), while otherwise will focus in emission
Christmann, P. (2000). Effects of best prac-
control strategies.
tices of environmental management on cost
advantage: The role of complementary assets.
Escuchar
Academy of Management Journal, 43, 663680.
Leer fonticamente
doi:10.2307/1556360
Diccionario - Ver diccionario detallado
1. nombre Cleff, T., & Rennings, K. (1999). Determinants
a. si of environmental product and process innovation.
b. B European Environment, 9, 191201. doi:10.1002/
2. conjuncin (SICI)1099-0976(199909/10)9:5<191::AID-
a. if EET201>3.0.CO;2-M
b. whether
Darnall, N., Henriques, H., & Sadorsky, P. (2008).
c. once
Do environmental management systems improve
d. supposing
business performance in an international set-
ting? Journal of International Management, 14,
364376. doi:10.1016/j.intman.2007.09.006
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(1987). Our common future. Oxford, UK: Oxford specified sustainability targets (Rennings, 2000).
University Press. Environmental Organizational Innova-
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Social Innovation: Social Innovation as the
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103
modes of the company and results in changes in Technical Environmental Innovations:

consumer behavior, changes within the enterprise Specific kinds of innovations that consist of new
and changes in the companys relationship with or modified products and processes to avoid or
the social and natural environment. reduce the environmental burden. (Rennings et
al., 2006).
104
105
Chapter 7
Observe, Conceive, Design,
Implement and Operate:
Innovation for Sustainability
Javier Alejandro Carvajal Daz

Universidad de los Andes, Colombia
Mara Catalina Ramrez Cajiao

Jos Tiberio Hernndez Pealoza

ABSTRACT
Innovation within organisations permits the transformation of knowledge into applications for the devel-
opment of new knowledge and new organisations that are able to respond to the needs and changes of
the society. However, how can we establish a framework for acquisition of the skills needed to manage
successful initiatives for innovation in organisations and how can we guarantee the sustainability of
these innovations? In order to provide an answer to these questions, this chapter presents a proposal for
the promotion of sustainable innovation based on the engineering cycle of Observe, Conceive, Design,
Implement and Operate (OCDIO). For this purpose, we reviewed examples of innovation in some world
class universities, analized cases of education for innovation and developed a case study. We conclude
that the OCDIO cycle was set up in a framework that enables the development of sustainable innovations
through a permanent cycle of observation and adjustment of the systems designed to resolve problematic
situations. The phase of observation allows the professionals facing the challenges of innovation inside
organisations to obtain the relevant information for the conception, design, implementation and opera-
tion of sustainable engineering systems that take into account the relevant economic, social, technical,
environmental and cultural aspects.
DOI: 10.4018/978-1-61350-165-8.ch007
Observe, Conceive, Design, Implement and Operate
INTRODUCTION of the final sale price; it also adds social value,

intellectual value, improves the competences of
The world is becoming increasingly more the organisation (not only commercially but in
complex and connected, the advance of science terms of the quality of production) and helps to
is accelerating, and socio-technical problems clearly define the objectives of the organisation
are abundant (Steiner, Ramrez, Hernndez, & (Organisation for Economic Co-operation and
Plazas, 2008, p 141). This rapid process of change Development [OECD], 2004).
implies that organisations and society in general Traditionally, engineering as a profession has
should be ready to constantly adapt to their chang- been one of the disciplines in charge of leading the
ing conditions and evolve in order to survive in processes of innovation generated in the Academy
their environment. In order to accomplish this or in the production sector. For this reason, many
goal, innovation has become a key element that schools of engineering have highlighted the im-
enables organisations to respond to the increas- portance of the development of skills in order to
ingly demanding and complex conditions of the tackle the challenges of innovation in the market,
market (Evans, Parks, & Nichols, 2007). so that these skills may be used in the future to
Innovation within organisations permits the create successful projects (Siller, Rosales, Haines,
transformation of knowledge into applications & Benally, 2009). One initiative that had been
for the development of new knowledge and new gaining ground in recent years is the CDIO cycle,
organisations that are able to respond to the needs which aims to structure education in engineering
of the society (Edmondson & Nembhard, 2009). based on the cycle of observe, conceive, design,
In the future, only companies that make sustain- implement and operate. This proposal is intended
ability a goal will achieve competitive advantage. to assist the transformation of innovative ideas
That means rethinking business models as well into real projects using the CDIO cycle (CDIO,
as products, technologies, and processes (Nidu- 2010; Crawley & Brodeur, 2008). The aim is that
molu, Prhalad, & Rangaswami, 2009. p. 1). In this the engineering professionals of the future will
sense, new companies with an innovative spirit have effective communication and teamwork
are able to take the place of established companies skills and an innovative attitude, which will al-
which have become old and tired, creating an in- low them to successfully carry out sustainable
novative attitude that generates a higher level of innovation proposals based on the proposed cycle
development (Thurik, 2009). (Hernndez, Ramrez & Carvajal, 2010). Sustain-
However, how can we establish a framework ability is achieved through a permanent cycle
for the acquisition of the skills needed to manage of observation of the designed systems within a
successful initiatives for innovation in organisa- process of constant adjustment (Carvajal, Ramrez,
tions? In addition, how can we guarantee the & Hernndez, 2010; Carvajal, Ramrez, Torres,
sustainability of these innovations? In order to & Arias, 2010). After several years of research,
provide an initial answer to these questions, we and obtaining pragmatic innovation results from
need to develop a way to introduce innovation into student teams, a group of researchers proposed
the education of the professionals that are going to the introduction of an additional initial phase of
be part of organisations, promoting the develop- observation into the CDIO framework (Steiner,
ment of innovative ideas from different fields of Ramrez, Hernndez, & Plazas, 2008).
action or simply favouring a continuous process These researchers believe that a person (or a
of innovation in the daily running of organisations. group of people) trying to develop an initiative
We have to keep in mind that innovation generates for the purpose of innovation in any context must
value in many different ways, and not only in terms observe his/her context in order to attempt to
106
understand it (market needs, restrictions in the (2009, p. 58) added to that definition by stating
systems, economic, technical, environmental and that innovation provides the private producer
human conditions, the current situation, etc.). In with competitive advantage or allows the social
order to innovate you have to know your customer, producer to better meet the needs of consumers
his community, his ideas (OECD, 2004). Based with a given resource cost. For Chesbrough
on such an understanding, a solution with which (2003), innovation is an invention implemented
to tackle the observed situation is conceived; and taken to the market. However, Zoltan, Au-
the solution is designed, taking into account the dretsch and Strom (2009) have stated that an
restrictions and projections for the future, and innovative spirit allows new companies to take
then the design is implemented and materialised the place of those companies that are unable to
in order to operate it. The cycle restarts, and the develop innovative activity and promote a higher
project is observed as it runs with the purpose of level of development.
improving it in each iteration, thus making the The National Academy of Engineering (NAE)
solution (project) sustainable. (2000, p. 44) of the United States of America
This chapter starts by presenting cases of inno- (USA) defines innovation as the transformation
vation training initiatives developed by prestigious of an idea into a marketable product or service, a
institutions which operate in this area. It continues new or improved manufacturing or distribution
by presenting the OCDIO cycle as a framework process, or even a new method of providing a
for the development of sustainable innovation. social service.
Later, it presents the progress of innovations in Although reaching a consensus regarding the
Colombia such as the framework of the proposed definition of innovation is outside of the scope
OCDIO cycle. Afterwards, this research presents of this chapter, the proposed definitions allow us
innovations and innovation training initiatives, to create a framework with which to introduce a
and discusses the particular case of the School concept that is more relevant for us: the innova-
of Engineering at the Universidad de los Andes. tion process.
Finally, this chapter presents the results of the Davenport reinforced the idea of innovation
application of the OCDIO proposal in specific processes by stating that it is clear that innovation
engineering contexts. We conclude this research is the introduction of something new, but that we
suggesting future work in this initiative and pre- presume that the purpose of introducing something
senting some reflections on it. new into a process is to bring about major, radi-
cal change (Davenport, 1993, p. 10). Innovation
processes are combinations of structures for the
INNOVATION IN ENGINEERING development of work oriented towards achieving
visible and measurable results with a clear busi-
Innovation as a Concept ness objective (Davenport, 1993).
Taking into account that it is more important
The concept of innovation has several inter- to focus on the processes of innovation than the
pretations and meanings. Schumpeter (1936) concept of innovation, we will then present the
propounded that innovation is the commercial or OCDIO cycle with the aim of answering our
industrial application of something new: product, two questions relating to the necessary skills for
process or production process, market source of innovation processes and the sustainability of
offer, organisational form. Cozzens and Kaplinsky innovation.
107
Education for Innovation: Based on these domains, MIT has created a

Several Cases flexible curriculum in which the students receive
a solid education in basic sciences (mathematics,
Several schools of engineering across the world chemistry, biology and physics). The students
are working to structure innovative engineering can choose from different education cycles in
curricula, which will include the challenges of humanities, arts and social sciences. Alongside
engineering in the 21st century as identified by these components of the curriculum, the students
organisations such as the Accreditation Board receive specific education in an area of engineer-
of Engineering and Technology (ABET). The ing of their choosing.
objective of these curricula is to respond to the During their education, the students apply the
needs and requirements of existing organisations concepts and skills they acquire in the different
regarding the professional education of engineers areas of their curriculum in their undergraduate
in particular. At the same time, an awareness of curriculum by developing real engineering proj-
the development of the necessary competences ects. These projects are developed based on the
for innovation has been developed as one of the CDIO framework guidelines, combined with the
pillars of economic development and the growth research teams that confront the great scientific
of society. challenges that we face today (MIT, 2006, p. 7).
Institutions such as the Franklin W. Olin The education model at MIT aims to aims to
College of Engineering (Olin College), the Mas- develop skills which can be integrated with the
sachusetts Institute of Technology (MIT), the knowledge the students possess. Therefore, they
Chalmers University of Technology (Chalmers), expect that innovative ideas will emerge as a result
the KTH Royal Institute of Technology (KTH) and of the intersection between science and technology,
Linkping University (Linkping) have developed humanities, arts, social sciences and the academic
successful initiatives for the purposes of education interests of each student (MIT, 2010).
in innovation; the first three in the USA and the Meanwhile, Chalmers bases its curricula on
remaining three in Sweden (Bankel et al., 2005). the knowledge triangle, the base of which is
MIT, Chalmers, KTH and Linkping, as well composed of education and research. On the
as being known for their success in the field of top of the triangle is innovation, which forms a
innovation, lead the CDIO initiative that had been primary objective of education at Chalmers (see
spreading to several universities around the world Figure 1). This innovation is developed within
(Crawley & Brodeur, 2008). Olin College, which the framework of the five areas of advancement:
does not belong to the CDIO initiative, has de- energy, the science of materials, nanoscience and
veloped a curricular structure which is consistent nanotechnology, production, and transport. In
with elements of the CDIO framework. order to achieve this goal, Chalmers structures its
The cases of these universities allow us to curricula around a sound education in the basic
understand the role of education (in this case in sciences that provides the students with enough
engineering) as a key element in the development knowledge to build an excellence profile in an
of the competences required for sustainable in- active field. Excellence profiles are areas where
novation in organisations. we take a national responsibility with the potential
Let us begin with the case of the engineering to meet the challenges of today and tomorrow.
curricula at MIT that have been structured around They are positioned in the international forefront
three large domains: science and technology, of research, education and innovation with a mis-
culture and society, and the prior preparation and sion to meet the long-term needs from society and
aspiration of students (MIT, 2006, p. 1). industry (Chalmers, 2010a).
108
Active fields on the next level describe re- KTH and Linkping, as Swedish universities,
search areas within or between excellence profiles. have structured their curricula in the same fashion
They include excellence centers, research pro- as Chalmers, which, in part, accounts for their
grams [sic], clusters of research groups and in- position as the three universities (along with MIT)
ternational networks, coupled with education and leading the development of the CDIO framework.
innovation activities in collaboration with research Regarding innovation, KTH is to be posi-
institutes, industry and society. The research is tioned as an entrepreneurial university that values
very often carried out at several departments in innovation and entrepreneurship in education
joint effort where both applied and basic sci- and stimulates the creativity and innovative at-
ences are vital parts (Chalmers, 2010b, p. 2). titude of students and researchers (KTH Royal
This model indicates that Chalmers is the leading Institute of Technology, 2009, p. 31). Meanwhile,
university in Europe for providing support for the Linkping aims to continue developing its skills
creation of businesses. Chalmers is well known as a university which combines basic and applied
for the development of systems of innovation research in innovative contexts.
based on the creation of companies that exploit Olin College (USA) was established in the
research applications in the commercial arena autumn of 2002 as a result of an initiative to pre-
(Chalmers University of Technology, 2010c). pare ...students to become exemplary engineer-
These activities are closely connected with ing innovators who recognize [sic] needs, design
government efforts, the business sector and ini- solutions, and engage in creative enterprises for
tiatives by the University itself (Chalmers Uni- the good of the world (Kerns, 2001). Olin College
versity of Technology, 2010c). Chalmers is an does not see itself as a teaching institution where
open arena in which the forces of innovation are the faculty teaches something new to a group of
gathered together. And Chalmers researchers are students who are only going to be in the Univer-
also successful as regards creating a stimulating sity for a couple of years (Kerns, 2001). In this
collaboration between the business world and the sense, the faculty and the students will nurture
university (Chalmers University of Technology, a culture of innovation, inquiry, problem-solving,
2010a). entrepreneurship, research, [among others], to
ensure the faculty stay current with the latest de-
velopments in their field, that they are encouraged
to explore interdisciplinary areas, and that faculty
Figure 1. Chalmers knowledge triangle
transmit the results of this intellectual vitality to
students both in and outside of the classroom
(Kerns, 2001). In addition, Olin College devel-
oped the conceptual framework known as the
Olin triangle (see Figure 2a). At the peak of
the Triangle was Superb Engineering, supported
by the Arts, Humanities and Social Sciences
(AHS) (encompassing Design, Creativity and
Innovation) and by Entrepreneurship (including
Philanthropy and Ethics) (Greis, 2009, p. 25;
Kerns, Miller, & Kerns, 2000).
109
Figure 2. Olin Colleges triangles
Based on the Olin triangle framework, Olin (Kerns, Miller, & Kerns, 2000, p. 105). Olin Col-
college has designed an engineering curriculum lege has presented a second triangle in which the
structured around four years of education, as fol- courses are related (in terms of curricular content)
lows: two-year foundation course and project with competences (skills such as team work, ef-
work, a third year of specialization in which the fective communication and an innovative attitude,
student focuses on a particular area of interest and among others) and the incorporation of spaces in
a fourth year (realization) during which the ex- the development of projects. Olin College consid-
pertise is applied to a project of professional ers that the development of competences through
caliber (Greis, 2009, p. 25; Kerns, Miller, & the application of content in real projects permits
Kerns, 2000). the creation of innovative ideas, while spaces
In the first two years, the students work in based only in courses with disciplinary content
projects based around integrated course blocks (traditional spaces) do not necessarily guarantee
(ICBs), large course blocks that combine two such innovation.
areas of study (say, engineering and biology) and Another common element in the listed uni-
an interdisciplinary project (Greis, 2009, p. 26). versities is their participation in their innovation
The ICBprovides teamwork opportunities for systems. These tight links with companies, busi-
faculty and studentsthe fourth-year senior cap- ness people, local and national governments,
stone project, pairs student teams with businesses research groups and international networks of
to develop a solution that incorporates the students innovation have allowed these institutions to
specialized [sic] skills and meets the business generate meaningful contributions to the eco-
clients requirements and schedules (Greis, 2009, nomic and social development of Sweden and the
p. 26). In their final year, the students not only USA. This relationship among the actors in their
learn the fundamentals of engineering science, but innovation systems has resulted in the success of
also can apply these techniques to the solution of innovative projects that have become productive
real-world problems (Greis, 2009, p. 26). organisations with a direct impact on the economic
Through this curriculum structure, Olin Col- indicators in these countries. In later sections, we
lege aims to prepare leaders who can predict, will present the experience of Colombia regarding
create, and manage the technologies of the future the running of its own innovation system.
110
We have presented the innovation process OCDIO AS A PILLAR OF

as raised by Davenport (1993); this concept is SUSTAINABLE INNOVATION:
tightly linked with the idea of educating profes- A MODEL OF EDUCATION IN
sionals and developing their competences in order THE FIELD OF INNOVATION
to develop innovation processes. The leading IN ENGINEERING
team of universities in terms of the CDIO have
structured their educational programmes around Engineering as a profession has been experiment-
the integration of areas of knowledge such as the ing with changes in its education-learning mod-
arts, humanities, social sciences and exact sci- els, with the purpose of educating the engineers
ences. At the intersection of these areas is where who will face the challenges of this particular
these universities have managed to capitalise on discipline in the 21st century (Siller, Rosales,
opportunities for the development of innovative Haines, & Benalli, 2009; ABET, 2004). One of
projects that include engineering as a basis for their the most relevant changes has been moving from
development. At the same time, the development the knowledge transfer paradigm to the develop-
of innovative ideas is based on the framework ment of professional skills paradigm (Hernndez,
of CDIO that began in courses included in the Caicedo, Duque, & Gmez, 2004; Siller et al.,
engineering curricula. Lately, these universities 2009; Witt, Alabart, Giralt, Herrero, Vernis, &
have begun to hope that their alumni develop Medir, 2006). Examples of these changes have
similar processes in the organisations that they been reviewed by various global institutions such
go on to work for. as the NAE (Siller et al., 2009) and the ABET in
The core of the CDIO framework is the devel- the USA. Nonetheless, the teaching-learning of
opment of skills to be used at each of the stages these skills is difficult, especially for faculties that
of the proposed cycle. These skills are acquired are looking to find a balance between the need
by the students through their study programme to include or increase the technical content in the
and used by them throughout their entire profes- curriculum (Siller et al., 2009) and the formation
sional career. In this way, we can start to form an of engineers who are able to apply such content
answer to the question regarding the creation of and acquire new skills through what is known as
a framework for the acquisition of skills for the lifelong learning (McCowan, 2002).
successful development of initiatives for innova- In response to the new challenges involved
tion in organisations. This is because CDIO is the in education in the field of engineering, a group
framework for the development of competences of globally renowned institutions (MIT, Chalm-
that will allow workers to conceive, design, imple- ers, KTH and Linkping) developed a proposal
ment and operate systems (projects) for innovation based on the CDIO cycle for engineering projects
in their organisations. (Crawley & Brodeur, 2008). The proposal has three
Regarding our second question, we will pro- main principles: (i) scientific breakthroughs and
pose an initial stage in the CDIO framework: technological developments; (2) internationalisa-
observation. This stage has been proposed by tion; and (3) the skills and attitudes of first-year
the research team of Universidad de los Andes students of engineering.
in order to guarantee the sustainability over time Scientific breakthroughs and technological
of the innovations achieved through the OCDIO developments: With regard to technological de-
framework. velopments, the question is whether schools of
engineering have enough resources to be able to
develop applied research, or if there is a way to
111
integrate engineering programmes into industry the School of Engineering at the Universidad de
developments. The closeness between engineering los Andes has proposed a curricular space which
programmes and the industry is fundamental to a is designed to develop some of the skills proposed
countrys technological development. The CDIO by the ABET together with students, professors
initiative allows students to experience learning and businessmen. As a contribution to the CDIO
in pragmatic terms in the midst of a social context framework, we have proposed an additional initial
in which engineering can add value (Cutkosky & phase of observation.
Fukuda, 2004; Froyd & Ohland, 2005; Lloyd et This phase allows a careful investigation pro-
al., 2004). cess based on a literature review and creativity
Internationalisation: Globalisation demands workshops that allow us to explore the technologi-
that engineers have the capacity to adapt very cal conditions that surround us and to approach
quickly to contexts that are different from their potentially problematic situations that could be
own. Such is the case in European student ex- addressed from the point of view of different
change programmes such as the Erasmus European fields of engineering. This first phase of what we
programme and the Socrates programme, where have decided to call the OCDIO cycle provides
professionals with the ability to adapt to different the necessary information to start the conception
environments are sought after. In the USA and of ideas as proposed in the CDIO cycle.
Canada, the same thing happens with Chinese The CDIO framework starts with the con-
and Indian students (CDIO, 2010). According ception of an idea that will later be designed,
to the Asociacin Colombiana de Facultades de implemented and operated through a project. The
Ingeniera (Colombian Association of Engineer- Conceive stage includes defining customer needs;
ing Faculties, ACOFI), engineers are being drawn considering technology, enterprise strategy, and
to developing countries other than their own. In regulations; and developing conceptual, technical,
this sense, additional efforts should be made in and business plans (Crawley & Brodeur, 2008, p.
order to include analyses of different contexts as 138). These activities are important immediately
an integral component of their training. prior to the design of a solution and are the basis
The skills and attitudes of first-year students of for the structure of a project that executes the
engineering: One of the main concerns of schools design. However, a research group of Universidad
of engineering is the level of knowledge in basic de los Andes proposed that before an idea can be
sciences which is applied in projects developed conceived, a rigorous observation stage is required
by engineering students (Cutkosky & Fukuda, (Ramrez, Carvajal & Hernndez, 2010). In this
2004). It is necessary to generate curricular pro- stage, opportunities for innovation are identified,
cesses in which knowledge of engineering and as, by observing the world around us, its variables,
basic sciences is integrated into the development its agents and the iteration among them, we can
of real projects. This requires a widespread effort understand the different complexities that surround
at every educational level (school, undergraduate us and we can propose mechanisms (solutions)
and postgraduate). With this in mind, the CDIO that could absorb part of that complexity (innova-
initiative promotes the development of hands-on tions) (Vest, 2000). For this reason, we believe
activities that allow the integration and imple- that the first stage in the OCDIO cycle should be
mentation of a scientific basis into real projects. the observation stage.
Taking into account the challenges highlighted Connecting these ideas with the proposals of
by the NAE and the ABET, which have been dis- the CDIO leadership team, it is possible to argue
cussed in multiple schools of engineering through- that in the crossover between the social sciences,
out the world, and the principles of the CDIO cycle, arts and humanities lies opportunities for the
112
development of innovative ideas. However, for THE INNOVATION SYSTEM

the identification of such ideas to be possible, IN COLOMBIA
the development of the observation processes we
have previously discussed is absolutely necessary. There are plenty of opportunities to develop
If we move to the final stage of the cycle sustainable ideas for innovation in countries with
(operate), we find that it is necessary to develop the current characteristics of Colombia. We will
a new process of observation of that solution (or present the main reasons for this fact in the fol-
system) which has been designed, implemented lowing section.
and is now operating. Based on these new obser- One indicator of a countrys competitiveness
vations, we could conceive, design, implement in terms of research and development is the
and operate new solutions or improvements to publication of scholarly articles as a measure
the same solutions in the OCDIO cycle. of scientific activity and knowledge production
This stage of the initial-final observation (Jaramillo, Lugones, & Salazar, 2001). Between
process allows us to ensure the sustainability of 1997 and 2002, the Colombian participation
the solutions developed in the CDIO framework. in bibliographical production in Latin America
However, the question remains of why this is so. relating to publications in indexed journals was
The reason is that in a constant and systematic 2.42%, which is higher than that of Bolivia
process of observing the results and the behaviour (0.33%), Costa Rica (0.96%), Ecuador (0.45%),
of implemented and operating solutions, there is Paraguay (0.11%), Peru (0.85%) and Uruguay
the possibility and opportunity to improve with (1.35%) (Jaramillo, 2003). However, Colombia
each iteration, by finding the shortcomings and ranked below the production of countries such
obstacles that can then be overcome in new ver- as Argentina (18.10%), Brazil (43.77%), Chile
sions of the OCDIO cycle. In this way, we can (7.99%), Mxico (18.54%) and Venezuela (4.08%)
guarantee that over time, innovative engineering (Jaramillo, 2003). Figure 3 shows the increase
solutions will adapt to these new conditions, in the Thomson Scientific (ISI) publications in
challenges and requirements identified in the Colombia between 1975 and 2005.
observation process. Figure 3 shows that between 1980 and 1995,
Therefore, we have established that the CDIO the number of publications in Colombia, as is
cycle is an adequate framework for the acquisi- usual in a developing country, increased slowly.
tion of the skills required for successful innova- Since 1995, with the appearance of science and
tive ideas. We have included an initial stage of technology policies and investment in interna-
observation that guarantees the sustainability of tional cooperation (see Figure 4), a rapid and
those innovations over time. In this way, we will sustained increase in the number of publications
carry on building an answer to the two questions emerged. From then on, the increase inclines,
that guide this chapter. once again, towards moderation. The question
In the next section, we will present the details that arises is why the behaviour of Colombian
of the educational contexts in which we used the publications changed after 2005. It seems that the
OCDIO framework for the development of sus- country reached its peak in terms of production
tainable innovative ideas. For this, we believe it capacity, and does not have the institutional in-
to be important to present the context in which frastructure to support any further increase in new
these education spaces are developed. Therefore, knowledge production.
we will present elements of the Colombian inno- When comparing the results for Colombia with
vation system as the environment of the School those of more developed countries, such as Brazil,
of Engineering of the Universidad de los Andes. similar patterns are found but with significant
113
differences in the number of publications, which System of Science and Technology (SNCyT) and
in the case of Colombia is in the hundreds the National Innovation System (SIN) have been
whereas in Brazil it is in the thousands (see Fig- consolidated, with the aim of supporting and im-
ure 5). Furthermore, both countries have a grow- proving knowledge production and its subsequent
ing number of publications, but in Brazil the application in order to foster economic growth.
growth in faster than in Colombia. The relevance Two characteristics of the incipient Colombian
of Brazil is based on two reasons: (i) Brazil is the innovation system in terms of human capital are
most developed country in the region (South presented by Gmez (1999) as the common aspect
America); and (ii) economically speaking, Brazil for Colombians: on one hand, their capacity to
is one of the strongest countries in the world (it solve individual problems and, on the other hand,
is a member of the G20). their incapacity to solve collective problems.
The academic development of Brazil is The latter issue is aggravated because of a lack
closely related with its innovation system that, as of resources and investment. For the resolution
a result of the relations between the different ac- of collective problems, there is a clear need for
tors that participate in it, generates a high level engineering and other disciplines to immerse them-
of knowledge and sustained economic growth. selves in topics such as security, environment, in-
Colombia has been advancing in terms of frastructure, public health, and knowledge, among
the structure and consolidation of its innovation others. Public goods related to knowledge are those
system since the nineties; however, this initiative that are most urgently needed in Colombia. This
has not yet been as successful as the Brazilian lack makes extremely expensive the production
equivalent. of private goods (Gmez, 1999). These assess-
Colombia has made new efforts via legislative ments by Gomez pose two challenges: increasing
initiatives to foster scientific and technological the investment in knowledge development so as
innovation. Examples of these efforts include to enhance competitiveness, and increasing the
several bills that are being discussed in the Co- ability of Colombians to work in teams, aiming
lombian Congress and which aim to improve the towards the same collective goal.
institutional infrastructure regarding science, With regard to the first challenge, private in-
technology and innovation. There is an initiative vestment in technology in Colombia, according
for the creation of a Ministry of Science, Tech- to the National Planning Department, oscillates
nology and Innovation, a National Trust for the between 15% and 20% of the national budget,
Funding of Science, Technology and Innovation whereas in countries such as Mexico and Brazil
and a National System of Science, Technology and that percentage in 2003 was 29.8% and 39.8%
Innovation. These initiatives ratify the clear need respectively. In the period 2002-2004 in Colombia,
for Colombia to be introduced into the knowledge an average of 0.03 patents per 100.000 inhabitants
society and to improve its position in the regional were issued, while in Chile the same indicator
context and worldwide. was 0.13 and in Argentina it was 0.53. The total
These initiatives are aligned with Colombian expenditure on investigation and research as a
history regarding the creation of an innovation percentage of the Gross Domestic Product GDP
system which will be consolidated in the coming in 2004 in Colombia was 0.37%. The number of
years. Figure 2 shows the milestones that allowed researchers per 100,000 inhabitants in Colombia
Colombia to advance towards its incorporation was 109 in 2003. These indicators show that Co-
into the knowledge society, which demonstrate lombia is on the right track but lacks the driving
their efforts to develop social, institutional, human force required to boost its economic growth.
and financial capital. In this manner, the National
114
Figure 3. Increase in Colombian ISI publications (Source: General Research Office of the Universidad
de los Andes)
Figure 4. Milestones in the creation of the Colombian innovation system
115
Figure 5. Brazilian ISI publications
In countries such as Colombia, companies THE CASE OF THE SCHOOL

should coordinate with national research groups OF ENGINEERING AT THE
and universities in order to find sources of pro- UNIVERSIDAD DE LOS ANDES
posals for new products, processes and services
(National Research Council, 2007) which would In the aforementioned scenario, the University
reduce the gap between these organisations and of Los Andes has been a key actor. The School
multinational companies with specialised depart- of Engineering has made explicit its aim of con-
ments and a budget for research and development. tributing to the countrys competitiveness through
This joint work may be modelled on the processes innovation. The strategic postulates (mission
developed by the universities presented above. and vision) of the School Development Plan
Regarding the second challenge, proposals like 20022005 refer to innovation capacity based on
the one set out by the School of Engineering at technology as one of the core characteristics that
the Universidad de los Andes seek to strengthen its undergraduate alumni must have, and to add-
the competences of teamwork, observation and ing value to companies as one of the focal points
conception in constantly changing scenarios (ne- of the School of Engineering. It also express it
gotiation processes and technology, among oth- intention to have a positive impact on the com-
ers). This has a huge impact on the competitiveness petitiveness of the country through research. For
of companies, fostering a culture of innovation in the period 20062010, the School kept on track in
new generations of professionals as an essential terms of the previous plan concerning innovation,
practice for the economic development of their but introduced an additional element: the level of
country. This will allow the national industry to participation that it must have in the technological
participate to a greater extent in the international renovation processes in national industry. These
market. principles are based on the Universitys interest in
Taking this into account, we will present the participating in the Colombian innovation system
generalities of the OCDIO proposal and contex- and becoming a relevant actor in the transferral
tualise it with an example of its application in of knowledge from the academy to the produc-
the School of Engineering at the Universidad de tion sector.
los Andes.
116
There are several diverse initiatives created conducting high level research as one of its in-
by the School with the objective of developing stitutional aims, which means producing its own
its capacity to promote and support innovation knowledge about relevant problems.
in national industry. In the 1990s, it participated With this objective in mind, the School fo-
in the establishment and direction of INNOVAR, cussed on activities such as strengthening its
an institution dedicated to the incubation of busi- masters and doctorate programmes, using its own
nesses with the potential to succeed. In the same resources for research, subscribing to international
decade, at the end of 1993, it created the Innovation scientific databases, upgrading its infrastructure,
and Technological Development Centre (CITEC) equipping its laboratories with the latest technol-
with the expectation of helping to increase the ogy and educating and assigning its professors
welfare of citizens through its participation in staff for research purposes.
the industrial development of the country. The In 2007, the university created the Vice Rectors
CITEC established its objective as the execution Office of Investigations, which was focussed on
of projects with a high component of innovation, managing the accomplishment of these objectives.
oriented towards the solution of problems in the As a result of these initiatives, the Universidad
field of engineering. de los Andes has experienced a sustainable growth
In 2000, the newly available infrastructure of in indicators such as the number of ISI publications
facilities and laboratories and the realisation of the (see Figure 6), placing itself in 5th place in the
importance of working closely with the produc- ranking of Ibero-American research institutions.
tion sector motivated the School to reflect on how The results presented in Figure 6 accompanied
to formally incorporate the innovation process a significant growth in the rate of production of
into the institutional dynamic. Under the name ISI articles per professor: 0.36, 0.45 and 0.59 for
of InnovAndes, a proposal was prepared for the 2007, 2008 and 2009 respectively. In the same
creation of an innovation centre building upon the way, 20 of the 130 research groups at the Univer-
experiences gained through the CITEC, with the sity are in the highest category of the National
aim of boosting the development of the graduate Administrative Department for Science and Tech-
School through applied investigation. The idea nology (Colciencias) in terms of the quality and
was to open spaces up for effective interaction frequency of their publications and researches
among research groups and companies, with the results.
aim of solving the relevant problems in the field
of Colombian engineering. Model of Education in
Other initiatives such as the Centro Gua (Guid- Innovation in the Field of
ance Centre) or the Red de Empresas Asociadas a la Engineering: The OCDIO Cycle
Universidad de los Andes (Network of Companies in the Context of Undergraduate
Associated with the Universidad de los Andes), Students of Engineering at the
both in an alliance with the Business Manage- Universidad de los Andes
ment School, also tried to offer the participating
companies a way to resolve their management and Taking into account the national context and the
competitiveness problems through the transfer of context of the Universidad de los Andes, the School
the appropriate technology. of Engineering has been consolidating a space for
The Universidad de los Andes (and particularly the development of engineering projects from the
the School of Engineering) had been working to first semester until the end of the undergraduate
reinforce the activities of teaching and investiga- programme (see Figure 7).
tion related to innovation. The University cited
117
Figure 6. Growth of the number of ISI publications of the Universidad de los Andes
Figure 7 presents the undergraduate engineer- although with less emphasis. Without a doubt,
ing programme and the points in the course at the main strength of ExpoAndes is its capacity
which certain projects are developed. These proj- to generate in the students the ability to come up
ects are developed across the curriculum and aim with teamwork solutions. There are some very
to be a way of integrating the students into the interesting issues concerning this matter. In the
curriculum. In the following sections, we will evaluation of the ExpoAndes process, the most
develop two of these points in the course as part positive opinions regarding teamwork belonged
of the OCDIO model of education for innovation. to the students in the final semesters of their un-
dergraduate programmes. The a priori hypothesis
First Semester of the research team is that these were the students
that first had the opportunity to work in interdisci-
In the first semester, the students of all of the en- plinary teams. This was the first phase of change
gineering programmes undertake a project which for ExpoAndes, in which engineering projects
is based around a specific topic that is defined were undertaken by teams composed of students
according to the context of the different intro- of industrial engineering, chemical engineering,
ductory courses to the engineering programme. computing and systems engineering, and general
This active learning scheme is called ExpoAndes. engineering.
At the end of the semester, around 150 groups This process required a complete integration
of students present projects that aim to provide of the students with the group and with the profes-
an initial approach to innovation in engineering sors in charge. The identification and resolution
with regard to a specific problem (Ramrez & of the problems being addressed showed that
Hernndez, 2008). This phase of the undergraduate knowledge from each discipline was necessary.
programme is intended to start the development Another interesting result concerns the develop-
of an innovative attitude through activities with ment of the students communication skills, due
an emphasis on the observation and conception of to the interdisciplinary nature of the teams. It is
engineering projects. Activities intended to foster noticeable that the teams (both the ones composed
the design of these projects are also supported, of students from the programme as well as those
118
Figure 7. Projects in the education of engineers at the Universidad de los Andes
composed of students of different engineering One hypothesis (which may be too strong) is
programmes) were unable to develop their oral that these contradictory results may be associated
expression skills. The researchers relate this to with the different approaches that ExpoAndes has
the fact that the students presented their projects employed in recent years. The new students had to
only once, in a very demanding and pressure-filled design their solutions using only their knowledge
open exhibition with more than 2000 guests (in- of their own engineering discipline. The question
cluding parents, business people, engineers and that arises is whether or not interdisciplinary
professors). Even though the students have shown teamwork promotes innovation in the design of
some resourcefulness in presenting their projects an engineering solution. These preliminary results
in the proper way, it would be sensible to create may indicate that this is in fact the case. In that
opportunities for smaller oral presentations during sense, it is important to explore in depth such a
the semester. In this way, permanent systematic strong asseveration in the middle of a learning
training of this skill would be guaranteed. process. In this way, ExpoAndes is an initial op-
Regardless of its limitations, ExpoAndes portunity for students to develop their capacities
presents itself as an opportunity for professors to as entrepreneurs.
guide the students in the process of observation, There is a significant and potentially big re-
identification and design using an engineering search opportunity in exploring whether or not
approach. Although it is clear that the students this competence develops in the same way for the
will be unable to solve a problem like engineers in students of each different engineering programme.
the first semester, we want to them to experience The preliminary results show, for example, that
what they will be doing in their professional lives. the perceptions of students regarding their inno-
The results show that there are good perceptions vative attitudes were more positive for chemical
of different relevant actors regarding this matter. engineering students than industrial engineering
A learning process such as ExpoAndes aims students. This result is interesting if we take into
to develop an innovative attitude in the engineer- account that in the industrial engineering depart-
ing students from the first semester, so that the ment, the students have more courses in which to
students will be able to identify opportunities to develop an entrepreneurial attitude.
add real value to their society. The senior students This may lead us to assume that, at least
perceived that the greatest strength of ExpoAndes initially, the industrial engineering students
is the development of the capacity for innovation were more critical of what they did in the first
applied to the resolution of a problematic situ- semester, because they had more opportunities to
ation. The students who had just gone through develop opportunities for entrepreneurship. This
ExpoAndes had contrasting opinions. discussion is important, but should be explored
in future research.
119
The Middle of the Study Programme In particular, in recent years the OCDIO
framework has been used in the course known
The next point at which the students engaged in as the middle study programme project. This
the elaboration of an engineering project with a course is taken by students in the fifth and sixth
special emphasis is called the intermediate project. semester of the study programme. In the follow-
In this project (like in ExpoAndes) the students ing section, we will present the details of the
work in teams to develop more compelling projects process developed by the students in each of the
than those they made in the first semester. In this stages of the OCDIO cycle in the middle study
process, the activities for the elaboration of their programme project. In this course, the students
projects are defined with a strong emphasis on work on problems related to information and
observation, conception and design. In addition, communication technologies (ICT).
the aim of this project is for students to develop
the first activities relating to the implementation of Observation: Conception
the prototype they have developed (see Figure 8). Over a period of six weeks, the teams engage
Both in the first semester and in the middle of in four activities that require the participants to
the study programme, the project is intended to develop observation skills.
foster attitudes which are conducive to teamwork, The students make a presentation referring
the design of engineering solutions and effective to the technological changes in the world and
communication, among other aspects. This is the the central role of information technologies. For
reason why the CDIO framework with the pro- this purpose, a panel of engineer-entrepreneurs is
posed additional observation phase forms a good assembled, and the research teams make presen-
context for the design of these projects (Hernn- tations on tendencies and opportunities. Parallel
dez, Ramrez & Carvajal, 2010). to these national interventions, there are video-
conferences with project development experts in
Figure 8. Application of the OCDIO proposal in the middle of study programme course with ICT
120
other parts of the world. With these presentations, the students. The following week, each team must
the students not only begin to visualise poten- integrate the result of their proposal with the infor-
tial areas for their engineering proposals both mation gathered in the bibliographical research,
nationally and internationally, but also start to stressing the added value supplied by information
make connections with entrepreneurs who could technologies. The entire process of observation for
eventually become their mentors. the innovation workshop is repeated, with each
In the next step, the students begin, on an indi- team choosing a different situation. The intention
vidual basis, a bibliographical research process, in of the workshop is that the student will sharpen
which they produce written technical reports about his/her observation skills and start to work suc-
engineering proposals that may or may not have cessfully with other students in a team.
been particularly innovative. This second activity At the end of this observation stage, the
seeks to strengthen their research skills through a students attend a presentation of the advanced
systematic review of the relevant texts, as well as projects of teams that are one semester ahead.
strengthening their written communication skills. The goal of this final activity of the observation
For that purpose, the students receive feedback on stage is that the students who are beginning their
their reports from their professors. This process is projects observe and analyse the work of other
repeated several times during the semester. teams that are ahead in their innovation proposals
During the third and fourth weeks of the with information technologies. This phase ends
semester, the students participate actively in an with the presentation of ideas for the conception
observation for innovation workshop. During the stage of the project.
first three hours of the workshop, the students ob-
serve and make comments on images of projects Conception: Design
that have been acknowledged for their creative In this stage (during four weeks), the groups must
content and innovation. After this, teams of five capture their observations and produce a project
students are drawn up, who have to identify during proposal that must be presented and refined based
the following week a situation that has attracted on the critique and contributions made by entrepre-
their attention, essentially because it refers to the neurs, professors and students. This stage, like all
behaviour of a representative sample of people in of the following ones, is characterised by cycles
the communities that surround them. The situa- of teamwork, feedback and coaching sessions
tions may be as commonplace as the behaviour with an engineer-entrepreneur and the professors.
of people riding on public transport, in an lift, After one week of work, a proposal with the
inside the classroom, writing a text on a mobile initial project requirements must be generated.
phone, etc. Once the situation is identified, they It must be presented in a written report that
must make an audiovisual record of the different identifies the problematic situation in which the
behaviours at different times during the week. With students intend to intervene using engineering
the audiovisual material obtained by each team, tools, establishes the objectives of the project,
all of the students get together and the chosen defines the field of technological relevance and
situations are presented. For three hours, each determines the niche in the market in which the
group produces a visual 3D presentation and an proposal would have a potential impact.
intervention proposal for the selected situation. Teamwork plays a fundamental role in this
The team should construct their presentation using process of helping students to reach their learn-
materials such as paper, cardboard, photographs ing goals.
from magazines, etc. At the end of the session, Based on a communication-feedback process,
each team shares their proposal with the rest of a full session (poster-session) is held with the
121
participation of the engineer-entrepreneurs, the conducted by entrepreneurs, the potential for in-
professors and the students. In this session, each novation, effective communication, knowledge
group presents its proposal orally and exhibits a development and the capacity to work in teams
poster with the main features of the proposal dis- increases considerably (Evans, Parks, & Nichols,
played on it. Each group has seven minutes for its 2007; NAE, 2000; Skogstad, Currano, & Leifer,
oral presentation, which must be focussed on the 2008; de la Hoz, & de Blas, 2009).
results of their observations and the initial concep- From the sixth week onwards, the design
tion phase of their proposal. This is followed by phase becomes more relevant in the development
immediate feedback (three minutes of questions project. Two-week cycles are defined by meetings
and commentaries), and an evaluation given by with the engineer-entrepreneur who is assessing
the engineer-entrepreneurs and the professors the project. The purpose at this stage is to make
based on effectiveness of the teamwork and the progress in terms of the relationship between the
development of their innovation abilities. The ef- requirements of the selected situation and potential
ficiency of the teamwork is evaluated according alternative solutions derived from the application
to criteria which are related to the oral and written of information technology. The entrepreneur helps
presentations, as follows: support material; oral to analyse the project, encourages teamwork,
expression; time management, structure of the provides oral and written expression tools to the
document; written expression, and proper use of students, and assists them so that the prototype
the bibliography. The development of innovation has a concrete application that generates value in
abilities is evaluated according to criteria which a determined area.
are related to: project content; project objective; This teamwork between businessmen, teachers
state of the existing prototype; projects referred and students generates value within the learning
to; deliverable definition of the innovation with process in the sense that each member brings the
an information technologies showcase; knowledge expertise and perspective of his or her own field
and technologies involved, and work schedule. to the collaborative task (Edmondson & Nemb-
At the end of the presentations, the engineer- hard, 2009).
entrepreneurs offer another round of questions, After the first two weeks of the cycle, there
this time more specialised, to each group. is a presentation and feedback session with the
At the end of the poster-session, each entre- group of professors.
preneur chooses the two projects that captured
their attention the most. From then on, each Design: Implementation
entrepreneur follows their two chosen projects. Over a period of four weeks, the design must be
The engineer-entrepreneur assists the team in the consolidated, based on teamwork and assistance
strengthening of their communication, teamwork from the professors and entrepreneurs. Ideally,
and innovation with information technologies by the end of this phase, the project will have
skills. These skills are assessed based on numeri- its first prototype to illustrate the proposal and a
cal criteria, in which 1 means that the student has defined implementation programme. This phase is
not developed the skill and that he/she may still the last one of the first semester in the teamwork
improve. Entrepreneurs may choose the groups and innovation learning period, and, at the end,
that are of the most interest to them. At this point, there is a Public Showcase of Innovation with In-
the coaching process begins. Successful cases formatics Technology in which the first results of
such as the ones presented by the University of the implementation of the proposal are displayed.
Texas at Austin, UPC and Stanford University, The public display lasts for one day, with students
provide evidence that if a couching process is and professors from the university attending,
122
along with entrepreneurs invited by the School RESULTS OF THE IMPLEMENTATION

of Engineering and the engineer-entrepreneurs OF THE OCDIO PROPOSAL AT
who have assisted with the projects. THE SCHOOL OF ENGINERING
The process described above takes place dur- (UNIVERSIDAD DE LOS ANDES)
ing the first semester of the third year of study
in the engineering course. The teams can either Through the aforementioned methodology for
pass or fail the semester. If they pass, they enter learning and developing engineering projects, it is
the second semester of the third year, in which intended that students will develop the necessary
there are four phases, each of which culminates skills for eventually becoming innovators in their
in a communication-feedback activity. own organisations, as well as making those inno-
vations sustainable over time. One of the groups
Operation which formed during this learning process was
The best projects participate in the Innovation among the top four in a national entrepreneurship
Contest that takes place at the end of the semester. award (Santander Award: Entrepreneurship, Sci-
The jury for this contest is made up of entrepreneurs ence and Innovation 2010), which had more than
who evaluate the students development in terms 400 contestants. Similarly, another group, whose
of teamwork and innovation skills using criteria members are now graduates from the engineer-
such as the establishment of an objective, target ing programme, formed a company and recently
market determination, precision in the presenta- became one of the five winners of the Ventures
tion of the solution design, sustainability analysis 2010 national contest, which had more than 1200
(economic and technological), innovation (design, participants. DataTraffic received the award for
price, technology), endeavour (planning, under- the project with the greatest potential for growth,
standing the problem, understanding the solution). and received $10 million COP in shares granted
The winners of the contest receive incentives by the Colombian Stock Exchange.
to put their proposed prototype into operation. The projects summarised below were devel-
During the next year, they have access to a space oped with the aim of providing innovative ICT
in one of the faculty laboratories, economic re- solutions in the context of transportation in big
sources (1500 US dollars) and the coaching of a cities.
board of directors made up of two entrepreneurs
and a professor. Information System of Routs
During the fourth year of the course, the teams and Transportation (Sistema
can strengthen their proposals and plans using de Informacin de Rutas
the academic resources that are at their disposal y Transporte, SIRT):
(courses, course projects, laboratories, coaching
from entrepreneurs and their graduation project), The intensification of urban development in cit-
thus attaining a very high level for competing in ies during the twentieth century, caused by rapid
international contests of innovation using infor- population growth and the concentration of people
mation technology and endeavour. During public in urban areas in search of opportunities, made
presentations, the groups have to explain criteria engineers, architects, politicians and economists
such as sustainability which are very important think about what the formula could be for building
in an education in engineering. viable cities and making them sustainable over
time. Such sustainability would largely depend
on mobility. Nowadays, this issue is a priority in
Bogota (Colombia), because we are at a critical
123
point at which the decisions made today will have ployees, supervise their functions and increase
a major impact on the future. Bogotas Master their efficiency.
Plan for Mobility proposes that it is necessary to In its short trajectory, DataTraffic has partici-
integrate different forms of public transportation, pated actively in the development of solutions for
and therefore the passengers should have access to the Urban Development Institute, the Transporta-
all available information regarding routes, stations tion Secretary Office, and the Bogota Emergency
and times of arrival. Currently, such information Telephone Number.
is not available for the public bus system (exclud- These projects are examples of the results of
ing Transmilenio), and therefore its users cannot the sustainability of the OCDIO learning proposal
easily find answers for questions such as which for developing the innovation, company-building
bus to take, where to take the bus and where to talents and skills of our students, and of the men-
get off, or where to walk in order to reach their toring and advisory work carried out by teachers
final destination. and businessmen who are interested in technology
From the perspective of a city in the not too and encourage the building of knowledge. Both
distant future, using public transportation should groups have been acknowledged by academic and
be an enjoyable experience. From this perspective, business entities as projects with a high potential
SIRT was born with the intention of intention of for sustainability. This sustainability has been
making a contribution to the city, by enabling conceived in the learning model comprised of
people to better organise their time. In order to the OCDIO cycle.
achieve this, this group is proposing a solution There are several results which appear to show
that informs users of the estimated time of arrival that the students and professors attitudes to inno-
of the next bus in two ways: vation were strengthened through the elaboration
of projects in the first semester and in the middle
1. The user tells SIRT where he/she is located of the study programme. The current synergy
and where he/she wants to go; between professors and students shows a high
2. The user tells SIRT where he/she is located level of connection between the courses, which
and which route he/she wants to take; exists in order to promote an innovative attitude
in engineering students. Every year, around 300
The project is being carried out in phases. The
first one was developed in the second semester
of 2008. In this phase, a prototype was designed Figure 9. SIRTs project
which informed the user of the estimated time
of bus arrival using a Java based simulator. The
information travelled across the cellular network
(GSM) and text messages (SMS). The preliminary
model of the prototype is presented in Figure 9.
DataTraffic
This project develops innovative solutions using

digital maps which generate value within the
processes of its clients, through the development
of solutions which are focussed on the areas of
logistics, maintenance and marketing, among
others, in order to increase control over the em-
124
projects are developed, with the participation of Cup 2009 - Colombia, TIC Americas 2010
1,500 students and 20 professors from all of the - ECO CHALLENGE 2010, 2010 Computer
engineering programmes. Some of these projects Society Student Competition and Calling All
are reinforced later on thanks to the knowledge of Innovators. The professors have written nearly
basic sciences acquired later on by the students. 10 articles about this subject and presented them
Some of them are resumed in the middle of the in congresses and national and international
study programme, where we have been able to magazines. With these results, we are starting to
strengthen the synergy between the professors generate a mass of criticism that is having an impact
involved. Regarding with Innovation Projects on the Universidad de los Andes, its environment
with ICT course, we have managed to develop and other universities in the country.
40 projects annually with the participation of 10 In order to evaluate the development of compe-
business leaders, professors and students from tences in the engineering students who participate
several study programmes, particularly students in the Middle Study Programme Project with ICT,
of Computing and Systems Engineering and In- the people who attended the Innovation Show-
dustrial Engineering. case (businessmen, professors, researchers, MSc
Without a doubt, one big achievement has been students and PhD students) evaluated different
the consolidation of an educational space where aspects of the activity.
students from several study programmes are in Figure 10 shows the average perception of
constant communication with one another in order the different evaluators of the work done by the
to identify problems that can be addressed using students who had been part of the education space
engineering and to share multidisciplinary knowl- during the last three semesters. These results show
edge to facilitate the design of solutions. In the favourable and sustained evaluations in areas such
last years, 5% of these projects have transformed as the capacity of the students to identify problems,
into final study programme projects. their innovative attitudes, and the quality of the
In addition, some groups have achieved impor- proposed solutions among others. The results are
tant positions in competitions such as Imagine motivating and confirm those mentioned before.
Figure 10. Results of the OCDIO cycle in the Middle Study Programme Project with ICT
125
CONCLUSION AND FUTURE WORK in general, where projects have an increasingly

short lifecycle and where it is necessary to have
A diverse range of engineering education institu- a significant capacity for observation, adaptation,
tions across the world has developed initiatives learning and change in order to respond to these
for the education of professionals in the field challenges.
of innovation, particularly for engineers. These The OCDIO proposal was set up in a frame-
institutions have successfully incorporated them- work that enables the development of sustainable
selves into the innovation systems of developed innovations. This is achieved through a permanent
countries and of others that are searching for eco- cycle of observation and adjustment of the sys-
nomic development. In this way, they contribute tems (solutions) designed to resolve problematic
to the development of favourable conditions for situations in a particular society. The additional
the development of innovative ideas that have a phase of observation that has been proposed
positive impact on society. as a complementary initial stage of the CDIO
Colombia, being a country that is seeking framework allows the professionals facing the
to move from a feudal-capitalist economy to a challenges of innovation inside organisations to
knowledge-based economy, is working to consoli- obtain the relevant information for the concep-
date an innovation system with the participation tion, design, implementation and operation of
of the government, companies, business people, sustainable engineering systems that take into
research centres and society in general. This account the relevant economic, social, technical,
intended alliance requires certain characteristics environmental and cultural aspects.
and competences for the fundamental players of We may be able to argue that we obtained
an innovation system: the engineers. In this way, incipient results from this education proposal,
the School of Engineering at the Universidad de which would allow us to continue the develop-
los Andes seeks to educate engineers so that they ment of this initiative in other universities, with
may be able to face the challenges of innovation the aim of it becoming a successful and replicable
and transfer their knowledge later on to the market model that results in a positive impact on the
in the shape of products, services and business performance indicators relating to the develop-
models. The purpose of the School of Engineering, ment of the economy, science, technology and
as part of the innovation system in Colombia, is innovation in Colombia.
that its alumni may develop innovative attitudes The OCDIO framework has been examined
and the capacity to work in teams through effec- during this chapter which has focused on the
tive processes of communication, not only with education of engineers, but the researcher team
engineers from several disciplines but with pro- believes that the proposal can be replicated in
fessionals from other areas. This school intends other areas such as basic sciences, social sciences,
to achieve this objective through the undertaking and in general in the interdisciplinary work which
of curricular activities framed in the CDIO cycle has become a motif in society. In this sense, the
with an initial phase of observation that guarantees OCDIO proposal can become a point of reference
the conception of ideas as proposed by the CDIO for other professions.
framework and warrants the sustainability in the For future investigations, we intend to refine
time of the innovations which are developed. our instruments of evaluation and the ways in
In this way, the OCDIO cycle has established which the innovation projects that arise in the
itself as a framework with which to educate the en- proposed context of engineers education are
gineers of the future to face not only the challenges monitored. In order to consolidate this investiga-
of the engineering as a profession, but of society tion, it is very important to observe in detail the
126
development of the sustainable innovative engi- Chalmers University of Technology. (2010a).

neering projects which arise from the education Retrieved from http://www.chalmers.se /en/sec-
of the engineers until the consolidation of their tions/ collaboration
projects in organisations. Similarly, it is important
Chalmers University of Technology. (2010b).
to monitor the development of their innovation
Areas of advance. Retrieved from http://www.
skills and their contribution to entrepreneurship in
chalmers.se/ en/areas-of-advance/ Documents/
Colombia the contribution made to entrepreneur-
Areas%20of%20advance%20print.pdf
ship in Columbia by the groups formed during this
process, such as the ones presented in this chapter. Chalmers University of Technology. (2010c).
Retrieved from http://www.chalmers.se/ en/sec-
tions/ about_chalmers
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129
Section 2
Organizational Networks and
Innovation
131
Chapter 8
The Integration of Independent
Inventors in Open Innovation
Gavin Smeilus
University of Wolverhampton, UK & Caparo Innovation Centre, UK
Robert Harris
University of Wolverhampton, UK
Andrew Pollard
University of Wolverhampton, UK & Caparo Innovation Centre, UK
ABSTRACT
Whilst current academic literature points to the growing importance of Open Innovation as a means of
companies capturing new products from sources other than internal R & D facilities; the integration
of independent inventors, a source of innovative new products, within Open Innovation has proven
challenging. This chapter presents a series of preliminary Critical Success Factors, driven by current
academic literature, which are intended to positively contribute towards independent inventors becom-
ing more successful suppliers of new product ideas to businesses operating an open innovation model;
with the intention that adherence to such factors may have a positive influence on the effectiveness and
future sustainability of Open Innovation.
INTRODUCTION from an existing open innovation centre suggests

that just 0.7% of new product ideas supplied by
The Open Innovation model, at a theoretical level, independent inventors resulted in the business
allows for independent inventors to become sup- launching a new product on to the market. This
pliers of new product ideas to companies. There statistic raises concerns as to whether open in-
is little evidence however, to suggest that the novation models operated by companies, which
practical integration of independent inventors as rely on inputs from independent inventors, are
suppliers, to businesses operating an Open Inno- sustainable.
vation mechanism, has been fruitful. Indeed, data The chapter will present a series of preliminary
Critical Success Factors, driven by academic lit-
DOI: 10.4018/978-1-61350-165-8.ch008 erature, intended to positively contribute towards
The Integration of Independent Inventors in Open Innovation
Figure 1. The closed innovation model (Chesbrough, 2003)
independent inventors becoming more success- nesses (Chesbrough, 2003); the Open Innovation
ful suppliers of new product ideas to businesses model provides a relatively new and contrasting
operating an open innovation model; with the approach to the Closed Innovation model, which
intention that adherence to such factors may have is historically prevalent amongst large innovative
a positive influence on the future sustainability companies. The traditional Closed Innovation
of such operations. model relies heavily upon the internal capabili-
The chapter is structured as follows; firstly a ties of businesses to develop and commercialise
summary of the key principles behind Open Inno- a new product or service with little or no input,
vation is outlined. Secondly, a discussion suggests regarding the innovation process, coming from
what is currently understood about independent external sources. Within the Closed Innovation
inventors and then finally, a series of preliminary model, businesses typically generate the innova-
critical success factors are proposed, underpinned tive concepts, perform R&D related activities
by current academic literature. The identification that facilitate the metamorphosis from concept to
of Critical Success Factors will guide independent innovative product, then complete commerciali-
inventors to operate as successful suppliers of new sation related activity in the form of marketing
product ideas to businesses following an Open through to distribution (Chesbrough, 2003). The
Innovation model. diagram in Figure 1 proposed by Chesbrough
(2003) summarises this process very effectively:
Open Innovation Principles In interpreting Figure 1, the critical aspect is
research investigations and development projects
A formal definition of Open Innovation is suggest- reside within non-permeable firm boundaries. As
ed by Chesbrough, Vanhaverbeke & West (2006, such, there is a heavy reliance upon the companys
p.1) Open Innovation is the use of purposive internal science and technology base to originate,
inflows and outflows of knowledge to accelerate research and develop innovations. The figure il-
internal innovation, and expand the markets for lustrates the funnelling effect experienced as re-
external use of innovation, respectively. search investigations are filtered down in number
Essentially a mechanism for organising innova- as go/no-go decisions are reached, regarding in-
tion related activity within large R&D led busi-
132
Figure 2. The open innovation model (Chesbrough, 2003)
dividual projects, potentially through a stage-gate In interpreting Figure 2, the important point
process. is research investigations and development may
In terms of outputs, the company is constrained originate within the company or be in-sourced
to direct commercialisation of its development through permeable firm boundaries. As such,
projects. reliance upon the companys internal science and
technology base to originate, research and de-
Open Innovation velop innovations is reduced as input can be
taken from external sources.
The Open Innovation model, as proposed by In terms of outputs, the company can launch
Chesbrough (2003) has two distinct elements: new products directly into current markets, form
Inbound Open Innovation and Outbound Open spin-out companies to carry the technology into
Innovation. Inbound Open Innovation is directly a new market or license the intellectual property
related to the aspect of the model that allows the rights to a third party company who subsequently
company to search for and integrate innovative launches it into the market.
concepts and products from sources outside of the The contention is made that innovation has,
company (Chesbrough, 2003). Outbound Open and potentially still is, undergoing a paradigm
Innovation is concerned with using external routes shift from a closed to an open model (Chesbrough
to commercialisation (Chesbrough, 2003). It can & Crowther, 2006, p.229); although some ac-
be argued that a useful source of innovations for knowledgement should be made that there is the
a business is through researching best practice potential for huge variation across industry sectors,
in industries and markets outside of its own. The since innovation is never homogenous. A number
Open Innovation model allows inter-industry of environmental factors have contributed to this
exploration and collaboration to take place. alleged paradigm shift, including: an increase in
The diagram in Figure 2 proposed by Ches- the number of and quality of external suppliers, the
brough (2003) provides an effective illustration growth and apparent success of the venture capi-
of this opportunity. tal sector, which has facilitated the development
of new, usually relatively small businesses that
133
hold the intellectual property rights to innovative inventor community, there is an expectation that
technology and the increased freedom enjoyed by the average age of independent inventors will
knowledge workers (Christensen et al., 2005). It increase as more retired people take up inventing
is also possible to suggest that factors such as: a (Richards, 2002)
general trend towards outsourcing, strengthening With regard to educational attainment, inde-
of international patent law and globalisation may pendent inventors appear to be more educated,
be contributory. in a formal sense at least, than the general public
This chapter focuses on the inbound element (Parker et al., 1996). 68% of those independent
of the Open Innovation model that facilitates the inventors studied by Parker et al., (1996) had
use of external parties, specifically independent been in receipt of college training. This view is
inventors, as suppliers of new product ideas. supported by Albaum (1975) who suggests that of
respondents to his study 30.1% had some Higher
A Profile of Independent Inventors Education experience, 11.7% had an undergradu-
ate degree, 18.4% undertook post-graduate train-
Independent inventors are characterised by two ing and 16.5% held a post-graduate degree.
factors; firstly their inventive activity is conducted In terms of profession, independent inventors
outside the confines of an established business are not heavily concentrated in any particular
and secondly, the independent inventor has no occupational classification, however those in
formal obligation to invent (Lettl et al., 2009; technical, skilled and farmer occupations were
Whalley, 1991) represented to a greater degree in the sample of
From a demographic perspective independent 141 independent inventors used for the study
inventors have historically tended to be male rather conducted by Parker et al., (1996) than they were
than female (Parker et al., 1996). This appears to in the general population; as determined by the
reinforce Albaums (1975) research which, based Statistical Abstract of the United States, 1990.
on a sample of 103 independent inventors who In addition to demographic characteristics, the
had approached the Experimental Center for the current body of literature on independent inven-
Advancement of Invention and Innovation at the tors suggest a number of other interesting char-
University of Oregon between 1974-1975, sug- acteristics. Firstly, independent inventors place
gested that female inventors were responsible for a significant importance on both autonomy
just 10-11% of invention. and individuality. (Weick & Martin, 2006, p.10).
A number of studies (Albaum, 1975; Parker Whilst the definition of independent inventors
et al., 1996; Sirilli, 1987; Hisrich, 1985; Weick does not prescribe an autonomous approach to
and Eakin, 2005) make an attempt to identify the working, the ability to work alone when required
typical age of an independent inventor. Whilst the appears to be important to this group. Secondly,
age categories used in some studies, Parker et al. independent inventors have a particular skill in
(1996) for example, makes the result too broad the identification of problems (Weick and Martin,
to be helpful, the results of three studies suggest 2006). This suggests that independent inventors
that independent inventors are likely to be in their may be well equipped to operate a market pull, as
late forties to early fifties. Sirilli (1987) suggests opposed to technology push strategy for invention;
an average age of 46.5 years; Weick and Eakin firstly identifying problems and then developing
(2005) conclude an average age of 50-years and an inventive solution. Thirdly, surprisingly few
Albaum (1975) 54 years of age. In terms of fu- independent inventors aspire to be an entrepreneur
ture demographic trends within the independent (Parker et al.,1996).
134
Types of Independent Inventors Inventive Activity
Meyer (2005) illustrates the diversity of inven- Weick and Eakin (2005) present an insight into
tors by suggesting that there may be as many as the activity undertaken by independent inventors.
four different types. The first category identified Their study, based on a sample of 351 question-
is: Inventor-Entrepreneurs, which denotes an naires from full-time and part-time independent
inventor that attempts to use their invention in inventors, produced a number of interesting find-
an entrepreneurial sense by setting up a start- ings, firstly they noted that an average independent
up company as a vehicle to commercialisation. inventor had progressed six inventions to the stage
The second category: Proprietor-inventors are of having a working prototype, however they ac-
inventors that already operate a company and knowledged that the median and modal average
are seeking to exploit the invention through this was considerably lower; 2 and 1 respectively. In
company. The third category: Licensing/transfer terms of the nature of the inventions developed,
inventors relates to inventors that opt to either Weick and Eakin (2005) identified that the most
license the intellectual property behind their common areas for inventions were:
invention to a third party or sell the intellectual
property to a third party, in its entirety. The final Hardware/Tools (23%)
category: Academic Inventors denotes inven- Household Products (23%)
tions developed by academics within the HE sector Novelty Items (15%)
(Mayer, 2005, p. 115). Toys/Games and Hobbies (15%)
In reflecting upon the definition of the inde-
pendent inventor provided by Whalley (1991) The nature of these innovations is consistent
and its emphasis on the inventor being external with the view of Astebro (1998) who made the
to a corporate institution, it is easy to see how assertion that independent inventors were most
independent inventors could stem from both the likely to develop inventions that are technically
Inventor-entrepreneur and Licensing/transfer uncomplicated and demanded relatively lower
inventors group. It is slightly more difficult, al- financial investment. The findings of Weick and
though not impossible, to imagine that inventors Eakin (2005); Dahlin et al. (2000) and Astebro
categorised as Academic Inventors or Propri- (1998) seem to suggest that independent inven-
etor-Inventors have the corporate independence tors are most likely to concentrate their efforts in
necessary to be classed as independent inventors. industries that follow the Schumpeterian type I
Clearly, in the case of the Inventor-entrepreneur pattern of innovation, often referred to as Creative
it could be that inventing is not part of the job role, Destruction or Widening (Breschi et al., 2000).
but the inventor chooses to commercialise the in- Conversely, the industries where fewer inventions
vention via his or her existing company. Likewise were developed by independent inventors, include:
in some parts of the world academics have no Mineral recovery/processing, 2%; Biological/
obligation to invent but do assume the full rights microbiological, 2%; Marine/ocean technology,
to intellectual property they develop and as such 3%; Telecommunications, 3%; (Weick & Eakin,
could be classified as an independent inventor. 2005 p.10) appear to fit the characteristics of
the Schumpeterian type II pattern of innovation
(Breschi et al., 2000): patent applications often
originate from a small number of companies that
135
already hold a significant number of patents and 4. The inventor decides to sell the intellectual
hold established market leading positions; the property rights behind the innovation out-
knowledge upon which innovations are developed right to a third party organisation.
is likely to be strongly rooted in scientific prin-
ciples; investment of significant sums of money In analysing the degree to which these poten-
is no guarantee of developing an innovative new tial routes to market are utilised by independent
product, however for new ideas that are developed inventors, Weick and Eakin (2005, p.11) identi-
they are likely to be patentable and founded on fied that licensing the intellectual property rights
knowledge developed through prior innovations behind an innovation to a third party company
(Breschi et al., 2000). was the most frequently used route to market with
44% of the 351 respondents to their study having
Typical Commercialisation Paths employed this strategy. The second most popular
Used by Independent Inventors commercialisation path was via a company inven-
tor that distributes the innovation, but outsources
Weick and Eakin (2005) found that in their survey the manufacturing element to a third party. This
of independent inventors, 16% made no attempt strategy was utilised by 29% of the independent
to take their innovation to market, whilst Mayer inventors surveyed by Weick and Eakin (2005).
(2005) found that commercial success was not the Almost as frequently used was commercialisation
objective of all independent inventors with some through a company inventor that undertakes both
inventors believing that their efforts are validated the manufacturing and distribution of the innova-
by non-commercial success such as: placing the tion. 26% of respondents to the survey conducted
invention in the public domain to enhance ac- by Weick and Eakin (2005) indicated that they
cessibility, improving public wealth or pursuing had employed this commercialisation strategy. Of
an innovation because it was interesting from a those independent inventors that responded to the
technical perspective. None the less, commer- survey, selling the innovation to another company
cialisation remains the intention of the majority in its entirety was the least utilised strategy with
of independent inventors (Weick & Eakin, 2005). just 16% of respondents indicating that they had
Weick and Eakin (2005) suggest that there are pursued this option.
potentially four commercialisation paths that can Whilst the licensing of the intellectual property
be utilised by independent inventors: behind an invention is the most commonly used
commercialisation path by independent inventors,
1. A start-up business maybe formed specifi- consideration also needs to be given as to the
cally to act as a vehicle to carry a new in- extent to which the various commercialisation
novation to market. paths yield sales. Weick and Eakin (2005) make
2. The inventor is already the proprietor of a the assertion that those independent inventors that
business that will be used to carry the in- employed a licensing strategy were more inclined
novation to market. to achieve a higher level of sales than inventors that
3. The inventor chooses to license the intellec- engaged with one of the other commercialisation
tual property rights behind their innovation paths: commercialisation via their own company
to a third party company, typically in return or selling the rights to the innovation to another
for a royalty on sales. company outright.
136
Table 1. Proposed critical success factors

PROPOSED CRITICAL
SUCCESS FACTORS 1 Time commitment
2 Use of intellectual property protection
Central to this chapter is the notion that inde- 3 Advice, support and guidance received
pendent inventors can enhance the prospect of
4 Timing of approach
achieving commercial success and become more
5 Access to resources
effective suppliers of innovations to businesses,
6 Access to formal and informal social support networks
via an Open Innovation model, by paying heed
7 Ability to adopt a credible business persona
to critical success factors. The 12 critical success
8 Willingness to share information
factors proposed are driven by current academic
9 Ability to identify and gain access to potential com-
literature and represent our view of the key fac- mercial partners
tors that emerge across multiple published texts 10 Ability to select an appropriate commercialisation path
(see Table 1). We acknowledge the omission of 11 Alignment of inventor and corporate objectives
factors relating directly to the product/innovation 12 Experience of the inventor
under development as these reside outside of the
scope of this particular study.
(Mayer, 2005), family issues may create an ob-
1. Time Commitment
stacle to committing time to an innovation.
Moving away from literature relating directly
There is a small portion of academic literature that
to independent inventors, Poolton and Barclay
discusses the extent to which the time commit-
(1998) identify the need for long-term commit-
ment made by independent inventors to inventive
ment to innovation projects as a critical factor in
activity impacts upon the level of commercial
achieving new product introduction success at
success achieved.
company level. In addition, Cooper and Klein-
Weick and Martin (2006) suggest a positive
schmidt (2007) reinforce the importance of time
correlation between the time an independent in-
commitment by suggest that many new product
ventor commits to inventing and the potential for
introduction attempts, at a business level, are
commercial success. In the first instance, full-time
hampered by a lack of time available to perform
inventors are more productive when it comes to
key tasks properly. Thus, the availability of time
developing prototypes when compared to their
is viewed as potentially critical to successful new
part-time equivalent. In terms of commercialisa-
product introduction.
tion, full-time inventors are more likely to take
a product to market, achieve sales and make a
2. Use of Intellectual
profit than part-time inventors (Weick & Martin,
Property Protection
2006). This led Weick and Martin (2006, p.10) to
conclude that the level of sales was a function
In addition to the time committed to invention,
of making a full-time commitment to inventing
Weick and Martin (2006) note the importance
In a similar vein, Whalley (1991) notes that
of independent inventors being willing to invest
family commitments can impact upon the ef-
in patents. Indeed Dahlin, Taylor & Finchman
fectiveness of independent inventors. For those
(2000); Khan and Sokoloff (1992) and Dagenais
independent inventors that do have a family and
et al. (1991) are in agreement that the commer-
invent in their spare time, which is often the case
cial success achieved by independent inventors
137
is closely coupled with their use of the patenting very narrow as claims get removed and amalgam-
system. ated, it does suppose that the originally drafted
Whalley (1991, p.223) claims that patent claims were of a reasonable scope to begin with.
protection turns the use value of the idea
into something that has commercial possibility. 3. Advice, Support and
Reflecting on this statement there certainly ap- Guidance Received
pears some logic. For example, if an independent
inventor sought to commercialise their innovation Meyer (2005) suggests that the social and business
via a start-up company then a patent adds to the skills possessed by an independent inventor have
commercial legitimacy of the business case by a considerable bearing on whether that individual
providing a legally founded mechanism for re- is able to successfully commercialise their innova-
stricting competing products that infringe upon tion. Unfortunately, Mayer (2005) also suggests
the technology outlined in the patent. This is an that commercialisation of innovations is hampered
important issue when seeking investment in the by the skills set that many independent inventors
new business. Perhaps more importantly, in par- actually possess.
ticular for this research inquiry is the pivotal role As a result of this apparent deficiency in skills;
patent protection plays in new product introduction the advice, support and guidance received by
via a licensing deal. As Whalley (1991) suggests, independent inventors from third party sources
the innovation developed by the inventor may becomes critically important to the prospect of
have intrinsic value in so much that it resolves commercialisation. For example, Parker et al.
an acknowledged problem, but the innovation (1996) make an assertion that the progress made
only has commercial value, in this instance, if it by independent inventors towards commercialisa-
is patented. This is true in so much that a licensing tion of their innovation is positively influenced
deal works on the basis that the inventor agrees by the business, including marketing, advice
to allow a third party manufacturer to utilise their and mentoring that they receive. Mayer (2005)
intellectual property (patent), for a given period suggests that independent inventors in receipt of
of time, within a specified territory; in return for a intellectual property guidance and advice, early
predetermined royalty on sales. Without a patent, in the development process, are more able to
the inventor has little to exchange in return for a select the most commercially relevant invention
royalty, so the basis of the exchange breaks down from their invention portfolio and as a result
and a commercial deal is unlikely to be brokered. pursue the development and commercialisation of
Bakos and Nowotarski (2003) add to the debate fewer ideas that are flawed, from an intellectual
by suggesting that the existence of a patent for property perspective, from the outset. Weick and
an innovation is not, in itself, enough to ensure Martin (2006) suggest that independent inventors
a licensing deal because the patent still needs to should engage with the growing support structure
be viewed as being credible in the eyes of the and resource pool accessible via the Internet, as
potential licensee. In discussing credibility, Bakos a means of ensuring they pay closer attention to
and Nowotarski (2003) suggest that a credible financial and market factors during the develop-
patent application is one which under review of ment and commercialisation phase.
a professional Patent Agent would be expected In identifying the types of advice, support and
to be granted with the majority of its original guidance required to negotiate the new product
claims still in place. Whilst we believe that this introduction process, Cooper and Kleinschmidt
is a reasonable statement to an extent, in that it (2007) suggest that, at company level at least,
attempts to mitigate against patents that become market and technical assessments and clear
138
product definition are essential to success. This is inventors are reliant upon their own personal
reinforced by Lynn et al., (1999) who emphasise funds or the financial support of their family to
the need for a clear appreciation of the market and finance the development and commercialisation
it dynamic characteristics, if successful negotia- of their innovations.
tion of the new product introduction process is Access to inventive space, raw materials and
to be achieved. appropriate tools is also identified by Whalley
(1991) as an important resource requirement. This
4. Timing of Approach would appear to be particularly appropriate when
considering physical, mechanical innovations,
In addition to the time commitment allocated to where the absence of these resources and manu-
the invention process, Mayer (2005) suggests facturing equipment may prevent the invention
that the innovations developed by independent being developed (Whalley, 1991).
inventors are susceptible to the issue of timing. Indeed, evidence at company level suggests
Innovations that are ahead of their time are likely that a lack of resources is the scourge of new
to suffer at the hands of conservative or uncon- product introduction projects and often results in
vinced investors or potential licensees, whilst inadequately executed commercialisation attempts
those innovations that are too late are unlikely to (Cooper and Kleinschmidt, 2007)
appeal to potential investors or licensees. Indeed,
Sun and Wing (2005) in their review of critical 6. Access to Formal and Informal
success factors for new product development in Social Support Networks
the Hong Kong toy industry identified the need
to make innovations accessible to customers at If innovation networks theory is applied at in-
the right time. dependent inventor level then those individuals
With regard to timing, independent inventors with enhanced network linkages would appear to
would appear to have a more difficult job satisfy- benefit, both prior to invention conceptualisation
ing the criteria than commercial inventors. Whilst and during the new product introduction process.
independent inventors may have difficulty in In the first instance, the act of innovation arguably
knowing what the current state of technological occurs as the result of knowledge being trans-
development is in an industry and the types of ferred or shared through networks, independent
new innovations that are being sought, particularly of spatial definitions, whereby said knowledge
given that they are by definition inventing outside is either utilised in its original form or reapplied
of a corporate structure; commercial inventors in a new innovative way (Coe & Bunnell, 2003).
may have cues as to what type of innovations are As such, independent inventors that interact with
required and will almost certainly be aware of the corporations: businesses, universities, government
current state of technological development in their and research institutes; those that can strike up
industry much of which development is hidden. social relationships with knowledgeable individu-
als; and those that access and utilise knowledge
5. Access to Resources from published sources, such as patent databases,
newspapers, conference papers and academic
The capacity for an independent inventor to journals should be better placed to generate in-
commercialise their innovation appears to be novative ideas in the first place (Coe & Bunnell,
influenced by the resources they have available 2003 p.452).
to them. From a financial perspective, Whalley Post innovation origination, Whalley (1991)
(1991) claims that the majority of independent proposes that the effectiveness of independent
139
inventors is influenced by the degree of social statement: The independent inventor has often
support they receive; partially because of their been portrayed as something of a mad scientist-
need for feedback on their inventions and social type individual or an uneducated dreamer in search
confirmation that what they are doing is useful. of the holy-grail. The result of this perception is
In this respect, the role of family and friends in that the independent inventor no longer is viewed
providing a social support network can be viewed as a serious source of product innovation.
as essential (Whalley, 1991). Interestingly, Whal- Whalley (1991 p.225) suggests that manufac-
ley (1991) suggests that, family and friends aside, turers, potential licensees in many cases, are all too
individual inventors lack the mutual support willing to believe the negative image of inventors
groups that can be found in other creative disci- as odd, even crazy A view which is cor-
plines. Whilst this was perhaps a valid assertion to roborated when inventors not only lack business
make in 1991, a simple Google Search of the term expertise, but perhaps more importantly, do not
UK Inventor Clubs yields a list of organisations adopt accepted business conventions and do
in East London, Wessex, Birmingham, London, not want to play by the rules that manufacturers
Malvern, Sheffield, the Black Country, Kingston think are appropriate. (Whalley, 1991, p.225).
and Liverpool, which certainly points to this issue Whalley (1991) suggests that this may not be
being addressed, although not resolved. Indeed, intentionally contrary behaviour on the part of
Von Hippel (2005) argues that the trend towards independent inventors, simply the result of many
making innovation more democratic, through years of segregation from the commercial world
mechanisms such as open innovation, has resulted of inventing and the socially accepted norms that
in a rapid increase in the number of support com- are associated with it. Although speculative at this
munities, which should positively influence the point, it would appear that the more capable an
ability of independent inventors to develop com- independent inventor is at adopting appropriate
mercially successful innovations. business etiquette, speaking the language of busi-
Interestingly, the work of Lettl et al.,(2009) ness, using the correct terminology and following
points to the fact that independent inventors who modern business practice, the greater the potential
actively engage with social support networks and for commercial success.
communities are more able to access resources If we are to make the assertion that indepen-
that are usually reserved for corporate inventors. dent inventors should behave in a more business
Indeed, the Black Country Inventors Club in the like fashion when presenting their innovation
UK is a good example of this, as it allows a group to potential licensees then extant best practice
of independent inventors to operate as a collective literature surrounding successful new product
with enough critical mass to enlist the assistance introduction becomes pertinent. At a basic level
of an Intellectual Property Rights specialist at there is a need for good communication skills,
favourable rates. indeed Lester (1998) highlights the ability to
effectively communicate information, regarding
7. Ability to Adopt a Credible the product and associated opportunity, to man-
Business Persona agement is a critical element of successful new
product introduction. In addition, Cooper and
A potentially significant obstacle for indepen- Kleinschmidt (2007), in their paper on critical
dent inventors to overcome, when attempting to success factors for businesses introducing new
commercialise their innovation, is the negative products, identify a number of constructs under
perception held by industry and potential inves- their A high-quality new product process Criti-
tors. Parker et al. (1996 p.7) makes the following cal Success Factor that are potentially valuable
140
to this research inquiry. Firstly they suggest that their innovation. Whalley (1991) suggests that
assessments are made of the technical and market the legislation governing intellectual property
potential for the proposed innovation, prior to protection acts as a constraint, hampering the
its development. These assessments may move independent inventors ability to disclose details
from preliminary overviews of potential into in- of their innovation. This is presumably a refer-
creasingly detailed insights. Key components in ence to the notion that in order to obtain patent
these assessments, include: market research with protection the intellectual property behind an idea
potential end-users focussing on the identifica- cannot be in the public domain.
tion of customer needs, desires and requirement; In addition to the restricting force of intellectual
assessment of technical requirements: possible property legislation (Whalley, 1991), the degree
manufacturing methods, technical viability of of trust between the independent inventor and the
proposition, costs associated with production, third party is seemingly central to the prospect
timescale and resource requirements; analysis of of invention commercialisation. Mayer (2005
the financial case at different levels of sensitivity p.115) notes that: Inventors have developed a
(Cooper & Kleinschmidt, 2007) mistrust towards manufacturers and innovation
In addition to providing documented evidence professionals partly because of bad experiences
of market and technical assessments of the innova- with the world of business professionals and also
tion, Cooper and Kleinschmidt (2007 p. 7) also fraudulent support services.
identify the importance of being able to precisely
define key aspects of the business case, namely: 9. Ability to Identify and Gain Access
the product its target market; the concept, to Potential Commercial Partners
benefits and positioning; and its requirements,
features and specs Although purely conjecture Appropriate selection of commercial partners is by
at this point, it would appear that independent no means an easy task. Firstly, businesses often do
inventors who have a working knowledge of the not welcome new ideas, regardless of their origin
early stages of the new product introduction pro- (Whalley, 1991) and those that are open to external
cesses that businesses are accustomed to will be ideas will not deal with independent inventors
able to talk about their project and the introduction because of the associated costs of administering
process, with potential licensees, in terms they the enquiries when compared to the probability
are familiar with. As such they may be viewed of successfully launching and generating profit
as more credible. from an innovation brought into the company via
this source (Whalley, 1991).
8. Willingness to Share Information Those independent inventors that are able to
identify a commercial partner that has access to
The ability to share information concerning an manufacturing methods appropriate to the require-
innovation may aid the early stages of the devel- ments of the innovation; is able to provide a route
opment. At a more advanced stage, the sharing to market that allows penetration of domestic and
of information is critical to obtaining investment international markets (Mayer, 2005) and then is
in the innovation, whether to enable a new busi- able to identify and gain access to key decision
ness to be formed or at the point of negotiating a makers in that organisation are likely to fare well
licensing agreement or outright sale of the intel- commercially.
lectual property rights. Interestingly, Kotabe et al., (2007) note
The problem is that independent inventors companies are increasingly moving away from
often feel unable to share information concerning centralised research and development decisions
141
towards a decentralised approach. From a UK 12. Experience of the Inventor

independent inventor perspective this may be
critical, since it would theoretically provide access The extant literature points to the fact that inde-
to a larger base of potential licensees. pendent inventors with greater experience of the
development and commercialisation of innova-
10. Ability to Select an Appropriate tions are more likely to have commercial success
Commercialisation Path than inexperienced inventors. Whilst Eakin and
Martin (2006) suggest that experienced inventors
Mayer (2005, p.114) points to the fact that: are more likely to have access to the informal
Those inventors, who choose to commercialise networks that enable commercialisation and expe-
their inventions on their own, in the form of a rience of attempting to take a previous product to
start-up company, face the full complexity of market is beneficial in later attempts, Von Hippel
the business world. Starting up a business is a (1988) and Henderson and Clark (1990) make the
challenging endeavour requiring different skills assertion that inventors with direct experience of
at different times. This appears to imply that the the industry in which they are inventing in are
independent inventor needs to carefully align his more likely to achieve commercialisation.
or her skills set and willingness to commit time The effect of previous experience is also
against the requirements for each of the potential evident when consideration is given to new prod-
commercialisation paths open to them. Those that uct introduction at company level. Lynn et al.,
do this most successfully would appear to stand (1999), for example, identify the need for relevant
a better chance of realising commercial success. experience and the ability to learn lessons from
previous projects as fundamental to new product
11. Alignment of Inventor and introduction success.
Corporate Objectives In the US Insurance industry, 75% of new
patents emanate from independent inventors with
The degree to which the independent inventor the vast proportion specialists in that field: Actuar-
and commercial partner have aligned commercial ies, underwriters, and programmers (Bakos and
objectives is a potentially important success factor. Nowotarski, 2003). Indeed, Lettl et al. (2009) in
Whalley (1991) notes that independent inventors their study of 1681, medical equipment, patent
and businesses often have divergent opinions con- families from the Derwent World Patent Index
cerning commercialisation and that, for example, filed between 1980 and 2005; found evidence that
whilst a business may be heavily biased towards focussing inventive efforts in an industry where
income generation, income generation may not be the independent inventor has some specialist
central to the wishes of the independent inventor. knowledge, rather than inventing for disparate
With regard to expectations over the financial industries, is very beneficial to the prospect of
rewards for the innovative endeavour, independent an impactful technology being developed. Whilst
inventors need to have some appreciation that not all impactful technologies go on to become
the spectre of failure looms large over potential a commercial success there is certainly grounds
licensees and as such independent inventors should to argue that commercial success appears more
be modest in their expectations over the licence probable in this instance.
fee, especially since a modest fee reduces the
probability that the potential licensee will seek
to challenge or infringe upon the patent (Bakos
and Nowotarski, 2003).
142
CONCLUSION Chesbrough, H., & Crowther, A. K. (2006). Be-

yond high tech: Early adopters of open innovation
This chapter proposes 12 preliminary critical in other industries. R & D Management, 36(3),
success factors that we anticipate will enhance 229236. doi:10.1111/j.1467-9310.2006.00428.x
the prospect of independent inventors achieving
Chesbrough, H., Vanhaverbeke, W., & West, J.
commercial success and becoming more effective
(2006). Open innovation: Researching a new
suppliers of new products to businesses, via an
paradigm. Oxford, UK: Oxford University Press.
Open Innovation model.
We have amalgamated the current body of Christensen, C. M. (1997). The inventors dilemma.
academic literature surrounding independent Boston, MA: Harvard Business School Press.
inventors and new product introduction in order
Christensen, J. F., Olesen, M. H., & Kjaer, J.
to identify these factors. At this stage, no critical
S. (2005). The industrial dynamics of open in-
success factors are eliminated.
novation - Evidence from the transformation of
The following chapter will take the preliminary
consumer electronics. Research Policy, 34(1),
critical success factors proposed in this chapter
15331549. doi:10.1016/j.respol.2005.07.002
and utilise them as priori constructs (Eisenhardt,
1989) as evidence is sought through case study Coe, N. M., & Bunnell, T. G. (2003). Spatial-
for their presence or non-presence in a practical izing knowledge communities: Towards a
context. conceptualisation of transnational innovation
networks. Global Networks, 3(4), 437456.
doi:10.1111/1471-0374.00071
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144
KEY TERMS AND DEFINITIONS Open Innovation: Open Innovation is the use
of purposive inflows and outflows of knowledge to
Independent Inventors: Independent inven- accelerate internal innovation, and expand the mar-
tors are characterised by two factors; firstly their kets for external use of innovation, respectively
inventive activity is conducted outside the con- (Chesbrough, Vanhaverbeke & West, 2006: p.1)
fines of an established business and secondly, the
independent inventor has no formal obligation to
invent (Lettl et al., 2009).
145
146
Chapter 9
An Examination of Independent
Inventor Integration in
Open Innovation
Gavin Smeilus
University of Wolverhampton & Caparo Innovation Centre, UK
Robert Harris
University of Wolverhampton, UK
Andrew Pollard
University of Wolverhampton & Caparo Innovation Centre, UK
ABSTRACT
Open Innovation allows independent inventors to become suppliers of new product ideas to businesses.
Unfortunately, only a small percentage of independent inventor approaches, to companies operating
Open Innovation mechanisms, result in a commercialised product. Preliminary Critical Success Factors
proposed in the previous chapter seek to improve the ability of independent inventors to operate as ef-
fective suppliers of new product ideas to businesses through Open Innovation. This chapter will take the
preliminary critical success factors proposed in the previous chapter and utilise them as priori constructs
(Eisenhardt, 1989) as evidence is sought through case study for their presence or non-presence in a
practical context. A case study on the Caparo RightFuel, an automotive device originating from an inde-
pendent inventor and commercialised through an Open Innovation model, forms the basis of this chapter.
INTRODUCTION commercialised product. The figure for the Caparo

Innovation Centre open innovation programme,
Open Innovation provides a mechanism for in- at the time of writing, stands at 0.7%.
dependent inventors to become suppliers of new Preliminary Critical Success Factors proposed
product ideas to businesses. Unfortunately, only in the previous chapter seek to improve the ability
a small percentage of independent inventor ap- of independent inventors to operate as effective
proaches to Open Innovation schemes result in a suppliers of new product ideas to businesses
through Open Innovation.
DOI: 10.4018/978-1-61350-165-8.ch009
An Examination of Independent Inventor Integration in Open Innovation
This chapter reinforces the previous chapter by The physical manifestation of the strategic
focusing on a case study - The Caparo RightFuel, move towards product ownership was the forma-
an automotive device originating from an indepen- tion of the Caparo Innovation Centre (CIC), a
dent inventor and commercialised through Open collaboration between Caparo and the University
Innovation. The case study examines the presence of Wolverhampton, which was launched in 2003.
or non-presence of the proposed critical success The CICs remit was, and continues to be, the
factors in an actual open innovation context. identification and sourcing of innovative new
products, typically of a mechanical or engineered
nature, that display commercial potential, either
BACKGROUND through exploitation by Caparo directly or as a
revenue stream from a license with an alternative
Caparo is a multinational manufacturer of steel, commercial enterprise. The CIC source innova-
automotive and general engineering products. tive ideas exclusively from independent inventors
With its headquarters in London, England Caparo and have, at the time of writing, received 805
was founded in 1968 by the industrialist the Lord approaches since inception.
Paul of Marylebone. By supplementing traditional sources of in-
In 2002, in response to increased competitive novative new products, through internal R&D
pressure from low-cost Far-East manufacturers, teams, with an external source of innovation,
Caparo took a strategic decision to supplement its Caparo have implemented an Open Innovation
steel processing and manufacturing activity with strategy skewed towards inbound open innovation
product ownership. In particular, the organisation (Chesbrough & Crowther, 2006, p. 229).
were keen to introduce a portfolio of technically
innovative new products that benefited from patent
protection, as a means of generating alternative METHODOLOGY
higher-margin income streams. Of particular
interest to Caparo were mechanically engineered One of the innovations successfully commer-
products that have a good synergy with manufac- cialised via the Open Innovation model employed
turing processes conducted within the organisation by the Caparo Innovation Centre is the Caparo
or the markets they currently address: RightFuel, which will form the basis of this case
study.
Aerospace This chapter utilises the preliminary critical
Agriculture success factors proposed in the previous chapter,
Automotive as priori constructs (Eisenhardt, 1989); as evidence
Commercial Vehicles is sought through case study for their presence or
Construction non-presence in a practical context (see Table 1).
Defence The Caparo RightFuel, an automotive device
Furniture originating from an independent inventor, Martin
Industry White, and commercialised through an Open In-
Leisure novation model, is used as a case study to con-
Marine textualise twelve critical success factors (identified
Oil and Gas through current academic literature), in a real-
Power Generation life Open Innovation setting. A case study ap-
Railways proach was selected for this exploratory research
because it is an effective method of developing
147
Table 1. Critical Success Factors enabling inde-

Case Studies allow for a variety of data col-
pendent inventors to becoming more successful
lection methods, including secondary data from
suppliers of new product ideas to businesses
archival sources and data emanating from primary
operating an open innovation model
data collection methods, such as: questionnaires,
1 Time commitment observations and interviews (Eisenhardt, 1989).
2 Use of intellectual property protection
For this particular research inquiry a series of three
3 Advice, support and guidance received
in-depth interviews with four key participants
in the new product introduction process were
4 Timing of approach
undertaken. The interviewees1 were selected to
5 Access to resources
provide a multi-perspective view of the integration
6 Access to formal and informal social support networks
of independent inventors in open innovation. This
7 Ability to adopt a credible business persona
primary data was supplemented with secondary
8 Willingness to share information
data in the form of the written documentation
9 Ability to identify and gain access to potential com-
mercial partners provided by Martin White to the Caparo Inno-
10 Ability to select an appropriate commercialisation path
vation Centre at their initial meeting. This data
11 Alignment of inventor and corporate objectives
included: the initial PowerPoint presentation of the
12 Experience of the inventor
opportunity associated with the innovation and a
formal Business Plan detailing the technical and
commercial case for the innovation. Secondary
data on diesel car registrations in the UK obtained
new theoretical notions that ultimately provide
from The Society of Motor Manufacturers and
direction to future research inquiries (Dyer &
Traders Ltd and details of the inventors intellec-
Wilkins, 1991)
tual property position at the point of approaching
The Caparo RightFuel case is one of four
the Caparo Innovation Centre, accessed via the UK
planned cases, selected through a theoretical
Intellectual Property Office website and original
sampling method (Glaser & Strauss, 1967) that
patent documentation, were also considered. The
emphasises the examination of polar types
Proquest database, which enables quantification
(Eisenhardt, 1989 p.537). This particular case was
of the number of times a particular search term
hand-picked because it provides a good example
is mentioned in Newspapers, was also used as a
of how an independent inventor can achieve
guide to the amount of coverage the act of Mis-
commercial success through the licensing of their
fuelling received in UK Newspapers.
intellectual property rights to a company, via an
open innovation model.
Semi-Structured, In-Depth Interviews
Given the reliance on a single case study, the
question of whether it is appropriate to make
The interviews conducted as part of the case study
generalisations is pertinent. Reference is, there-
approach to this research inquiry were semi-struc-
fore, made to the work of Flyvbjerg (2006) who
tured and based on a series of interview prompts.
lends support to the notion that generalisations
Each interview lasted on average 61 minutes. Each
are permissible from even a single case study.
respondent was given the opportunity to review
Indeed, Yin (1994) argues that the number of case
and comment upon the transcribed interviews
studies completed is not in itself important, since
prior to their utilisation.
the qualitative paradigm does not subscribe to the
link between sample sizes and generalisability.
148
CASE STUDY BACKGROUND: With sales of new diesel cars increasing year-
THE CAPARO RIGHTFUEL on-year, both within the UK and parts of Western
Europe, there is acknowledgment that misfuelling
The Problem is becoming an increasingly common problem5
At the time the Caparo RightFuel device
In relation to this chapter, the term misfuelling was initially presented to the Caparo Innovation
relates specifically to incidents of drivers incor- Centre, Misfuelling Prevention Devices were
rectly putting petrol into diesel powered cars. The being introduced as Original Equipment on the
effects of such action can be both far reaching and Ford Mondeo; however there was no evidence
expensive. In most modern diesel engines the oil of competing retro-fit devices. This situation
content within the diesel is essential to lubricate changed during the development programme
the engine; in the event of petrol being added and when the inventor and licensee became aware of
the engine being started, or primed, the potential two competing development projects: SoloDiesel
for serious engine damage is considerable due and the Fuel Angel.
to the lack of lubrication. In addition, the seals
within a diesel engine are adversely affected by The Product
petrol, which causes them to soften, contributing
further engine damage. The cost of rectifying The Caparo RightFuel is a retro-fit device, which
this mistake can vary from less than one hundred prevents motorists putting petrol in diesel powered
pounds to have the fuel tank drained, up to tens cars. The device replaces the filler cap on the
of thousands of pounds for replacement parts for vehicles and is designed so that when a diesel
a sophisticated engine. fuel filler nozzle is inserted, a physical barrier
Misfuelling a petrol car with diesel is very dif- incorporated within the device swings out of the
ficult because a diesel nozzle on a garage forecourt way allowing fuel to be added to the vehicle.
is too large to fit into the filling aperture on a petrol The device can distinguish between petrol and
car; however the smaller petrol nozzle can easily diesel fuelling nozzles and will not open when
be inserted into the filling aperture on a diesel car. someone attempts to insert the smaller diameter
Since the process of fuelling a vehicle usually petrol nozzle, therefore preventing the wrong fuel
involves little conscious thought and combined being added to the vehicle (see Figures 1 and 2).
petrol//diesel pumps are commonplace the high
incidence of misfuelling is understandable. The Inventor
The Market The Caparo RightFuel device was invented by

Martin White. Martin is a retired Royal Navy
According to the AA Motoring Trust, misfuelling Commander with a career that spanned 37-years.
diesel vehicles occurs in the UK approximately He lives in Somerset, England with his wife Teresa.
120,000 times a year2 with the average repair costs Upon joining the Royal Navy in 1967, Martin
standing at 70003. Fleet and Lease Vehicle opera- was employed as an Airframes and Engines Arti-
tors are the most heavily affected by misfuelling ficer where his duties included the maintenance
incidents with data from Lloyds TSB Autolease of Phantom, Vixen and Hunter Jets and Wasp
indicating costs of 250,000 as a result of 750 and Sea King Helicopters. It was in this role that
misfuelling incidents in first 8-months of 20064 Martin developed his mechanical engineering
149
Figure 1. The Caparo RightFuel Device (1)
Figure 2. The Caparo RightFuel Device (2) Command Structure. His duties included creating
the vision, concepts and detailed requirements for
the future of intelligence within NATO, providing
military advice to NATO HQ (Brussels) and the
nations and the production of directives and plans
for current military operations.
In terms of formal education Martin has an
ONC in Aeronautical Engineering from Dundrum
Technical College, Dublin, Republic of Ireland.
Martin makes use of the additional spare time
he has in retirement by undertaking building
design and construction tasks and developing
innovations and fabrications in metal, wood and
Glass Reinforced Plastic. Martin is a member of
the South West Inventors Club, UK.
skills that he later applied to the Caparo RightFuel Findings

innovation.
By 1975, Martin had been appointed into his Time Commitment
first Air Traffic Control position and by 1998 he
had risen up the ranks to Senior Royal Navy staff The Caparo RightFuel case provides support for
officer for Aviation Operations Support and Head the notion that time commitment plays an impor-
of the Royal Navy Air Traffic Control Branch. tant part in the capacity of independent inventors
In 2001, Martin served within Strategic HQ to act as effective suppliers of innovations to busi-
Allied Powers Europe (SHAPE) in Mons, Belgium nesses through Open Innovation. The concept of
where he was responsible for transformation of an independent inventor operating as a supplier
intelligence organisation within the new NATO is reliant upon the inventor having something to
150
supply. Without the time and importantly dedica- Use of Intellectual Property Protection
tion to inventing this particular inventor would not
have had a product with which to approach Caparo. The inventor of the Caparo RightFuel demonstrat-
ed a willingness to invest in intellectual property
I had plenty of time having recently retired and protection, in the form of a Patent, prior to engaging
I had always had an interest in innovation, I had with the Open Innovation programme operated by
several ideas in the past that I never had time Caparo. A UK patent application, GB0524168.2,
to work on, but here was an ideal problem that was filed by the inventor on the 26th November
needed a solution and because I thought the solu- 2005 carrying the title of: Diesel Vehicle Misfuel-
tion lay within my sphere of experience, I decided ling Preventer, whilst the initial approach to the
to dedicate quite a bit of time to it. White, M. Caparo Innovation Centre was made on the 29th
(2010) Personal Interview (Caparo RightFuel), August 2006, just over 9-months later.
14th January. The inventors views on patent utilisation
are particularly interesting. Whilst conventional
When I decided to run with this project, I did wisdom may suggest that independent inventors
become quite single minded about dedicating a lot are best served by having their patent applica-
of time to it and there was one particular winter tion drafted by a professional Patent Agent, this
where I was quite happy to spend 10 hours at a course of action was not pursued by the inventor.
stretch in a cold workshop cutting metal when I Instead he chose to draft the patent application
got to that phase, so, the time is very important to the UK Intellectual Property Office himself,
and to be focussed on a project I think is quite without professional assistance.
important. White, M. (2010) Personal Interview
(Caparo RightFuel), 14th January. First of all I could easily decipher that this sort
of product needed to be protected by patenting
In addition to both having free-time and the rather than any other form of protection and
dedication to spend that time on innovation, the having spent a lot of time researching alternative
inventor reveals that devoting time to selecting prior art out there it seemed to me that it wasnt
a single innovation to pursue and then focussing that hugely difficult to put together some sort of
fully on that innovation is more advantageous, a patent. White, M. (2010) Personal Interview
in his eyes, than pursuing multiple innovations (Caparo RightFuel), 14th January.
with less focus.
Under questioning as to why he chose to file
an individual cant have lots of great ideas for patent without Patent Agent involvement the
that theyve really worked through and can offer inventor revealed that five factors were influential.
them as being of significant potential; you need Firstly, he was confident in his ability to draft
a huge amount of research and time dedicated an application that covered the critical technical
to this sort of endeavour to decide that the one aspects of the innovation. Secondly, the financial
project is worth proceeding with, so available time cost of filing a patent application, via a patent
and dedication are quite important. White, M. agent, is notably more expensive than the inventor
(2010) Personal Interview (Caparo RightFuel), drafting a submission himself, so this approach
14th January. minimised cost. Thirdly, the inventor expressed
a view that having filed for a patent he felt more
able to disclose details of the product to third par-
ties enabling progress towards commercialisation.
151
There was no point in having a prototype and during the R&D process, he appeared to find this
exposing it to other people unless I could also say experience less rewarding than it might have been.
that I had some form of protection in place
White, M. (2010) Personal Interview (Caparo The one negative aspect in all this was that I
RightFuel), 14th January. was appointed an Innovation Counsellor who
supported our Inventors Club and that linkage was
Fourthly, the existence of a patent application quite useful, but my counsellor was of the opinion
was seen as adding credibility to the business case that private inventors very rarely break into the
around the innovation, making it more appealing motor trade because the motor industry has huge
to potential investors. Finally, filing of a UK Pat- amounts of R & D capacity and its quite difficult
ent acted as a holding mechanism, enabling the for an individual outside of that business to bring
inventor to place a stake in the ground and secure anything new to the party. But nevertheless I was
a priority date at an early stage in the development undeterred because I still felt that the weight of
process; before another party lay claim to a similar evidence said there was a market there. White,
innovation. This was particularly important given M. (2010) Personal Interview (Caparo RightFuel),
that diesel misfuelling was becoming a nationally 14th January.
recognised issue, illustrated by the Telegraph
newspaper article entitled A Costly Mistake A fascinating feature of this particular case is
published on the 27th August 2005, just 2-months the extent to which the inventor appears to value the
before the inventor filed his UK patent application. practical, first-hand experience of other inventors
more than that offered by professional innovation
Advice, Support and experts. The tone and enthusiasm evident when
Guidance Received discussing the advice he received from members
of the South-West Inventors Club was in stark
The inventor had benefitted from particularly contrast to the air of disappointment articulated
wide-ranging experience and was equipped to when discussing the views expressed by his ap-
develop a credible technical and commercial case pointed professional Innovation Councillor.
for the innovation in his own right. This fact is
pertinent in so much as the inventor rarely sought Fortunately I had identified an inventors club
advice, support or guidance from third party and joined that about the same time as I made
organisations. the prototypes and found that there was a mine
of information there, people who had succeeded
I would rather spend a lot of time acquiring the and people who were struggling, but there were
machinery so that I could do it with my own hands people here with lots of advice about non disclo-
rather than entrusting anything to a third party. sure agreements, about the requirement to patent,
White, M. (2010) Personal Interview (Caparo about the limitations on the protection provided by
RightFuel), 14th January. patenting. White, M. (2010) Personal Interview
(Caparo RightFuel), 14th January.
Indeed the inventor only sought a professional
opinion of his patent application after submission, A feature of the interview conducted with the
when he received a free 30 minute consultation, independent inventor of RightFuel was the degree
and although he was interacting with an Innovation to which he was aware of the various organisa-
Councillor from a public-sector advice provider tions responsible for innovation within the UK.
152
Nesta produced quite a good paper about 8 years UK in the year 2006, when the commercialisation
ago which talked about a strategy for invention, attempt was made, was significantly greater at
it floundered for lack of finance I guess and then 38.3%. In volume terms this equates to an increase
later our own regional development agency in in the registration of new diesel powered cars of
the South West instituted a study, lots of public 65.1% over the 7-year period, between the year
money expended on revisiting work and brain 2000 and 2006 (see Table 2).
storming with people in business and Universities Whilst there appears scope to argue that the
and, they put together a new document which was new car registration figures for the year 2000 may
called The Strategy for Supporting Inventionbut still have provided enough of an incentive for a
again it came to a full stop when it got beyond the prospective licensee to show interest in the prod-
concept White, M. (2010) Personal Interview uct, the fact that an automotive device, designed
(Caparo RightFuel), 14th January. to fit exclusively on diesel cars, was introduced
to Caparo at a point in time when the number of
To this end there is very little evidence to newly registered diesel cars were at an all time
suggest that the inventors limited use of third high, was critical to the positive view taken of
party advice was attributable to a general lack of this innovation. This assertion is reinforced by
awareness over available support. the comments of the eventual licensee, Caparo
AP Braking, who revealed that the decision to
Timing of the Approach take on a new product was primarily data-driven.
The Caparo RightFuel case does little to dispel Its data driven, its strategically driven where the
the proposal that timing plays an important role business is looking at entering a market or entering
in the effectiveness of independent inventors to a product range and financial yes. Sarel-Cooke,
act as suppliers of new products to businesses H. (2010) Personal Interview (experiences from
through Open Innovation. Whilst it is not possible the Caparo RightFuel programme), 7th January.
to form an accurate judgement as to whether the
inventor would have been more or less successful The data contained in Table 3 illustrates the
had his approach been made at a different point extent to which the act of misfuelling gained
in time, the case study provides evidence that prominence in UK newspapers between the year
the timing of the approach from the inventor to 2000 and 2007. At the point when the inventor
Caparo was advantageous. Consideration is given filed his UK Patent application in 2005, there
to the following; the initial approach made by the were double the number of newspaper articles
inventor, to the Caparo Innovation Centre, was containing the term misfuelling than the previous
made on the 29th August 2006. As an automotive year, suggesting recognition of the misfuelling
accessory, for use exclusively on diesel powered problem was growing. By the 17th October 2007,
cars, the market potential for this innovation is when the Collaboration Agreement was signed
intrinsically linked to the number of diesel cars between the inventor Martin White, the Caparo
on the road. Secondary data in the form of New Innovation Centre and the eventual licensee, the
Car Registration figures for the UK provided by number of newspaper articles containing the term
The Society of Motor Manufacturers and Traders misfuelling had again doubled from 10 articles
Ltd suggests that whilst diesel powered cars held in 2005 to 20 articles in 2007. This suggests that
a market share of just 14.1% of all new car reg- either by luck or judgement the inventors timing
istrations in the year 2000, the market share held in seeking to commercialise this innovation was
by newly registered diesel powered cars, in the impeccable.
153
Table 2. New Diesel Car Registrations UK: Year

not a significant barrier to the inventors ability
2000 - 2006
to negotiate the early stages of the new product
Market Share introduction process. Indeed, the inventor had
Year Volume (cars) (%) purchased machining equipment, in the form of
2000 313,192 14.1 a lathe, to support his progress towards develop-
2001 436,591 17.8 ing a working prototype, financed his own patent
2002 602,623 23.5 application and purchased the raw material and
2003 704,637 27.3 components required for several iterations of the
2004 835,334 32.5 prototype using his own money.
2005 897,887 36.8 In terms of non-financial resources, the inven-
2006 898,521 38.3 tor divulged during interview that he had access
Source: The Society of Motor Manufacturers and Traders
to a concrete resource, in the form of a workshop
Ltd (2008) SMMT New Car Registrations 2003-2008 [online]. at his home, which provided him with space in
Available at: http://www.smmt.co.uk/search/searchresults2.
cfm?fid=2&stid=1 [accessed 11th January 2010].
which to develop his innovation in private.
I just created a small workshop, I have got a

The following comment by the Managing reasonable size garage and I just found a home
Director of the Caparo AP Braking, who took the for the lathe, its quite a large machine, but I had
license for this technology, summarises the degree various other little machine tools. White, M.
to which the inventor introduced the product at (2010) Personal Interview (Caparo RightFuel),
an appropriate point in time and the impact it had: 14th January.
at the time there was a screaming demand for In addition to traditional non-financial re-
something, you had companies saying how much sources, the inventors mechanical engineering
they were spending on misfuelling and putting knowledge garnered as a Royal Navy Aircraft
equipment right. It was a key thing in a lot of the Artificer between 1967-73, was a most significant
newspapers what can we do to overcome this resource, giving him the ability to design, draw
problem.You remember Top Gear playing around and craft in metal.
with different scenarios and then slating the simple
solution or what was classed as rubbish solutions. Access to Formal and Informal
There was a very clear demand and as I said Social Support Networks
diesel market, how big is it? Geldard-Williams,
N. (2010) Personal Interview (experiences from Whilst extant literature points to the family being
the Caparo RightFuel programme), 7th January. the primary source of social support for indepen-
dent inventors (Whalley, 1991) it is notable that no
direct mention was made of the inventor relying
Access to Resources on his family for support during the development
of this innovation. Seemingly more integral to his
The inventor of the Caparo RightFuel benefit- success was his involvement with the South-West
ted from access to potentially critical resources. Inventors Club. This organisation provided a
Having recently retired from a military career formal social support network where the inventor
spanning 37-years, at least part of which was spent could discuss his innovation with other inven-
in senior positions, financial constraints were tors under the protection of a Non-Disclosure
154
Table 3. Number of ProQuest Newspaper articles

RightFuel appeared to place greater importance on
containing the term Misfuelling 2000-2007
the frankness of the discussions that took place at
(UK)
the inventor club meetings. This is an intriguing
Number of articles containing the word consideration, whilst family members and friends
Year misfuelling may contribute positive and reassuring comments
2000 1 out of a close personal bond with the inventor,
2001 0 the formal structure of the inventor club environ-
2002 1 ment coupled with looser personal ties appears
2003 1 to allow a frank exchange of views, regarding an
2004 5 innovation, that is potentially important to future
2005 10 commercial success.
2006 4
2007 20 Ability to Adopt a Credible
Business Persona
Agreement. The shared practical experience of This case provides evidence of the importance of
individuals in this network, combined with the adopting a credible business persona. Consider-
absence of commercial business representation, ation is given to the following two excerpts from
was highly valued by the inventor. the interview with a Caparo Innovation Centre
representative:
Right from the outset they appeared to be a good
group to expose ideas to because each meeting is I think inventors are quite poor at presenting
proceeded by a non disclosure agreement where ideas and it is difficult to directly transfer the
everyone around the table agrees not to discuss knowledge the inventor has derived straight into
what has been exposed and usually new members a company. There needs to be some manipulation
will come to the club and they wont say anything of that first. Lester, J. (2010) Personal Interview
for the first time round, but very quickly they re- (views on the Caparo RightFuel programme),
alise that its a friendly environment, there are no 13th January.
poachers, so I talked about my idea quite openly
at the second meeting and people made various Martin came to us face-to-face and he had come
suggestions and I learnt a little bit more about especially well prepared really for an inventor.
patent protection and the forms of non disclosure He had produced a well thought out business
agreements, so yes I found it was a an extremely case and a written description and he had also
beneficial environment to be involved in. White, produced a PowerPoint pitch presentation and
M. (2010) Personal Interview (Caparo RightFuel), really good prototypes. Just by coming so prepared
14th January. is refreshing really because so many inventors
come to us with little supporting evidence that to
Interestingly, whilst it might be assumed that actually have this presented to us was a positive
the primary function of a social support network thing in terms of where Martin is concerned and
is to provide encouragement and morale support we obviously sat and listened a little bit more.
for the inventor in what has the potential to be Lester, J. (2010) Personal Interview (views on
an isolating activity; the inventor of the Caparo the Caparo RightFuel programme), 13th January.
155
In considering the statements above, it is pos- Personal Communication (Business Plan), 22nd
sible to draw a contrast between the almost formal September.
business approach adopted by the inventor of the
Caparo RightFuel, which contained a Business The issue has been raised at EU Commission
Plan, formal presentation and demonstration of level, by MEP Liz Lynne White, M. (2006)
prototypes, with the relatively ill considered and Personal Communication (Business Plan), 22nd
amateurish approach apparently taken by some September.
independent inventors. The excerpts also provide
a clue as to how much simpler it is for a receiving In addition to competence across engineering
company to have information presented to them and business functions and adherence to formal
that requires little manipulation before use. business practices; the ability to speak the language
Certainly, formal training, broad experience of business was also evident in the case. This ap-
and exposure to both technical and business pears to have benefitted the inventor in so much
functions appeared to have been pivotal to the as it made him easier to work with and ensured
inventors ability to come across as credible to the licensee and assessment team fully understood
the licensee and product assessment team at the the nature of his pitch and the advantages brought
Caparo Innovation Centre. The following excerpts about by his innovation.
illustrate the technical, commercial and legal
competence of the inventor: It was a brief business plan with the expected
headings that you would generally see in a stan-
These rely upon the lubricating properties of dard type of layout and it addressed a lot of the
diesel oil to maintain the pumps and metering marketing type of qualification and justification
devices in the vehicle fuel system. If these are issues, it also demonstrated Martins technical
contaminated with petrol, metal-to-metal contact competence because he was a recognised engineer
will quickly occur, producing fine swarf that can in the navy and it added to his case really and
destroy components. White, M. (2006) Personal it left us some real good evidence to take away
Communication (Business Plan), 22nd September. and to just check up on certain elements. It was
a good written document. Lester, J. (2010) Per-
The main impediment to marketing is the belief sonal Interview (views on the Caparo RightFuel
by many owners that it will never happen to them. programme), 13th January.
However, the following logic indicates otherwise.
The device is a form of insurance and its retail pric- In forming a view as to how the inventor
ing maybe influenced by the insurance analogy; was able to achieve such a formalised business
for a one off payment the owner of an expensive approach, consideration is given to the time the
product (diesel car) is insured for the lifetime of the inventor spent as an aviation engineer in the
vehicle from misfuelling repairs well over 1000 military, which would have fostered a reason-
(Daily Telegraph average = 7000). Now consider able understanding of engineering principles and
the UK Statistical likelihood of misfuelling taking subsequent administrative duties undertaken as
the 3.6 million cars (diesels under 6-years old) his naval career developed, which would have
divided by 120,000 (incidents per year) = 3.33% assisted with developing business acumen and the
over a period of 6-years of ownership = 20%. In ability to adhere to common business etiquette.
other words, there is a 1 in 5 chance the average
UK diesel user will misfuel White, M. (2006)
156
I think given his background as a Naval Com- Whilst it may be assumed that trust is a critical
mander he has always been used to having struc- ingredient in the willingness to share information
ture, having not worked in an abstract environment concerning an innovation, the inventor took the
that probably some of the other inventors have view that he became more trusting of the licensee
had Sarel-Cooke, H. (2010) Personal Inter- as time passed and their contact levels grew. This
view (experiences from the Caparo RightFuel suggests that in the early stages of the new prod-
programme), 7th January. uct introduction process, the lower levels of trust
were mitigated by the presence of formal legal
having been in the Royal Navy for 37 years but agreements that helped ensure confidentiality
within that 37 years I had done so many different and facilitated a willingness to share information.
things from engineering in terms of actually cutting
metal and making things, right the way through Ability to Identify and Gain Access
to dealing with an Industry and procurement. to Potential Commercial Partners
Understanding a little bit about contracts, about
the difficulties of delivering services, but also in The ideal prime licensee will be experienced in
my years as a Staff Officer framing arguments the automotive industry, be seeking a new market-
and putting together arguments in a fairly concise leading product and will possess:
fashion, the importance of presentation, so I felt
that I had the administrative skills as well as the The expertise to deal with the legal and business
engineering background and then in the middle aspects
the aviation industry appreciation of safety fac-
tors, engineering out problems, understanding Manufacturing capability or the experience and
that for every modification you make to something connections to source more effective production
there will be negative aspects as well as positive abroad. White, M. (2006) Personal Communica-
aspects White, M. (2010) Personal Interview tion (Business Plan), 22nd September.
(Caparo RightFuel), 14th January.
This statement made by the inventor in his
Willingness to Share Information initial business plan demonstrates that he had
little problem in identifying the characteristics
This case provides evidence of an inventor that he desired in a potential commercial partner.
was willing to share information concerning his However, the inventor also expressed a view that
innovation with others in a formal setting, but identifying the right people in an organisation and
always under the protection of a Non-Disclosure gaining an invitation to present to organisations
Agreement or filed UK Patent Application. The is challenging.
provision of a written Business Plan and a formal
pitch presentation provides evidence that the in- Whilst I was waiting for a response from them I
ventor was willing to share considerable amounts had prepared documents, PowerPoint presenta-
of information in order to convince potential tion, a brief on the basic invention without disclos-
licensees of the innovations value. ing too much and started short listing Industries,
Again referring to Caparos reliance upon data Companies that might be partners, written to a
to inform the decision to take on a new product, number of people and had lengthy conversations,
it seems inconceivable that the inventor would managed to have interviews with about four
have been successful had he not been willing to Companies under non disclosure agreements and
share information. I started to realise that this was the real difficulty,
157
this was the most difficult area for my invention, expenditure, especially in the area of intellectual
probably for most inventors, to convince people property protection, where he argued that such
that the idea had a commercial future and that it protection was not always essential for success,
was worth investing in at some risk. White, M. depending on the planned commercialisation path,
(2010) Personal Interview (Caparo RightFuel), and occasionally a poor investment.
14th January.
Alignment of Inventor and
Ability to Select an Appropriate Corporate Objectives
Commercialisation Path
Whilst developing a solution to a problem he had
The aim of this plan is to seek a licensing agree- personally experienced was a satisfying process
ment with a capable firm White, M. (2006) for the inventor, the focus of the RightFuel proj-
Personal Communication (Business Plan), 22nd ect, from the inventors perspective, was always
September. one of income generation; as such there was a
good synergy between the inventor and corporate
The inventor of the Caparo RightFuel identi- objectives.
fied his preference for commercialisation, via a
licensing arrangement, at a relatively early stage I think his expectations of the product in terms of
in the development process; prior to prototype volume movement are certainly higher than where
production. it is at the moment and so was ours. Sarel-Cooke,
A key driver behind the decision to pursue com- H. (2010) Personal Interview (experiences from
mercialisation via a licensing agreement was the the Caparo RightFuel programme), 7th January.
inventors desire to concentrate on aspects of the
new product introduction process that he enjoyed. I never wanted to invest a lot of time without
reward White, M. (2010) Personal Interview
it goes back to the desire to use my engineering (Caparo RightFuel), 14th January.
skills rather than spending a lot of time running a
business for me the passion of being involved in In considering the expectations of the inventor
design, taking something from a concept through towards the product commercialisation process,
to a prototype was much more important than the three important issues are illustrated by this par-
administration of running the business. White, ticular case. Firstly, the inventors expectations
M. (2010) Personal Interview (Caparo RightFuel), and aspirations for the project were not onerous.
14th January.
The inventor desires to be involved in the further
I really wanted to concentrate on engineer- development of this project only in so far as the
ing and for me the licensing route was always licensee considers his services to be beneficial.
the natural choice. White, M. (2010) Personal White, M. (2006) Personal Communication (Busi-
Interview (Caparo RightFuel), 14th January. ness Plan), 22nd September.
In commenting upon the selection of a commer- Secondly, the inventor displayed a willingness
cialisation path, the inventor felt that early decision to compromise and be flexible with his expecta-
making, concerning a suitable commercial route, tions as the development process progressed
was critical to avoiding costly and unnecessary
158
I would appreciate the opportunity to discuss about fluid systems involved in those platforms,
your quarterly reports in accordance with Clause so in a way this particular project was a bit of a
3.d. to our assignment agreement, but would gift because again it was down to fluid dynamics,
be content to meet every 6-months. White, M. to control valves and a lot of the bits of metal that
(2008) Personal Communication (Meeting review I was making I had some familiarity with, how
schedule), 4th October. they would be employed in an aircraft system so
it was a joy to go back to my engineering days
Finally, the inventor was professional in his and to become familiar again with things I had
conduct in instances when his expectations were known so many years earlier, certainly a gift.
not met. White, M. (2010) Personal Interview (Caparo
RightFuel), 14th January.
I think sometimes he is a little frustrated
with the speed of progress but he is professional The case provides evidence that the inventors
through and through and he doesnt rant and rave previous employment experience was important
at the Company which would be detrimental and to the process of commercialisation and his ability
he always provides his services if they need as- to convince the eventual licensee as to the merits
sistance with certain technical points. Lester, J. of the innovation.
(2010) Personal Interview (views on the Caparo
RightFuel programme), 13th January. I think that subconsciously that some of the guys
when they talk to him out there and whatever, that
He hasnt gone up in the air and said youre do- knowing his background was as a Naval Com-
ing it wrong Sarel-Cooke, H. (2010) Personal mander they listened to him more Sarel-Cooke,
Interview (experiences from the Caparo RightFuel H. (2010) Personal Interview (experiences from
programme), 7th January. the Caparo RightFuel programme), 7th January.
Experience of the Inventor He is not just a guy who has come in with an idea
off the street, hes a guy who has lived in the real
Whilst the inventor revealed that he had no per- world and he has obviously been to meetings where
sonal experience of new product introduction, he has had to behave in that forum. Sarel-Cooke,
prior to his attempts with the Caparo RightFuel, H. (2010) Personal Interview (experiences from
he had significant experience of operating within the Caparo RightFuel programme), 7th January.
a technical field closely aligned with his innova-
tion, which aided him in developing a relevant Emergent Critical Success Factors
innovation and in supporting the development
and commercialisation of the product. In addition to the proposed critical success fac-
tors presented in the previous chapter, within-
going back to my early days as an artificer, case analysis (Eisenhardt, 1989) suggests three
we had spent an awful lot of time in the classroom emergent critical success factors.
dealing with fluid dynamics, mainly to do with
air and aviation but also to do with liquid fluid Ability to Operate within a Partnership
systems, air being a fluid as well, but to do with
hydraulic systems and fuel systems but I had spent Both the Caparo Innovation Centre and Caparo
a lot of time setting engines and gearboxes to AP Braking identified the need for independent
helicopters and jet aircrafts so I knew quite a lot inventors to act as a partner to the commercialis-
159
ing company. The ability to understand that the got a definite view on the licensing route might
potential licensee is not a contract manufacturer find that process difficult. If they had a mind
producing a product to specification, but rather perhaps to manufacture themselves or to set up
an entity that is invested in and committed to a business or to be a partner within a business
progressing and evolving an innovation is critical. then they might find that detachment a little bit
difficult. White, M. (2010) Personal Interview
I think where Martin worked and I think as a gen- (Caparo RightFuel), 14th January.
eral for inventors is that they have to understand
that when they are bringing this to somebody, they it is very important for them (the licensee) to
are going to be working as a partnership and that start to view the project as their project and this
partnership, like any partnership, whether it be business of relinquishing your control or owner-
person or business will go through rough stages ship is very important for the overall success
and you will have to be able to bare your soul and of the project. Other people have to buy into it
be able to take on criticism when its intended to and you have got to be prepared to be sidelined
be from a positive point of view. Sarel-Cooke, and to relinquish a lot of control. Thats a fairly
H. (2010) Personal Interview (experiences from necessary part of the licensing route and I sup-
the Caparo RightFuel programme), 7th January. pose a lot of inventors find that very difficult to
live with. White, M. (2010) Personal Interview
Martin came to the table wanting to work with (Caparo RightFuel), 14th January.
us rather than us to do some work for him. The
ownership was different, rather than us do work he has been pretty smart and took the back
on a project that belonged to an inventor, its more seat at times and been very supportive. Geldard-
like I have got this to share and we can take it Williams, N. (2010) Personal Interview (experi-
together to get it commercialised. His whole ap- ences from the Caparo RightFuel programme),
proach was different from the outset. Lester, J. 7th January.
(2010) Personal Interview (views on the Caparo
RightFuel programme), 13th January. Ability to Filter Out Unviable Innovations
Ability to Relinquish Control An apparently important factor for independent

inventors seeking to become recognised as a vi-
This case provides evidence that a critical factor in able supplier of new products is their ability to
the inventors success was his ability to relinquish filter-out weak and unviable innovations to allow
total control of the innovation and not hold on them to dedicate their resources effectively.
too tightly. As such accepting that the receiving This case provides a number of pieces of
company will have certain areas of expertise and evidence to support this, in particular, instances
putting faith in that expertise appears important. where the inventor trialled ideas before discarding
those that were deemed unviable.
I didnt have too much difficulty with the idea
of them owning the project, taking it forward and I started drawing and over a very long period
taking a back seat because I suppose from the of time dismissed lots of ideas White, M.
outset I had always had the view that concept to (2010) Personal Interview (Caparo RightFuel),
prototype and a bit of admin to convince other 14th January.
people to come on board was what I really wanted
to do. I can see that other inventors who havent
160
The dangers of not filtering out innovations solutions to the problem in question, certainly
effectively lies in the misplaced allocation of appears to enhance the commercial value of the
resources, often in support of new product ideas inventors business proposition, by making it more
that are flawed from the outset. difficult to circumvent.
In our opinion independent inventors must
One of the most difficult things I guess is to tell make every effort to familiarise themselves with
people that actually their idea is rubbish and they the Intellectual Property Protection mechanisms
need to go back to the drawing board, but I guess open to them, how they are utilised in a commercial
a lot of people have got to realise that. We have sense and whether investment in intellectual prop-
met individuals in our own Inventors Club who erty is appropriate for their particular innovation,
have invested a huge amount of money on ideas given the proposed mode of commercialisation,
that are never going to return any of that money, the industry sector they are hoping to enter and
because they missed a few steps at the outset, their available financial resource to both take
became obsessed with a view that they were right out IP Protection and pursue those that infringe
when patently they were wrong and no one ever their rights.
really had the guts to stand up to them and say you The importance of advice, guidance and sup-
need to look at this there is plenty prior art, this port appears to be influenced by the extent of the
is on the market, think long and hard before you inventors technical and commercial competence
proceed any further. White, M. (2010) Personal or previous experience of negotiating the new
Interview (Caparo RightFuel), 14th January. product introduction process. As such, in some
instances support maybe vital whilst in other
cases the inventor maybe able to fair well without
DISCOURSE additional assistance.
In considering the type of advice, guidance
This work acknowledges twelve critical success and support provided for independent inventors it
factors, proposed in the previous chapter. We find is important to note that reliance on professional
support for the twelve critical success factors, innovation practitioners is not always desirable
which are present within the Caparo RightFuel and that much can be gained from engaging the
case study. assistance of peers with practical experience of
In terms of Time Commitment both having time innovation and new product introduction, poten-
available and making a decision to commit that tially via Inventor Clubs.
available time to innovation is important. It is our There is reasonable evidence from the case
view that without the necessary time commitment study to suggest that the timing of the innovation
made to inventing and developing the business approach is important. This perhaps reinforces the
case, independent inventors will find it difficult need for inventors to look for solutions to cur-
to firstly develop the innovations they wish to rent problems and avoid the situation where they
supply businesses with and secondly provide the continue to invest in and promote an innovation
level of data required to mitigate the increased that no longer meets need. Conversely, it may be
risk associated with taking on externally gener- difficult for independent inventors who propose
ated innovations. products that speculate heavily on what the market
In considering the Use of Intellectual Property may need in the future, as the associated risks in
a willingness to invest in Intellectual Property this situation are considerable and are likely to
Protection is important. In addition, a patent ap- deter businesses.
plication, which covers a multitude of technical
161
Access to resources whether financial, con- on the perceived risk associated with an externally
crete, raw materials or suitable tools are critical generated innovation. Disclosure of information
to the inventors ability to prove the concept and should be restricted to those instances where either
produce a functioning prototype. At present inde- a Non-Disclosure Agreement or Patent applica-
pendent inventors are overly reliant on their own tion is in place.
ability to acquire these resources. The provision of The ability to identify and gain access to
community based inventor groups that provide the potential commercial partners is both important
physical resources for inventors may therefore be and challenging for independent inventors. Whilst
worth considering. Consideration should also be inventors maybe able to take a view as to whether
given as to why there is so little financial support a business is operating in a suitable industrial
available to independent inventors, when there is sector it is much more difficult to identify the
so much available to SMEs. manufacturing capability, desire for new products
Access to formal and informal social support and appropriate internal point of contact within a
networks appears important, but not in the way company. Whilst those companies that operate a
extant literature seemed to indicate. Whilst the formal Open Innovation Strategy may make this
inventors family maybe critical in providing process less demanding, we believe that there
support, motivation and reassurance to indepen- continues to be a large number of businesses that
dent inventors, formal support networks, in the are receptive to external ideas from inventors
guise of inventors clubs, provide a platform for that do not make this known to the independent
a frank exchange of views regarding innovation. inventor community.
To a degree, the objective, constructive criticism The ability to select a commercialisation path
offered by a formal support network provides a early in the new product development process is
good counterbalance to the subjective support beneficial in terms of providing focus to the new
of family members and helps prevent inventors product introduction process and minimising the
pursuing inventions that are commercially or number of blind alleys the inventor travels down.
technically unviable. In addition, selection of a commercialisation path
The ability to convey a credible business early in the process can inform the degree to which
persona is central to the success of independent IP protection is required and as such prevent un-
inventors. The credibility of independent inven- necessary costs from being accumulated.
tors is an important consideration in the review In deciding upon a preferred commercialisa-
process undertaken for new products originating tion path, we would advocate the that the inventor
from outside a company. The ability to talk the appraise their skills-set and as such their ability
language of business, operate in a formal busi- to run a business, the extent to which they want
ness environment and present data in a fashion to risk personal wealth, their desire to control
that facilitates understanding and minimises the and be involved in commercialisation and their
need for excessive manipulation adds credibility expectations over financial reward, if any.
to both the inventor and the business case. Close alignment of inventor and corporate
It would appear that previous experience of objectives seems beneficial to the chances of
operating in a formal business context is advan- inventors operating effectively as suppliers of
tageous or alternatively it would be helpful for new products to business. The corporate objective
independent inventors to undergo training in busi- of introducing a new product is biased towards
ness practice and conventions. generating a financial return. Inventors need to
A willingness to share information is critical be aware of this from the outset and understand
because of the effect good quality information has that many of the decisions regarding the product
162
development and introduction will be governed by For independent inventors to supply the most
this objective. From how the product is manufac- commercially and technically viable product
tured, where its manufactured, what material its solutions to businesses they must make frequent
made from, through to the market its targeted at. assessments of their innovation and take on-board
The experience of the inventor is critical to external input. If after research and consultation
the extent that specialist knowledge in a certain innovations appear flawed they should be filtered
industry may be viewed as positive by potential out and attention should switch to an alternative
commercial partners and in addition improves the solution or project.
potential that an innovation is market driven and
relevant. Experience in a formal business context
would appear be more useful in adding credibility CONCLUSION
to a business proposal.
The findings from this research inquiry suggest Independent inventors have the potential to be ef-
a further three emergent critical success factors fective suppliers of new product ideas to businesses
(see Table 4). operating Open Innovation. If the commercialisa-
Independent inventors should view commer- tion opportunities presented by Open Innovation,
cialisation of new products via Open Innovation for independent inventors, are to be maintained
as a partnership arrangement. Despite originating then inventors must become more successful
the innovation, independent inventors need to suppliers. Within this chapter we find support for
acknowledge that the success of the project is the twelve critical success factors proposed in the
often contingent upon the receiving company and previous chapter. A further three emergent critical
inventor working together to fully understand the success factors are acknowledged and we will
legacy of the product, garner specialist industry continue to investigate the significance of these
insight and minimise divertive actions. An abil- as this research inquiry progresses. We believe
ity to operate within a partnership is therefore that the biggest contribution made by these two
critical. chapters is the amalgamation and communication
The ability to relinquish total control of an of critical success factors, from disparate academic
innovation is essential if independent inventors literature, in a format that independent inventors
are to become effective suppliers of new products and those businesses operating open innovation
to businesses through Open Innovation. It is fun- will find usable in a practical sense; by paying
damentally important that the receiving company heed to these factors independent inventors should
buys-in to the innovation. As such it is necessary become more effective suppliers to companies
for independent inventors to take a back-seat on operating Open Innovation and enhance the sus-
occasion and allow the collective expertise of the tainability of such operations.
business to add to the project. Whilst this chapter is geared towards the steps
that independent inventors should take to become
more effective suppliers, there are some important
implications for those individuals responsible
Table 4. Emergent critical success factors for the management of Open Innovation. Firstly,
management may wish to consider how they can
Additional proposed critical success factors
improve their visibility as an organisation operat-
13 Ability to operate within a partnership
ing Open Innovation. Independent inventors find
14 Ability to relinquish total control
it difficult to identify companies to approach with
15 Ability to filter out unviable innovations
their innovations and within those companies
163
identify who the key contact is. Importantly, man- LIMITATIONS AND
agers may wish to consider identifying themselves FUTURE RESEARCH
as being open to approaches from independent
inventors. This work identifies the preliminary findings of
Open Innovation Managers may also wish to an exploratory larger scale research inquiry and as
consider the proposed Critical Success Factors and such should be viewed in the context of work-in
determine how they can encourage independent progress. Although it represents a narrow view of
inventors that want to engage with their business a complex subject we believe that the case study
to operate accordingly. A prescriptive process that approach to this inquiry has added valuable evi-
requires independent inventors to submit specific dence in support of twelve critical success factors,
written details as part of the initial approach and has identified three emergent critical success
would help to ensure that inventors have given factors. It is envisaged that through the examina-
due consideration to key factors in advance of tion of further cases, the knowledge relating to
the first meeting. this field of research will be extended.
Whilst much can be learnt about a proposed As mentioned earlier in the chapter, the value of
innovation from reading documentation prepared the case study approach is in the formation of new
by an independent inventor, the degree to which insights that drive future research inquiries (Dyer
an independent inventor and business can work and Wilkins, 1991). In terms of future research,
together is critical to success. As such we would studies that test the boundaries of the identified
advocate that managers operating Open Innovation critical success factors by focussing on potential
request a face-to-face meeting with independent regional variations or variations across industry
inventors early in their process. sectors would be valuable.
A potential concern of management operating It is important to acknowledge that the criti-
Open Innovation models that allow independent cal success factors identified in this chapter are
inventors to act as suppliers is the cost of handling intentionally focussed on improving the ability of
the high quantity of inquiries. Consideration independent inventors to become successful sup-
should be given as to how administrative hurdles pliers of innovative product ideas to businesses
can be utilised to deter approaches from those operating open innovation. This is of course
that do not have the capacity or desire to see-out one-side of the coin. As such, there is potential
a potentially long development programme. for shifting the research focus away from the
A final consideration for those managers independent inventor and on to the receiving
wishing to encourage independent inventors to company, licensee, to discover if critical success
act as suppliers is the stance they propose to take factors relating to their involvement in the integra-
over confidential information. As a general rule tion of independent inventors in open innovation
independent inventors are unlikely to disclose can be established.
information concerning a proposed new product
without either having filed a patent application or
completed a Non-Disclosure Agreement (NDA). ACKNOWLEDGMENT
Whilst smaller companies may feel able to sign
up to NDA and adhere to the principles of this The authors wish to thank Caparo for allowing
arrangement, many larger businesses feel this us access to their facilities during this research
is practically impossible. As such independent inquiry. In addition we wish to extend our thanks
inventors will need to file for patent.
164
to Martin White the independent inventor behind Whalley, P. (1991). The social practice of
the Caparo RightFuel. independent inventing. Science, Technol-
ogy & Human Values, 16(2), 232256.
doi:10.1177/016224399101600205
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(Chesbrough, Vanhaverbeke & West, 2006: p.1).
gramme. Interviewed by: Smeilus, G. Leamington
Spa, U. K.: Caparo AP Braking.
Glaser, B., & Strauss, A. (1967). The discovery ENDNOTES
of grounded theory: Strategies of qualitative re-
search. London, UK: Wledenfeld & Nicholson.
1
The interviewees were selected as they
provided insight from three critical vantage-
Lester, J. (2010). Views on the Caparo RightFuel points: the independent inventor; the open
programme. Interviewed by: Smeilus, G. Wolver- innovation contact team and the eventual
hampton, U. K.: University of Wolverhampton. company licensee. The interviewees were:
Lettl, C., Rost, K., & Von Wartberg, I. (2009). Martin White (Independent Inventor);
Why are some independent inventors heroes Jonathan Lester (Caparo Innovation Cen-
and others hobbyists? The moderating role tre open innovation contact team); Neil
of technological diversity and specialization. Geldard-Williams (Managing Director
Research Policy, 38(2), 243254. doi:10.1016/j. Caparo AP Braking company licensee) and
respol.2008.12.004
165
Henry Sarel-Cooke (Sales Director Caparo 4

Fleet News Magazine (5th Sep06) Misfuel-
AP Braking) ling hits new record level
2
AA Motoring Trust Report (Feb 2004) 5
AA Motoring Trust Report (Feb 2004)
Misfuelling: Dont get caught out! Misfuelling: Dont get caught out!
3
Telegraph Motoring Section (27th Aug05)
A costly mistake
166
167
Chapter 10
Firm-Specific Factors and the
Degree of Innovation Openness
Valentina Lazzarotti
Carlo Cattaneo University, Italy
Raffaella Manzini
Carlo Cattaneo University, Italy
Luisa Pellegrini
University of Pisa, Italy
ABSTRACT
This chapter investigates the topic of how open innovation is actually implemented by companies, accord-
ing to a conceptual approach in which open and closed models of innovation represent the two extremes
of a continuum of different openness degrees; though, these are not the only two possible models. By
means of a survey conducted among Italian manufacturing companies, this chapter sheds light on the
many different ways in which companies open their innovation processes. Four main models emerge
from the empirical study, which are investigated in depth in order to understand the relationship between
a set of firm-specific factors (such as size, R&D intensity, sector of activity, company organization) and
the specific open innovation model adopted by a company.
INTRODUCTION be pursued in different ways, which are identifi-

able in terms of organisational form of acquisition
The concept of Open Innovation (OI) is often or commercialization, number and typologies of
studied supposing an artificial dichotomy between partners, phases of the innovation process that are
closed and open approaches, whilst the idea of actually open, the direction of opennes (inbound
exploring different degrees and types of openness and/or outbound) and governance (hierarchical
in a sort of continuum seems to provide a more or flat).
interesting avenue (Chesbrough, 2003b). Prior Moreover, previous research has also attempted
research has highlighted that open innovation may to study the relationships among different OI
models and several contextual factors, driven
DOI: 10.4018/978-1-61350-165-8.ch010 by the idea that these factors could explain or,
Firm-Specific Factors and the Degree of Innovation Openness
at least, characterize the companies choices in towards the establishment of collaborative models
terms of degree of openness. Lastly, different (Global Business Summit, 2010). Thus, investi-
OI models, defined according to this concept gating if, how and with what results companies
(i.e. degree of openness and models within their work together becomes a relevant issue for both
specific context), have been analysed in some Italian scholars and practitioners.
preliminary work in terms of their performance We would also like to emphasize that our en-
(Lichtenthaler, 2008; 2009). deavour to identify any in-between states along
The objective of this chapter is thus three- the Open Innovation Continuum is the first at-
fold: first, to provide evidence in support of tempt to research this topic and that the subject
Chesbroughs (2003b) theoretical proposition indeed requires further research in order to better
that businesses may be located along an Open characterise such intermediate states.
Innovation Continuum, second, through the use The following sections are divided into sub-
of extensive study, to identify any potential inter- topics: a description of the pertinent literature (so
mediate states between the extreme points of the as to better understand the research questions we
Continuum - Open and Closed Innovators - and, posed), a description of the empirical study we
third, to identify the contextual factors that affect carried out and the methodology used, the main
the choices firms make along the Open Innova- research results, a discussion of the results, con-
tion Continuum. clusions and future research.
In particular, for the identification of the po-
tential intermediate states in the OI Continuum,
we focalized on two variables representing the THEORETICAL BACKGROUND
openness degree, which are not still deeply in-
vestigated: (1) the number and type of partners The Theoretical Framework
(partners variety) and (2) the number and type of and the Research Questions
phases of the innovation process open to external
contributions in and/or out (innovation phase Traditionally, large firms relied on internal research
variety). It should be noted that we assume that and development (R&D) to innovate and, in many
the innovation process is composed of different industries, large internal R&D labs were a strategic
phases: idea generation (identification of a tech- asset and firms could internally discover, develop
nology opportunity through scouting, monitoring, and commercialize technologies. This approach
market analysis, trends analysis); experimentation has been labelled the closed innovation model
(from the idea to the prototype); engineering (Chesbrough, 2003a). Although it worked well for
(transforming the prototype into an industrial quite some time, the current innovation landscape
project); manufacturing (defining and organis- has changed. Due to labour mobility, increasing
ing the plant); commercialisation (planning of R&D costs, abundant venture capital and widely
commercialisation and promotional activities). dispersed knowledge across multiple public and
The choices in terms of OI will be investigated private organizations and the need for specialisa-
in terms of those contextual factors whose role is tion in knowledge production, enterprises can no
still controversial (Lichtenthaler, 2008), or oth- longer afford to innovate on their own, but rather
erwise it can be better understood in light of the need to engage in alternative innovation practices.
concept of openness suggested here. Our inves- In this regard, Open Innovation (OI) represents an
tigation was carried out in Italy, where empirical important innovation practice that can help firms
evidence about OI is still poor. However, there to innovate without having to rely only on their in-
are many pressures, arising from institutions, too, house strengths. Since Chesbrough published his
168
book in 2003, the concept of Open Innovation open innovation can be observed: the inbound,
has received a considerable amount of attention exploration or outside-in process, the outbound,
from practitioners and researchers. A large num- exploitation or inside-out process, and the coupled
ber of studies are adopting this term to describe process (Keupp & Gassman, 2009; Lichtentaler,
the phenomenon where firms rely increasingly 2008; Enkel, et al., 2009). Thanks to the outside-
on external sources of innovation, which means in process, firms aim at enriching the companys
that ideas, resources and individuals flow in and own knowledge base through the integration of
out of organizations (Chesbrough, 2003a). While external knowledge sourcing, and hence increase
contributions are still growing (Gassmann, 2006; their innovativeness (Enkel et al., 2009). Through
Enkel et al., 2009; Enkel et al., 2010), the debate the inside-out process, firms aim at earning prof-
on innovation management is enriched by stud- its by bringing ideas to market, selling IP, and
ies that critically examine the Open Innovation multiplying technology by transferring ideas to
concept by exposing its weakness and limitations the outside environment, in order to bring ideas
(Dahlander & Gann, 2007; Trott and Hartmann, to market faster than they could through internal
2009). In particular, the concept of Open Innova- development (Enkel et al., 2009). The coupled
tion is criticized because of the widespread view process combines the two abovementioned pro-
that the concept highlights an artificial dichotomy cesses to simultaneously gain external knowledge
between closed and open approaches. On the other and bring ideas to market.
hand, the idea of exploring different degrees and As regards the perspective connected with the
types of openness in a sort of continuum (i.e. the types of partners (Enkel et al., 2009), literature
openness degree concept) seems to provide a has highlighted the interactive character of the
more interesting and richer avenue to investigate, innovation process, suggesting that innovators
(Chesbrough, 2003b; Dahlander & Gann, 2007). use ideas and knowledge of external actors in
Indeed, this view allows for a deeper and more their innovation processes: firms rely heavily on
real investigation into company behaviour and their interaction with lead users, suppliers, and a
into the particular nature and context of innovation range of institutions inside the innovation system
sources (Chesbrough, 2003b; Gassmann, 2006; (von Hippel, 1988; Lundvall, 1992; Brown &
Dahlander & Gann, 2007). Eisenhardt, 1995; Szulanski, 1996). With each
In any case, the era of open innovation has innovation source, an organization can achieve
begun and many firms are opening their innovation different intensity levels of collaboration (Laursen
process to the outside world (Enkel et al., 2009). & Salter 2006; Keupp & Gassman 2009). Hence,
The way the innovation process can be opened it is possible to define different open innova-
has been studied in management literature from tion models depending on both breadth (i.e., the
a variety of perspectives. Although the perspec- number of sources used for innovation activities)
tive that has received most of the attention in the and depth (i.e., the intensity of collaboration with
literature is undoubtedly the direction of openness, each source).
other approaches have also been investigated. As regards the perspective connected with
More specifically, these look at the number and the kind of governance in the innovation net-
types of partners, the kind of governance in the works, there are two dimensions which need to
innovation networks, and the organisational forms be considered (Pisano & Verganti, 2008): open-
chosen to define the links among partners (high ness, i.e. a large number of involved partners and
vs. low integration level). hierarchy, i.e. the level of democracy in decision
As regards the perspective connected with making. On the basis of two such aspects, four
the direction of openness, three models of open innovation models emerge: (1) the open/
169
hierarchical model, in which anyone can offer tive in explaining the open innovation models
ideas but only one company defines the problem followed by firms. In other words, the latest lit-
and chooses the solution; (2) the open/flat model, erature still does not fully explain in what ways
in which anyone can generate ideas, and no one the degree of openness can happen. Indeed, to
has the authority to decide what is or is not a valid the best of our knowledge, the literature does not
innovation; (3) the closed/hierarchical model, in address the question whether some firms conduct
which a company selects certain participants and open innovation in many phases of their innovation
decides which ideas are to be developed; (4) the funnel and if others focus only on a very few of
closed/flat model, in which a selected group offers them; if this is the case, we must consider which
ideas, while making critical decisions together. phases of the innovation funnel are open or closed.
As regards the organisational forms chosen Hence, literature does not help companies to
to define the links among partners (high vs. low find the right balance between closed and open
integration level), there are four technology sourc- phases of the innovation funnel. Neither is it
ing modes that firms can adopt: corporate Venture clear if the phases of the innovation funnel that
Capital investments, non-equity alliances, equity are permeable are open to many or just a few
alliances and acquisitions. Each form carries with partners. With few exceptions, it is not even clear
it different implications in terms of the investing if the involved partners are different in terms of
companys reversibility and commitment (Chiesa typologies or not. For instance, De Backer et al.
& Manzini, 1998; van de Vrande et al., 2006). (2008) analyzed such a problem and found that
More precisely, corporate Venture Capital invest- universities and government research institutes are
ments and non-equity alliances are reversible to generally considered to be an important source of
some extent and involve a relatively low level of knowledge transfer for the innovation activities of
commitment from the investing company, while companies, especially regarding more upstream/
equity alliances and acquisitions require a high research activities.
level of commitment and are hardly reversible. On the basis of these premises, our objective is
In our opinion, all these contributions share to contribute to the literature which sustains that
two aspects: on one hand, they have a common business reality is not based on pure open innova-
interpretation of open innovation, while, on the tion, but on companies that invest simultaneously
other, they have a weakness. in closed as well as in open innovation activities
Regarding common interpretation, all these (Enkel et al., 2009) throughout the innovation
contributions share the understanding that the funnel with different partners. Hence, we will
open innovation models which the firms follow introduce a new perspective that considers both
are not exclusively open or closed, but rather the number/typology of partners and the number/
show varying degrees of openness: i.e. between typology of phases, in order to understand if such a
the two pure models open or closed, which perspective can confirm the existence of different
represent the two extremes of a continuum there models of open innovation. Within this context we
are many shades of grey (Chesbrough, 2003b). will try to answer the following specific research
Indeed, according to Dahlaner and Gann (2007), questions:
the dichotomy between open vs. closed is artificial
and it is necessary to explore different degrees and Do different firm-specific factors charac-
types of openness: this can yield more insight in terize the models of open innovation?
understanding openness. Do such different models show a different
With regards to weakness, the perspectives level of innovative performance?
used in the previous contributions are not exhaus-
170
Figure 1 depicts the constructs of our theo- The Firm-Specific Factors

retical framework. The operationalisation of each and Open innovation
construct is reported in detail in the Appendix (all
questions were measured on a four-point Likert Relationship between R&D Intensity
scale to indicate the frequency of use, with 1 = and Open Innovation Models
disagreement and 4 = agreement).
As explained in the introduction, the main As regards the role played by R&D intensity,
objective of the chapter is to provide empirical Lichtenthaler (2008), Lichtenthater and Ernst
evidence to the notion of OI as a continuum, that (2009), Calantone and Stanko (2007) and Sofka
is to say that different OI models may exist. Before and Grimpe (2008) investigated this role from
characterizing them by means of our empirical different viewpoints. Lichtenthaler (2008) and
analysis, in the following we will analyze what Lichtenthater and Ernst (2009) analysed the effect
the literature says about the relationships between of R&D intensity and found that the greater the
some contextual factors (i.e. R&D intensity, size, level of R&D intensity the greater the techno-
type of industry, approach to innovation, com- logical exploration. This provides support for the
panys objectives for collaboration, managerial- assumption that firms pursue external technology
organizational actions supporting open innova- acquisition as a complement to internal R&D and
tion) and OI models and their performance, by not as a substitute (Cohen & Levinthal, 1990,
highlighting areas that are lacking which justify Zahra & George, 2002).
our subsequent empirical analysis. First, an Calantone and Stanko (2007) underpin that
analysis of the relationships between the firm- firms exploration activities cannot occur frequent-
specific factors and the open innovation models ly: therefore, given the high costs for developing
will be made. Then, an analysis of the impact of specialized structures, firms are more likely to
the open innovation models on innovative per- resort to outside expertise. Moreover, they state
formance will follow. Specifically, what is lacking that firms performing a great deal of in-house
in the literature has been highlighted for each of exploratory research are likely to be led by this
the relationships studied. exploration away from their competencies, and
will therefore be more likely to seek out outside
expertise.
Figure 1. Theoretical framework
171
Sofka and Grimpe (2008) studied the effect of companies and hence have wider technological
internal R&D investments on breadth (i.e. extent knowledge that is potentially suitable for com-
of partner typology) and depth (i.e. intensity mercialization. As regards technology exploration,
of collaboration for each partner) of research larger firms do not seem to be able to completely
strategies. They hypothesize that internal R&D rely on internal activities due to the diversity of the
investments lead to deep research strategies rather technological knowledge that they use. In general,
than broad ones. With their survey, which involved the fact that larger firms seem to drive the open-
firms from twelve European countries, they argue ing of the innovation process can be justified by
that firms building absorptive capacities through the more systematic approach they have in their
internal R&D have both broader and deeper re- innovation processes (Lichtentaler, 2008) and the
search strategies. However, the effect on depth is larger resources they possess with respect to small
stronger than the effect on breadth. In other words, and medium enterprises (Lichtentaler, 2008; De
committing internal resources to in-house labs and Backer et al., 2008; van de Vrande et al., 2008).
specialized scientists and engineers is therefore the In addition, according to Lichtentaler (2008), it
primary path for innovation managers to achieve should be noted that the effect of size seems to be
more depth in their search strategies. stronger in the case of technology commercializa-
Hence, on the basis of these contributions, the tion than in technology exploration, in that com-
role played by R&D intensity is studied in rela- mercialization is rather a newer phenomena than
tion to two of the abovementioned perspectives, acquisition. As the external mode of technology
through which it is possible to investigate how the exploitation has become a broader trend only in
innovation process can be opened: the perspec- recent years, it is still driven by large pioneering
tive connected with the direction of openness firms, while the acquisition of external technology
and the perspective connected with the types of is distributed more evenly across firms of different
partners. Thus, literature lacks the investigation sizes. Keupp and Gassman (2009) analyse the ef-
of the role that R&D intensity plays with regards fect of size on two different variables representing
to the perspective offered in this chapter, which the openness degree: the number of knowledge
will consider both the variety of partners involved sources used for OI activities (i.e. the breath of
and the variety of stages in which companies OI) and the intensity of collaboration with each
collaborate. source (i.e. the depth of OI) and show that there
is a positive and significant effect of firm size on
Relationship between Size and both the breadth and the depth of OI.
Open Innovation Models On the other hand, some literature emphasises
that especially small companies, often lacking
Size is one of the most investigated of the contex- resources and competence to innovate by them-
tual factors and it is still a controversial subject. selves, would have great benefits from exploit-
On the one hand, empirical literature suggests ing the OI model. In fact, SME are increasingly
that open innovation is mainly driven by larger adopting OI practices (van deVrande et al., 2008).
companies. Empirical investigations show that Hence, on the basis of these contributions,
size impacts on two variables representing the it is possible to draw considerations similar to
openness degree: the extent of both technology those regarding the role played by R&D intensity.
exploitation and exploration (Lichtenthaler, 2008; Indeed, the role of size is studied in relation to
Lichtenthaler & Ernst, 2009). Indeed, as regards the same two abovementioned perspectives: the
technology exploitation, larger companies seem perspective connected with the direction of open-
to have a bigger technology portfolio than smaller ness and the perspective connected with the types
172
of partners. In addition, its role is still controver- Relationship between Approach

sial. As a consequence, it is possible to assert that to Innovation and OI Models
literature lacks the investigation of the role that
size plays with regard to the perspective offered A relevant concept investigated in the literature is
in this chapter (number/typology of partners and that of technology aggressiveness (measured by
number/typology of phases). three items, among them the emphasis on radical
innovation rather than incremental innovation)1.
Relationship between Type of Industry Lichtenthaler and Ernst (2009) find that technol-
and Open Innovation Models ogy aggressiveness is negatively related to the
extent of external technology acquisition and is
Some authors investigate the impact that industry positively related to external technology exploita-
exerts on OI, interpreting industry as the typology tion, in that commercialization nurtures benefits
of sector in which firms operate. Also in this case, in terms of setting industry standards, entering
literature is not unidirectional in that empirical into new markets, and realizing learning effects.
findings show contrasting results. Whats more, In another publication, Lichtenthaler (2008)
the same Lichtenthaler in different publications studies the implications connected with firms
(Lichtenthaler, 2008 and Lichtenthaler & Ernst, emphasis on radical innovation and finds that the
2009), while referring to the same sample, finds degree of openness seems to rise with the degree
different results. of emphasis on radical innovation, especially
In fact, on the one hand, Lichtenthaler and Ernst concerning the degree of external technology
(2009) show that a firm belonging to a particular commercialization. There are two reasons for this:
industry does not produce any impact either on first, the opportunity to commercialize knowledge
the external technology acquisition or on external which, when not applied in the organization, turns
technology exploitation. Similarly, Lichtenthaler out to be residual; second, the possibility to facili-
(2008) states that his findings demonstrate the tate acceptance on the market and the creation of a
insignificant effect which industry differences standard. Lichtenthaler (2008) also finds that firms
have across the clusters. Thus, the openness of the which emphasize radical innovation are obviously
innovation process does not seem to be determined not able to develop all knowledge internally, but
principally by industry characteristics. they have to strongly rely on complementary
On the other hand, the studies by Gassman external sources and thus they use technology
and Enkel (2004) and De Backer et al. (2008) acquisition (Perrons et al., 2005).
demonstrate the opposite. More in particular, Hence we can draw even more restrictive con-
Gassman and Enkel (2004) state that the relative siderations than those regarding R&D intensity:
importance of internal and external sources var- technological aggressiveness is studied in the
ies across different industries. De Backer et al. literature in relation only with the perspective
(2008), although focusing on particular aspects, connected with the direction of openness. If we
such as patent licensing, find important differences add that this factors role is still controversial, it
among industries, with chemical/drugs, electronic/ emerges that new empirical investigation is needed
electrical/semiconductors and machinery/equip- to analyze the impact exerted by technological
ment/computers as the industries where licensing aggressiveness on OI models.
deals take place more frequently than in others.
173
Company Collaboration Managerial-Organizational

Objectives and OI Models Actions Supporting Open
Innovation and OI Models
The main reasons that push firms towards choices
of open innovation are, on the one hand, the need Managerial-organisational actions allow open
to reduce innovation costs and business risks, and innovation to be pursued easily and more deeply,
on the other, the need to extend skills, competences Some of these actions include the commitment
and creativity (Huang et al., 2009). of top management to promote the transition
As regards the objective of diminishing costs towards an open innovation approach (Vanhaver-
and risks, Calantone and Stanko (2007) analyze beke, 2006; vandeMeer, 2007; Chiaroni et al.,
outsourcing as a tool for increasing staffing ef- 2009, Pisano & Verganti, 2008); the need for a
ficiency measured in terms of employee sales champion supporting the integration of external
efficiency. They infer that the decision to reduce technology into an existing product develop-
the number of employees is related to the outsourc- ment phasegate process (Chesbrough, 2006;
ing of innovation in the short run but not over the Chesbrough & Crowther, 2006); the exploitation
long term. Gassmann and Enkel (2004) state that of the personal relationship of the R&D manag-
research-driven companies usually aim at reducing ers for starting technological collaborations; the
the R&Ds fixed costs and sharing risk. Chiaroni, formal evaluation of collaboration objectives
Chiesa and Frattini (2009) state that the reason and risks, as well as the analysis and selection of
for accessing external sources is the willingness the potential partners with a formal and explicit
to minimize risk by investing in technologies that process (Sakkab, 2002; Huston & Sakkab, 2006).
are already proven in other applications. Although the works cited have shed light on how
Another main reason for firms to undertake organizational and managerial factors facilitate the
R&D outsourcing includes accessing specialized implementation of open models, we believe that
skill sets and creativity, which exposes the internal enriching this line of inquiry with new empirical
development staff to new knowledge, technol- evidence is in any case quite important.
ogy, and organizational development processes
(Catalone & Stanko, 2007; Chesbrough and Teece, The Impact on Performance
1996; Linder, 2004; Lynch, 2004), even if this
strategy has drawbacks in terms of opening the The debate is still open on whether and how
market to new entrants (Porter, 1980) and exposing openness degree and contextual factors impact
core competencies to imitation and substitution on innovative and economic performance. The
(Piachaud, 2005). results are still quite limited and contradictory,
In comparison with the other firm-specific although very recent contributions (Chiang &
variables, the objectives of collaboration are stud- Hung, 2010; Sofka & Grimpe, 2010) shed more
ied in the literature even more restrictively; not light on the topic.
only are they studied in relation to the perspective A widely accepted assumption is that the rela-
connected with the direction of openness, but also tions between openness degree and performance
mainly in relation to one of the two directions, i.e. must be analyzed considering the moderator role
with the inbound process. Hence, for this firm- of external environmental moderators (e.g. patent
specific variable, too, there is a gap in the research protection status: Lichtentaler, 2009; Slowinsky
literature which needs to be filled, that being an & Zerby, 2008; MacCormack & Iansiti, 2009).
analysis of the impact exerted by collaboration Indeed, regarding performance, it should be
objectives on the open innovation models. noted that the analysis of the companys financial
174
performance is a complex topic due to the fact it RESEARCH DESIGN AND

can be explained only by considering a wide set METHODOLOGY
of factors that can have contrasting effects.
Probably, the concept of innovative perfor- Survey Design
mance (Chiang & Hung, 2010; Sofka & Grimpe,
2010) is more understandable. The impact of open The empirical study has focused on companies
innovation models on innovative performance has located in Lombardy, a Northern Italian region;
been analysed in terms of a companys competence in 2008 the companies had applied for funding
base, development costs, time to market and the from the Chamber of Commerce to conduct in-
level of innovation of new products/processes. novative activities within different manufacturing
Literature is unidirectional in showing the impact sectors, including the mechanical and machinery
of the outside-in process on the access and inte- sectors, as well as in sectors dealing with auto-
gration of internal company capabilities with new motive, metallurgy, textiles, food, electronics,
and complementary knowledge of external firms chemicals, pharmaceuticals, plastic, rubber, paper
(Gassmann and Enkel, 2004). Instead, literature and paperboard, publishing and printing, wood
results are not unidirectional as far as the reduction and wood products (NACE rev.2 codes). This
of development time is considered: for instance, engagement in innovation by such companies,
on one hand, Gassmann and Enkel (2004) state combined with the fact that Lombardy is marked
that the benefits of co-operation are seen in an by a particular propensity for innovation (if mea-
improvement in the competitive position and in sured by the number of patents, Lombardy ranks
risk minimisation, but not in a reduction of devel- first among the Italian regions according to the
opment time; on the other hand, according to Kolk European Patent Office data for Italy elaborated
and Pmann (2008) firms not concentrating on by the Unioncamere Observatory of Patents and
Open Innovation strategies fail, as rising develop- Brands, 2008) make them very interesting topics
ment costs and shorter product life cycles make of innovation study. The data was collected by
it increasingly difficult to justify investments in means of questionnaires distributed by email to
innovation. Other studies (e.g. Dahlaner & Gann, participants. The advantages of such a method
2007) show that relationships with other actors include low cost, completion at the respondents
help firms to increase the level of innovativeness. convenience, absence of time constraints, guar-
In summary, as suggested by the literature antee of anonymity and reduction of interviewer
listed above, certain relationships between the bias (Forza, 2002). Its shortcomings, on the other
selected firm-specific variables and the openness hand, are represented by lower response rate
degree are still controversial or lacking in depth. as compared to other methods, longer comple-
Below, we suggest improving the empirical evi- tion times and greater effects due to the lack of
dence available by adopting a perspective based both interviewer involvement and open-ended
on number/typology of partners and the number/ questions. The survey tool was conducted as a
typology of phases, with particular reference to questionnaire whose items regarded company
Italy, where partnerships are desired by many characteristics (sector, size), innovation strategy;
subjects, including institutional ones, though the organization for innovation; collaborations and
issue is still poorly studied. innovative performance, as will be clarified in
more detail below.
175
Before sending the questionnaire to the com- alization, we used subjective measures based on
panies, a pilot test was conducted to assess the four-point Likert-type scales (1=strongly disagree;
quality of the measure items. The items were 4 = strongly agree) as given in the Appendix. In
tested by a group of senior managers and academ- order to better specify the partner variety and the
ics with working experience in innovation. They phase variety we introduced the variables: intensity
were asked to analyze the questionnaire in order to of collaboration with partner and intensity of col-
eliminate items not having strong content validity. laboration on phases that make up the innovation
After this stage, the resulting questionnaire was funnel (measures also based on the Likert-type
sent to the key informants of the companies that scale). The study of correlations between these
we identified as the R&D manager (if present in two variables allowed us to understand which
the company) or the company owner, if deeply are the most typical combination partner/phase
involved in the definition of the companys in- and thus to characterize the innovation process
novation strategy (as is very common in Italian in practice. To study firms approaches to open
companies). innovation, we firstly carried out a cluster analy-
sis (complete linkage method, recommended
Statistical Analysis when researcher wants to identify groups which
are distinct from each other as much as possible;
Among the companies that have applied for fund- Barbaranelli, 2006) based on the partner variety
ing (about 500) 99 firms have responded during a and the phase variety. Secondly, concerning the
four-months period in 2009 (i.e. with a response firm-specific variables, with which we intended
rate equal to 20%). A general premise should to describe the companies belonging to different
be made as concerns company size (in terms of clusters, we carried out the following procedure.
number of employees and revenues): except for Items of the questionnaire were defined on the
few big subjects, the size of the studied companies basis of scales already used in previous works or
can be classified as middle/small2. This imbal- coming from partial reworking of such scales (still
ance can hardly be avoided because it is due to Likert-type). Anyway, we applied to the gathered
the intrinsic major sectoral composition in Lom- data an exploratory factor analysis (principal axis
bardia, where the small size plays an important factoring as extraction method and promax rotation
role. If, from the one hand, it is also found in in the case of initially unclear solution) in order
non-respondents and thus it protects against the to delete weakly related items and to understand
potential non-response bias, on the other hand the factor structure and the measurement quality.
it may prevent capture size differences when An evaluation of the Eigenvalues and the Scree
we will analyze firms characterized by different plot were used to identify the number of factors to
openness degrees. We must therefore bear in mind retain. In addition, all factor loadings were above
that this cannot make next comparisons between the acceptance level of 0.50 (Hair et al., 2006;
companies significant because of the intrinsic Barbaranelli, 2006; Cheng and Shiu, 2008), thus
nature of the sample. However, this is the typi- indicating the unidimensionality of the various
cal situation in Lombardia as well as in Italy. As factors. These were saved as variables and em-
clarified above in the theoretical background, we ployed in the subsequent analysis. The factors/
adopt the partner variety and the phase variety as firm-specific variables were the following (see
relevant variables to represent and to investigate the Appendix for detail):
the degree of openness. Regarding their operation-
176
Objectives of collaborations classified in two Finally, as concerns data analysis, we applied

factors: the one-way variance analysis (i.e. ANOVA), in
order to appreciate differences among clusters
1. aims to extend skills, competences and cre- in terms of scale variables, and Chi-square test
ativity (three items, inspired by the work of to compare the frequency on nominal variables.
Huang et al., 2009; Cronbachs : 0,71);
2. aims to share risks and costs (two items, based
on Calantone and Stanko, 2007; Cronbachs RESULTS
: 0,84).
Figure 2 illustrates the results of cluster analysis
Approach to innovation: technological aggres- based on the partner variety and the phase variety.
siveness with emphasis on radical innovation (five This has resulted in a solution with four groups
items, inspired by Lichtenthaler and Ernst, 2009, of firms. The decision on the number of clusters
that use suggestion by Brockoff and Pearson, 1992. has been determined by the criterion that suggests
We re-adapted the scale also on SURVEY TOOL of stopping the aggregation process at the stage
2.1 basis, a questionnaire sponsored by Industrial that precedes the one with the highest increase in
Research Institute, Cronbachs : 0,71) the coefficient of agglomeration (Barbaranelli,
Organizational and managerial actions for open 2006). In the four-cluster solution, the variance
innovation (five items, scale based on SURVEY inside clusters is about 21% whereas the variance
TOOL 2.1, Cronbachs : 0,85) among clusters is about 72% (F-tests sig. <.001).
Some other variables, not presented in Ap- Despite the quite high correlation between partner
pendix, were measured directly (and eventually variety and phase variety variables, which sug-
transformed in logarithmic scale to improve nor- gests that most firms adopt open or closed innova-
mality), such as: tion approach on both dimensions, small inter-
mediate clusters - 2 and 3 - exist (i.e. they open
R&D intensity (i.e. percentage of R&D their innovation process more strongly in one
expenses/sales) direction rather than in the other) and thus they
Revenues (i.e. to operazionalize size) are worth to be analyzed although they only pro-
Number of employees (i.e. to operazional- vide clues for further analysis.
ize size) Cluster 1 refers to the open innovators, com-
Indicators of companys performance panies that make up the largest group. From data
(ROA Return On Assets - and ROS about partner and phase variety variables (reported
Return On Sales). in Table 1), we found that these companies are
really able to manage a wide set of technological
As concerns companys results, also a factor relationships, that impact on the whole innova-
representing innovative performance was defined tion funnel and involve a wide set of different
(five items reported in the Appendix, our scale partners. Although the open innovators strongly
based on Calantone et al. (2002); Cronbachs : collaborate especially with the supplier in the
0,82). After all, dummy variables were included engineering and experimentation phases3, many
for: the type of industry; the existence of orga- other types of partners (particularly, firms oper-
nizational unit specifically devoted to support ating in different sectors of activity, customers,
collaboration; the type of organizational structure universities, technical and scientific service com-
used by companies for innovation activities (input- panies, governmental institutions) are involved at
oriented, output-oriented, matrix; Chiesa, 2001). different stages (especially in the idea generation,
177
Figure 2. Results of cluster analysis

similar to the closed ones: collaborations are with
few types of partners (typically suppliers and
customers), but instead of being tightly focused
on one stage, they can be extended to the whole
funnel. This means that the integrated collabora-
tors share with their few trusted partners the
whole process of innovation. An example is a
small company in the electronics industry that
produces and commercializes panels and electrical
equipment: suppliers and customers, with whom
the company has a longstanding relationship,
support it through the whole process of innova-
tion. Finally, companies in the other small cluster
4 can be classified as specialized collaborators.
Already also emerged in our previous work, they
form a group similar to open innovators regard-
ing the variety of partners (suppliers, customers,
universities, governmental institutions) but they
experimentation and engineering). An example
concentrate their collaborations in a single/few
is a medium-sized company from the machinery
points of the innovation funnel (typically the
industry that conceptualizes and produces boilers
idea generation and the experimentation). From
for industrial use. Cluster 4 refers to the closed
the follow-up interviews, these companies still
innovators, companies that form the second largest
seem a bit behind the open, but it is a matter of
group. From data in Table 1, we realized that these
time: with increasing confidence in partners, the
companies access to external sources of knowledge
cooperation will also increase by covering all the
only for a specific, single phase of the innovation
innovation process. An example here is a medium-
funnel and typically in dyadic collaborations. The
sized company in the electronics industry that open
prevalent partners are in fact suppliers and cus-
to many partners (universities and governmental
tomers, especially on the idea generation phase.
institutions as well as the traditional customers
Particularly little-used in the closed companies
and suppliers) the idea generation phase.
are the collaborations with universities and firms
To analyze differences across clusters, in par-
operating in different sectors of activity. A good
ticular the open and closed ones, one-way variance
example here is a small-sized textile company
analysis (i.e. ANOVA) has been used for compar-
that has declared in some follow-up interviews,
ing means of scale variables (i.e. companys size
carried out after data-analysis stage, to follow
expressed by revenues and number of employees,
a traditional innovation approach (i.e. internal
R&D intensity, approach to innovation, types of
research and development procedures jealously
objectives, organizational and managerial actions
preserved) by using the low-intensity contribu-
for open innovation, performance expressed by
tion of its customers and suppliers on the idea
innovative performance) and Chi-square test has
generation phase. The companies in the smallest
been employed to compare the frequency on
cluster 2 can be named integrated collaborators.
nominal variables (i.e. type of industry, existence
Already found in the evidence emerged by a mul-
of organizational units supporting collaborations).
tiple case-study in a previous work (Lazzarotti
It must be said that the scarcity of observations
& Manzini, 2009), these companies are the most
on clusters integrated and specialized makes not
178
applicable Chi-square tests as well as the results weight of medium-small sizes for companies) that
regarding scale variables are often not significant. reflects the Lombardias and Italys condition. But
Anyway, although the following evidence is use- what perhaps we can say is that Italian companies,
ful above all to compare open and closed compa- despite being small, are nevertheless brought to
nies, some clues on other two clusters also emerge open up to outside sources, in keeping the stream
and thus, if interesting, they will be briefly pre- of literature that argues that small firms behave
sented in order to deepen them with next research. like this (van de Vrande et al., 2008).
Regarding R&D intensity, we found significant Groups do not seem different even for type
difference among open and closed clusters (see of industry (see Table 2). As suggested by the
Table 1): the open companies invest more on follow-up interviews, the degree of open innova-
average than the closed companies. This finding tion seems to be mainly determined by the indi-
provides support for the assumption that firms vidual strategic choice of a company rather than
consider open innovation as complementary with by industry characteristics (for similar evidence,
internal R&D and not a substitute (Lichtenthaler, see Lichtenthaler, 2008).
2008). This is consistent with the theory of absorp- As concerns approach to innovation, with
tive capacity (Cohen & Levinthal, 1990, Zahra emphasis on radical innovation rather than incre-
& George, 2002) in the sense that to be able to mental innovation, we found that the open cluster
absorb from the outside, a company must have the has a higher mean (in the factor score resulting
appropriate skills and competences. This does not by factor analysis) than the closed and this dif-
mean that the closed invests little, just it seems ference is statistically significant. This is consis-
they invest less than open. As clues relatively to tent with the literature and empirical evidence
integrated and specialized clusters, interestingly that suggest that companies, when focalized on
the integrated shows the lowest average of R&D radical innovations, must collaborate because they
intensity whereas the specialist is more similar are not able to internally develop all relevant
to the open one. Perhaps the integrated innovator knowledge (Lichtenthaler, 2008; Perrons et al.,
invests internally less because it relies on a few 2005). Relevant knowledge that our data seem
trusted collaborators along the whole innovation to suggest is coming from a higher degree of
process. In addition, in similar vein with previous openness in term of wide partner variety and wide
absorptive capacity interpretation, Chi-square phase variety. Interestingly, the specialized, al-
tests on internal organizational structure for in- though very little, shows a mean higher than in-
novation activities show that the input-oriented tegrated, which might suggest that perhaps the
one (i.e. where people are organized according partner variety is more relevant.
to their specific area of expertise, whose growth Regarding the type of objectives pushing com-
is continuously fed - Chiesa 2001) is typical for panies to collaborate, open cluster shows higher
open innovators rather than for closed (for which mean (and statistical different) in the first-type goal
an informal type of organization is prevalent). aim to extend skills, competences, creativity
Indeed, the competence-building receives also with respect to closed companies. Very similar to
a formally structured attention and thus it could each other (and in intermediate position between
suggest competence is considered a pre-requisite open and closed), the integrated and the specialized
to openness. cluster. This finding suggests that companies look
As concerns size (see Table 1), we did not find for competences and creativity by opening up in
significant differences among clusters. However, some way: to a wide variety of partners (even if
we reiterate that this may be due to the inherent on few phases), to a wide variety of phases (even
imbalance of the investigated sample (i.e. high if with few partners) or, at the highest level, in
179
Table 1. Information on the clusters and main differences (scale variables)
Variables Sample Cluster 1 Cluster 2 Cluster 3 Cluster 4 Significance

(n=99) (n=43) (n=9) (n=11) (n=36) (Anova test)
Open Integrated Specialized Closed
collaborator collaborator
Partner and phase vari-
ables
Partner variety 2.63 3.44 1.89 3.18 1.67 .000
Phase variety 2.61 3.49 3.11 1.82 1.67 .000
Intensity of collabora- 1.38 1.59 1.16 1.36 1.18 .005
tion with University and
Research centres
Intensity of collaboration 1.37 1.56 1.29 1.05 1.25 .02
with Technical and Scien-
tific Service Companies
Intensity of collabora- 1.11 1.20 1.00 1.18 1.01 .03
tion with Governmental
institutions
with customers
with suppliers
with competitors
with firms operating in dif-
ferent sectors of activity
on Idea generation
on Experimentation
Intensity of collaboration 1.44 1.61 1.40 .1.32 1.29 .002
on Engineering
on Manufacturing set up
on Commercialization
Firm-specific contextual
variables/factors
Revenues (Log) 7.35 7.5 7.5 7.35 6.9 0.53
Employees (Log) 1.52 1.63 1.58 1.66 1.32 0.41
R&D intensity (Log) 0.59 0.86 0.20 0.59 0.35 .01
Innovation approach -0.04 0.33 -0.07 0.30 -0.47 .000
Objective of extending -0.20 0.45 -0.13 -0.11 -0.47 .000
skill and competence
Objective of sharing risks 0.02 0.28 -0.29 -0.13 -0.22 .05
and costs
Organizational and mana- 0.01 0.37 0.26 0.34 -0.61 .000
gerial actions for OI
180
Table 1. Continued
Variables Sample Cluster 1 Cluster 2 Cluster 3 Cluster 4 Significance
(n=99) (n=43) (n=9) (n=11) (n=36) (Anova test)
Open Integrated Specialized Closed
collaborator collaborator
Performance
Innovative performance -0.04 0.30 0.08 0.29 -0.48 .001
ROS (Log) 0.73 0.76 0.80 0.65 0.70 0.89
ROA (Log) 0.78 0.78 0.69 0.75 0.81 0.94
both directions. Similarly, the second-type goal of lower than the specialized) and probably a lower
sharing risks and costs is related to the degree of complexity in the collaborations. Thus, it is not
openness in our conception. It is also interesting necessary to introduce high-intensive managerial
to note the prevalent objective in each cluster. and organizational actions. Also a significant Chi-
Whereas in open cluster the main goal is the square test on the existence of an organizational
first, closed companies are pushed to open by the unit supporting collaboration (see Table 2) gives
objective of sharing costs and risks. evidence of the organizational and managerial
As concerns the organizational and managerial differences between open and closed approaches.
actions, open cluster shows an average intensity Regarding performance (see Table 1) we
on these tools statistically higher than closed (inte- obtained only some preliminary indications and
grated and specialised still similar each other and mainly focus on innovative performance. Indeed,
in intermediate position between open and closed). we believe that the analysis of overall companys
As suggested by literature (Pisano & Verganti, performance is a complex topic due to the fact it
2008) these type of actions are necessary to ensure can be explained only by considering a wide set
successful collaborations and this is confirmed of factors that can have opposite impacts. With
by our evidence. Integrated and specialised have this premise, we studied the differences between
got a lower degree of openness (the integrated clusters only with an explorative purpose to define
Table 2. Information on open and closed and main differences (dummy variables)
Variables Sample Cluster 1 Cluster 4 Significance

(n=99) (n=43) (n=36) (Chi-square test)
Open Closed
Industry
Mechanic/machinery 41% 46% 34% 0.29
Metallurgy 14% 12% 18% 0.38
Textile 8% 7% 9% 0.7
Food 4% 5% 3% 0.7
Electronics 7% 7% 6% 0.9
Chemical/pharmaceuticals 10% 14% 6% 0.42
Organizational context
Organization input-oriented 44% 53% 33% .05
Existence of organizational unit supporting 35% 47% 22% .02
collaboration
181
next steps of research and in terms of innovative here, that is difficult to generalise because of the
performance (i.e. factor that is a combination of limited number of companies included in these
five items). We found that open cluster seems clusters. Open and closed innovators actually
more performing than closed (and better than the emerge from this analysis as two significantly
sample average). Moreover, by studying correla- different open innovation models, especially in
tions between innovative performance and partner terms of:
variety, we found a high and significant relation.
Particularly strong were the relations between Approach to innovation: open innovators
the single item The companys competence base are those who choose an aggressive tech-
was enlarged and partner variety and the level nology and innovation strategy, in which
of innovativeness of new products/processes was they work to be technological leaders, to
improved and still the partner variety, suggest- come first to the market with new products,
ing that the open is more innovative and that the to lead the technology evolution with su-
innovativeness seems to be linked to the partner perior know-how, to pursue even radical
variety. Another clue for this type of interpretation innovations. In other words, it can be ar-
is given by the specialist innovative performance: gued that opening the innovation process
higher than integrated just in these two items. to a wide variety of partners and all along
Anyway, it is important to keep in mind that they the innovation funnel is conceived as part
are only clues, not confirmed by the analysis of of an aggressive strategy;
companys overall performance (measured by R&D intensity: open innovators invest
means of ROS and ROA), that is even greater in more in R&D than closed, and this in some
the closed than in the open cluster. Thus, further way confirms the difference in the strategy
investigation on performance is surely required. for the two clusters; aggressive innovators
spend significantly more in R&D and, as
part of their effort, they spend for opening
DISCUSSION up their innovation process. Another inter-
esting explanation of this result refers to
In this chapter, different models for open innova- the need to invest in internal competences
tion are studied, by means of a survey conducted in order to be open, as the absorptive ca-
among 99 Italian manufacturing companies, with pacity of the company is critical to iden-
respect to two variables: the partner variety and tify and exploit potential collaborations
the innovation phase variety. Although these two and exchanges with external partners. In
variables are highly correlated (.71; p<.001), inter- perfect coherence with this result, there
mediate cases (i.e. companies for which the two is evidence that an input-oriented organi-
variables are different in their value, low or high) sational structure for the R&D activities,
were found among companies. As a result, four which maximises the absorptive capacity,
different models for open innovation were found is typical for open innovators rather than
in the practice of companies: open innovators, for closed;
specialised collaborators, integrated collaborators, Type of objectives: in coherence with the
closed innovators. The two extreme models open two results above, open innovators, with
and closed - are far more diffused (in coherence respect to closed ones, mainly open their
with the correlation found between the two innovation process to achieve benefits re-
variables), so the intermediate ones need a more lated to internal competences, i.e. to deep-
dedicated analysis to confirm what is emerging en and integrate the knowledge base, to in-
182
crease creativity and flexibility, to achieve that dont have a highly aggressive approach
excellence in knowledge production. On to innovation and that dont want to invest too
the other side, closed innovators are rather much for opening up the innovation process. As
focused on reducing the costs and risks of a consequence, these companies have limited
innovation, by sharing them with external expectations in terms of benefits deriving from
partners; open innovation, but do not want to completely
Organisational and managerial actions abandon the opportunity to access to external
implemented to support openness: open sources of knowledge and competencies. As an
innovators have actually modified their example, lets take a specialised collaborator,
organisational structure and management the electronic company cited above: the general
techniques, by introducing roles, routines manager wanted to spend a limited amount of
and tools especially dedicated to the de- resources on studying opportunities for opening
sign, development and implementation of the innovation process, but, at the same time,
collaborations with external partners; R&D managers clearly felt the need to integrate
The results concerning the two inter- their knowledge with external contributions com-
mediate models of open innovation, i.e. ing from other industries, universities, excellent
specialised collaborators and integrated research centres. As a consequence, they decided
collaborators, are less robust, because of to open only the idea generation phase to a wide
the limited number of companies found variety of partners.
for these two clusters. As a consequence, Even in terms of performance the four models
only some tentative interpretation of are different and a first tentative conclusion in
the achieved results can be put forward. this sense is that the degree of openness is posi-
However, it is relevant to reflect on such tively correlated to the innovative performance:
results since they can represent the start- from closed innovators to open ones the level of
ing point for a future research aimed at innovative performance increases (in terms of
verifying whether these two open innova- new products and services, time to market, level
tion models can actually represent a valid of novelty, learning, costs for new products). But
alternative to open and closed models and, this does not seem to have an effect on the com-
if so, in which specific context condi- panys economic performance in the short term,
tions. By making a synthesis of all results as already discussed above. This result is in con-
achieved for specialised and integrated trast with other studies (Lichtenthaler 2009), which
collaborators, it seems that there is a sort found a positive correlation between the degree
of continuum in the openness of compa- of openness (measured in terms of intensity of
nies, in terms of the most relevant context outbound licensing) and the economic perfor-
conditions emerged in this study, as shown mance (measured through ROS and ROI). In our
in Figure 3. opinion, the relation between performance and
open innovation is very complex to be studied:
Figure 3 clearly shows that specialised and performance is intrinsically a multi-dimensional
integrated collaborators can be really considered concept (think, just to quote a well known frame-
as intermediate models: the most significant work, to the balanced scorecard concept), as well
variables that characterise the open and closed as the degree of openness. This can probably lead
models, in fact, have values that are between the to many different measures for evaluating the
two extremes4. Integrated and specialised col- relationship between openness and performance
laborators are thus viable options for companies that certainly requires further in depth studies.
183
Figure 3. Specialised and integrated collaborators between the two extreme models (C=closed innova-
tors; I=integrated collaborators; S= specialised collaborators; O=open innovators)
CONCLUSION AND FUTURE In conclusion, the chapter introduces a new

RESEARCH DIRECTIONS perspective that integrates both the number/ty-
pology of partners and the number/typology of
Our area of research is related and contributes to phases, in order to understand if such perspec-
innovation because collaborations and networks tive can confirm the existence of different open
(in particular, technological collaboration), and the innovation models. Moreover, it provides useful
proper ways to manage them, are today largely managerial implications because it suggests that OI
recognized as means to improve, or at least to sup- is not an on/off choice, but it can be interpreted
port, firms innovation capabilities (Chesbrough, and adopted with different degrees (Chesbrough,
2006). The study is conducted by means of a 2003b), consistently with the companys specific
survey involving 99 Italian companies operating context. Thus, intermediate open innovation mod-
in manufacturing industries. Different models els (i.e. integrated and specialized collaborators)
for open innovation are found in the practice of are viable options for companies that do not have
companies: open innovators, specialized collabo- a highly aggressive approach to innovation and
rators, integrated collaborators, closed innovators. that do not want to invest too much for opening up
The two extreme models open and closed - are the innovation process. As a consequence, these
far more diffused and actually emerge as two companies have limited expectations in terms of
significantly different open innovation models, in benefits deriving form open innovation, but do
terms of approach to innovation, R&D intensity, not want to completely abandon the opportunity
type of objectives, organizational and manage- to access to external sources of knowledge and
rial actions implemented to support openness. competencies. We suggest that intermediate mod-
The two intermediate models - specialized and els for opening the innovation process can be a
the integrated collaborators - although in need of first relevant topic for future research; performance
further empirical investigation, provide evidence of open innovation can be a second one and, fi-
in support of Chesbroughs (2003b) theoretical nally, a third one may concern the study of open
proposition that businesses may be located along innovation models in a dynamic perspective, i.e.
an Open Innovation Continuum. analyzing the path followed by companies to open
their innovation process (Chiaroni et al., 2009).
184
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models found in this study may be interpreted as (2002). Learning orientation, firm innovation
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KEY TERMS AND DEFINITIONS ENDNOTES
Absorptive Capacity: The ability of a firm to 1

The other two items are: the specialization
recognize the value of new, external information, of the companys R&D activities and the
assimilate it, and apply it to commercial ends high importance of development activities
(Cohen & Levinthal, 1990). (the D part of R&D) relative to the firms
Closed Innovation Model: In closed innova- overall R&D activities (Lichtenthaler and
tion model a company generates, develops and Ernst, 2009).
commercializes its own ideas. This philosophy 2
We applied the criteria suggested by the EU
of self-reliance dominated the R&D operations (European Commission, 2005) for classify-
of many leading industrial corporations for most ing firms on the basis of their size. Specifi-
of the 20th century (Chesbrough, 2003b). cally, an autonomous company is classified
Inbound Open Innovation (Outside-In Pro- as: (i) small, if the number of workers is <
cess): Enriching the companys own knowledge 50 and turnover is <= 10 million or the
188
annual balance sheet total is <= 10 million and each typology of phase are not reported
(ii) medium, if the number of workers is in this chapter but they are available upon
between 50 and 250 and turnover is between request.
10 and 50 million or the annual balance 4
Only R&D intensity is lowest in the case of
sheet total is between 10 and 43 million ; integrated collaborators, but this is coherent
(iii) large, if the number of workers is > 250 with the fact that closed innovators need
and revenues > 50 million or the annual to invest a lot in R&D, since they have to
balance sheet total is > 43 million . develop internally all tangible and intangible
3
Data about correlations between intensity of resources needed for innovation.
collaboration with each typology of partner
189
APPENDIX
1. Partner variety: in the last five years you have collaborated with a wide variety of external actors
2. Phase variety: in the last five years you have collaborated on a wide variety of phases.
3. Intensity of collaboration with (each) partner: in the last five years you have collaborated very
strongly with the following partner (University and Research centres, Technical and Scientific
Service Companies, Governmental institutions, Customers, Suppliers, Competitors, Firms operat-
ing in different sectors of activity).
4. Intensity of collaboration on phase: in the last five years you have collaborated very strongly
on the following phases (Idea generation, Experimentation, Engineering, Manufacturing set up,
Commercialization).
5. Objectives of collaboration
a. aims to extend skills, competences and creativity:
i. Enlarge the companys competence base
ii. Increase the flexibility of the internal organization
iii. Stimulate creativity and idea generation capability
b. aims to share risks and costs:
i. Reduce or share the risks of innovation
ii. Reduce or share the costs of innovation
6. Approach to innovation (technology aggressiveness)
a. Investing for technological leadership
b. Aggressive acquiring new business areas by means of innovation
c. Influencing the industry structure and rules by means of products characteristics
d. Trying to recruit the best researchers and experts available on the market
e. Giving emphasis on radical rather than incremental innovation
7. Organizational and managerial actions for open innovation
a. Top management is committed towards the maximization of the collaborations results
b. Personal relationship of the R&D manager are exploited to start technological collaborations
c. For each collaboration, there is a champion acting as a facilitator for the collaboration
success
d. The company formally evaluates the objectives and risks of the collaboration
e. The company analyses and selects the potential partners with a formal and explicit process
8. Innovative performance
a. The companys competence base was enlarged
b. The average development costs of new products/processes was reduced
c. The time to market of new products / processes was reduced
d. The level of innovativeness of new products / processes was improved
e. Sales volume and market acceptance of new products was improved
190
191
Chapter 11
Effects of Product Development
Phases on Innovation
Network Relationships
Christina berg
Lund University, Sweden
ABSTRACT
In research literature, product development has frequently been associated with four distinct phases:
introduction, growth, maturity, and decline. While these phases have been related to and used for the
study of product life cycle, market strategies and competition, less or no attention has been given to the
subject of Innovation Network Relationships (INRs), and more specifically, to whether and how INRs
are affected by these Product Development Phases (PDPs). Based on a literature review of Resource
Dependence Theory (RDT) and four case studies, this chapter contributes by discussing how various
INRs are affected by PDPs of an innovative firm. Findings include: (1) the specific needs and resource
dependence by the innovative firm during different PDPs affect the status of the firms INRs, whereas
new relationships are built and old ones are finished; (2) during product development, the INRs become
increasingly complex where network parties become negative resources of the innovative firm through
increased uncertainty being introduced into previous relationships; and (3) the development of INRs
cannot be captured on a dyadic level, but various parties relationships with one another need to be
considered.
DOI: 10.4018/978-1-61350-165-8.ch011
Effects of Product Development Phases on Innovation Network Relationships
INTRODUCTION ones are finished; (2) during product development,

the INRs become increasingly complex where
Studies on products and markets often describe network parties become negative resources of
their development as consisting of four phases: the innovative firm through increased uncertainty
introduction, growth, maturity, and decline being introduced into previous relationships; and
(Christiansen, Varnes, Gasparin, Storm-Nielsen & (3) the development of INRs cannot be captured
Vinther, 2010; Levitt, 1965). These PDPs would on a dyadic (between two parties) level, but
expectedly follow one another, and companies various network parties relationships with one
would act differently in the various phases (Moon, another need to be considered. The concept of
2005). The phases have been described in terms negative resources is developed in the chapter to
of how a company should act in marketing, and express how relationships of a company may be
what the competition looks like during the differ- negative in that companys relationship with other
ent phases (Lehmann & Winer, 2008). The PDPs firms. Negative resources thus describe assets or
could, however, also be considered in terms of relationships of a company, and mean that other
INRs. INRs here describe the ties to external parties companies become less inclined to establish or
that an innovative firm is connected to by means maintain a relationship with the firm. This chapter
of contracts, collaboration, ownership, or business contributes to the field of RDT through discus-
deals. Thus, they include relationships with both sions on negative resources in terms of connected
equity and non-equity partners, as well as pure relationships and how such relationships need to be
business partners. An innovative firm describes incorporated to fully understand the development
a new venture that was created to market a new of dependence, resource provision and balance/
product or service idea. imbalance between them. This chapter further
External parties have proven to be important contributes to research into business networks by
for the development and prosperity of a company showing that business relationships may develop
(Baldwin, Hienerth & von Hippel, 2006; Heide & and expire as a consequence of an innovative firms
John, 1990; Johnsen, Phillips, Caldwell & Lewis, PDPs. In addition, this research contributes to the
2006; Magnusson, 2003; Thomke & von Hippel, field of innovation by demonstrating how these
2002; berg & Grundstrm, 2009), yet less seems PDPs involve different needs and dependencies
to be known about how the relationships with on network parties.
these parties are affected by the development of an The chapter is structured as follows. The next
innovative firm. The purpose of the chapter is to section describes the theoretical point of depar-
discuss various INRs and how they are affected by ture, RDT, and also refers to the PDPs and INRs.
the PDPs of an innovative firm. Various network Thereafter, the method is described. The empirical
parties are discussed based on their roles as sup- part of the chapter is based on four case studies
pliers, customers, finance bodies, and so on, and of innovative firms. These are summarized after
how they are affected by the phases of develop- the method section and then analyzed in terms
ment (introduction, growth, maturity, and decline). of the development phases, the network parties,
The chapter shows that: (1) the specific needs and and whether and how RDT explains the effects
resource dependence by the innovative firm dur- on network relationships in the various phases.
ing different PDPs affect the status of the firms The chapter ends with conclusions and ideas for
INRs, whereas new relationships are built and old further research.
192
THEORETICAL FRAMING a means to decrease uncertainty (Doz & Hamel,

1998; Gomes-Casseres, 1996). The wider network
This section outlines the theoretical point of de- aspect of resource dependence suggests that other
parture, RDT, and briefly introduces research on relationships are kept to ensure that alternatives
PDP and network relationships in innovations. are available, to decrease dependence on a single
party and to maintain options should the first
A Resource Dependence View relationship become imbalanced to the detriment
on Network Relationships of the company.
While much of the focus in power and resource
RDT was developed from power-dependence dependency theory remains on the dyadic rela-
(Emerson, 1962; Hgberg, 1999) to explain why tionship level, a wider network is consequently
companies commit into business relationships considered, however mostly as rescue plans or
with one another and the consequences of such to decrease imminent dependence on a single
relationships. The power-dependence idea sug- actor. Network parties may act as alternatives to
gests that relationships would only continue as decrease dependence on existing business partners,
long as there is a balance between power from or may become allies to retain a balance towards
one firms perspective and dependence from its business partners.
business partners point of view. The idea thus
focuses on the dyadic level of relationships to Phases of Development
explain their continuity. When not in balance,
four basic strategic alternatives would expectedly The product life cycle is frequently used in market-
apply: (1) the party with less power withdraws ing and product management research to depict
from the relationship; (2) extension of the power how products, or even companies or industries
network, leading to bounding with and creat- progress (Agarwal, Sarkar & Echambadi, 2002;
ing new relationships; (3) emergence of status, Rink & Swan, 1979; Tellis & Crawford, 1981; Van
where the party with less power is given status De Ven & Scott Pole, 1995). Levitt (1965) outlined
recognition; or (4) coalition formation, meaning the product life cycle as consisting of market
that alliances are created with other actors. This development/introduction, growth, maturity, and
consequently means that when a relationship decline. The introduction phase describes how a
becomes imbalanced, this would potentially lead product is first brought to market without there
to other parties being considered or that changes necessarily being a demand for it, and without it
are induced on the dyadic level. necessarily having reached complete functional-
RDT developed from this (Pfeffer & Salancik, ity. The growth phase is marked by increased
1978), while focusing more on how companies demand and competition. Maturity describes how
should make themselves as little dependent on the product reaches a peak in terms of number of
other parties as possible. Consequently, RDT users, while also decreasing the number of new
replaced the discussion on power with a similar users. The decline phase refers to how custom-
one on resources. Dependence and uncertainty ers abandon the product. Each phase means new
became those variables to minimize, while si- challenges, and these could be expected to focus
multaneously optimizing company autonomy. on various types of resource needs, and conse-
Pfeffer (1972) used this argument early to explain quently also affect resource providers, dependence
mergers (cf. Katila, Rosenberger & Eisenhardt, between firms and thereby network relationships
2008; Thompson, 1967), while the alliance litera- in different ways.
ture has explained joint ventures and similar as
193
Network Parties in Product driven or customer initiative). The case companies

Development however share resemblances in terms of how they
now are part of mature industry structures, and
Several researchers have highlighted external that they have relied on external parties for sup-
parties in innovations. Von Hippel (1978), for port in their early developments.
instance, describes customers in idea generation. The data collection for the four case studies
Lee, Lee and Pennings (2001) focus on venture consisted of interviews with owners, venture
capitalists. Chandra and MacPherson (1994) capital companies, managers, innovators, cus-
describe consultants, suppliers and customers tomers, suppliers, and other external parties. A
in product development. berg and Grundstrm total of forty-one interviews were conducted
(2009) summarize external parties to innovative between 2003 and 2008. The interviews were
firms in the following categories: innovators, complemented with a secondary data analysis to
financial backers, non-equity partners, owners, gather background data on the firms and check
suppliers, customers, and public bodies. It is thus the accuracy of interviews (Welch, 2000). Re-
evident that various network parties provide the sults from the interviews have previously been
innovative firm with different resources, and the presented in berg and Grundstrm (2009). The
resource provision could, as argued in this chapter, article by berg and Grundstrm (2009) focused
be expected to vary with the PDPs of the innova- on challenges and opportunities related to the
tion. But how are the network relationships then development of innovative firms networks, and
affected by the various PDPs? was explorative in that sense. Compared to this
study, the present chapter deals with effects on
INRs and use the RDT lens to understand such
METHOD relationship effects. It further relates network
parties to various PDPs.
This chapter is based on case study research. The In the analysis procedure, notes from inter-
case study method enables the exploration of data views, interview transcripts and secondary data
and allows additional analyses on previously col- were coded. The coding was first performed to
lected data (Dul & Hak, 2008; Yin, 1994). Case capture the content of the individual interviews,
study research is often criticized for not allowing and as a second step to compare data on a cross-
generalization of findings. However, many case interview, cross-case basis. The second step also
study results would be expected to be transfer- entailed the analysis of the data using the frame-
able to other situations and cases (Hirschman, work of RDT and the division of development
1986). Such arguments are further strengthened into PDPs. Findings from the four cases presented
if similar findings are repeated between various in this chapter confirm each other through indi-
cases studied while not being the reason for their cating similar findings (Guba & Lincoln, 1989;
selection. Those particular companies studied here Hirschman, 1986). An additional four case studies
are innovative firms in mature industries. They have recently been performed to further ensure the
have all gone through the phases of introduction transferability of the findings from this chapter.
and growth and reached a phase of maturity or Thus, and as a consequence, the findings sug-
even decline, which made them suitable for this gested in this chapter could be expected to be
chapter. They were chosen based on how they general (with certain case-specific differences)
represent various innovations, and their different for INR effects in various phases of innovative
reasons for founding the companies (technology- firms development. Further, the conclusion on
194
how various INRs need to considered beyond also had strong foundations in university environ-
their dyadic relation with the innovative firm finds ments. For one of the companies, its financial
support beyond those specific circumstances of backers were industrial actors in the industry
innovative firms, and contributes to RDT through the company aimed for (Company A), while the
describing network relationships as positive and other two companies (B and C) were supported
negative resources of a firm. by venture firms with good knowledge on how
to develop companies but less knowledge on the
specific innovations developed.
EMPIRICAL FINDINGS
They were financial bodies, first and foremost
This section summarizes the four cases through with no actual knowledge on our product.
describing them in the various phases of develop- (Company C.)
ment. All four companies are small or middle-sized
companies with a turnover running from six to An industry-related venture firm allowed for
two-hundred million SEK, and with five to fifty contacts with other firms through its network,
employees. Companies B and D are the largest while those supported by pure financial bodies
of the firms, while Companies A and C still have developed skills in how to get to market, without
less than ten employees each. They were founded these skills being specifically encompassed by the
in the 1980s to the early years of the 21st century, company and without it leading to any inherited
Company B being the oldest of the firms. When relationships. The innovative firm built on a cus-
they were first established, they all operated on tomer initiative (Company D) relied heavily on
the Swedish market, but have since expanded into the customer to understand specific needs related
new geographical markets. Three of the compa- to the product, and the customer also helped in
nies (Companies A, B and D) are today part of spreading the innovation to other customers.
multinational industry groups, while Company C
remains domestically owned. Often when we are about to invest in a new system,
we check if any colleagues have it. (Customer
Introduction Phase to Company D.)
The four cases studied all describe companies

developing software solutions, either to be Growth Phase
implemented in other products or to be sold as
standalone solutions. Three of the companies All four companies managed to establish rela-
(Companies A-C) developed their innovations tionships with other industry actors: suppliers,
based on technological ideas, while the fourth additional customers or money providers. In the
(Company D) based its innovation on a cus- early phases of development, there was no conflict
tomer initiative. This was also the company that of interest between these parties, although several
developed the standalone solution. Those three of them actually were competitors. Additional
companies (Companies A-C), that were not ini- relationships were mainly established during the
tially backed by a customer providing ideas and growth phase, and network parties then helped
financial resources, became dependent on such the innovative firm to grow through providing
actors as venture capital companies or incubators initial income (Company D) and financial re-
in their early development. The three companies sources to the innovative firm (Companies A-C).
195
The network parties reasons for doing so much firms reached a maturity phase. Network parties
related to expectations on future returns: in terms experienced competition with the acquirers, either
of return on investments (venture firms), in terms because they were competing industry parties
of own revenues (customers and suppliers), or (Companies A and B), or as a result of how the
in terms of those products provided (customers). acquisitions changed their abilities to realize those
Venture firms had an explicit exit plan, and hence long-term intentions that the network parties had
connected such returns to that point, while other had with the innovative firm (Companies A-C).
network parties often saw returns as long-term Thus, for network parties, the acquisitions intro-
and as benefitting the parties in also other than duced an imbalance in their relationships with
financial terms. the innovative firms. Those future resources ac-
counted for previously would not be realized, and
It was clear from start that their (the venture the connection between the innovative firm and
firms) interest was only temporal. (Company B.) its new owner constructed a negative resource in
that way, as well as a result of competition. For
Relationships were often strong and close, network parties, the maturity phase hence caused
and thus marked by a difference in time between them to lose resources accounted for previously.
experienced dependence and resource provision
between the innovative firm and its network Decline Phase
parties.
Unless the acquisition was performed successfully,
Maturity Phase the innovative firm reached a decline phase. This
resulted from network parties no longer provid-
To secure financial resources long-term, the in- ing ideas, in combination with the performance
novative firms were acquired. The acquired parties and actions of the acquirer. Such declines were
(that is, the innovative firms) were active to various foremost seen in two of the four cases (Companies
extents in those processes, but clear for all cases C and D). In the first of these (Company C), the
is that the firms looked for long-term financial acquirer only had interest in part of the innovative
solutions for further growth at that point in time. firm, and hence, the rest of the company was not
given sufficient resources to continue, at the same
A new owner was needed if we should be able time as those network parties that had previously
to develop further. (Company C.) supported its development decided to dissolve their
relationships with the innovative firm. The other
The acquisitions meant that the companies case (Company D) describes how the acquirer
indeed reached those financial resources provided, continued to make additional acquisitions. These
but also meant a lessened focus on developing in- subsequently drained the acquirers financial re-
novations further. This was either a consequence of sources, in turn affecting the innovative firm and
the acquirer having other intentions with the firm finally ending up in liquidation of the acquirer and
(Company C) or resulted from a more restricted the innovative firm. Network parties experienced
innovation process than previously (Companies A, this decline as fewer resources being provided,
B and D). In addition, the acquisitions meant that and also that expectations on future resources
previous business partners distanced themselves increasingly disappeared. Dissolutions or further
from the innovative firm (Companies A-D). The distancing in network relationships followed.
acquisitions largely meant that the innovative
196
ANALYSIS ous phase, made them continue their relationship

with the innovative firm, where the potential for
Based on the cases, it seems apparent that several returns in terms of actual products increased, and
different network parties contributed resources to hence also for financial returns, while the per-party
various extents, and at various times, to the devel- dependence of the innovative firm decreased. In-
opment of products and the company established cubators or universities in this phase realized that
for the sake of the product. The innovative firm their resources were no longer needed, and such
equally became dependent on these resources relationships were often dissolved. The innovative
for its development. As new parties entered, firm was not as dependent on their resources, and
such dependence decreased while also leading in their constructs as incubators, the innovative
to increased uncertainty among network parties, firm no longer provided the right fit. What is
resulting in the possibility of new relationships more, based on additional parties being included
being considered as negative resources by the in the network (e.g., more customers), each partys
network parties. importance for the innovative firm decreased,
The introduction phase was marked by in- potentially causing an imbalance in individual
novators providing knowledge skills related to relationships. Resources provided by the innova-
the innovation, and customers or financial bodies tive firm were less customized, for instance, and
providing financial resources to enable possible less attention was paid to individual needs as a
growth. These network parties were affected by consequence, thus creating an increased distance
the introduction phase in terms of how it provided in relationships with customers. For network par-
them with the potential for future business op- ties, however, those other established relationships
portunities; hence, the resource balance between of the innovative firm often were considered as
the innovative firm and its network parties was positive resources of the innovative company that
based on how resources provided were expected vouched for its continuity. Additional customers
to equal future returns. Such returns were ex- increased the likelihood of successful develop-
pressed in terms of finances for venture firms, ments, for instance. Therefore, while individual
and in longer-term perspectives for innovators. To relationships became increasingly distanced, they
customers, it was instead dependence on future still remained. Little conflict was seen between
resource provisions (in terms of the innovation various relationships in this phase, and they were
as a complete functional product) that drove the thus considered rather as positive resources of
customers to that phase, where they were depen- the innovative firm, decreasing uncertainty in the
dent on the innovative firm for its knowledge in relationship. Similar to the introduction phase, the
those specific areas that the customers did not growth phase meant that relationships were close,
comprehend themselves. Relationships during the while also being marked by less-specific resources
introduction phase were close, yet often marked and actors of those network parties.
by how companies only included a limited amount The maturity phase was in the cases reached
of resources and actors in them. There was a bal- through acquisitions. These acquisitions further
ance between the expectations for future returns increased the distance in existing network rela-
and the dependence on these external parties by tionships, or caused them to dissolve. Previous
the innovative firm. research has related acquisitions to how a balance
The growth phase mostly entailed similar net- can be recreated in relationships, or how they may
work parties as in the introduction phase. However, be a means to decrease dependence and uncertainty
more customers or venture firms were included (Pfeffer, 1972). This chapter, however, shows
in the network. Similar balances, as in the previ- that the maturity phase meant that an imbalance
197
was created as a consequence of the acquisitions. ship with a firm, the decreasing dependence was
This imbalance can be explained twofold. First, less than the perceived decline in the need for
the network parties faced how their future posi- the resource.
tions with the innovative firm were challenged, Table 1 summarizes the various phases. The
and therefore reevaluated their relationships as figures (i) to (iv) refer to the various ways a com-
future resources from the innovative firm would pany would be expected to react based on RDT,
not meet their needs. Second, the relationship when the relationship with another party becomes
established between the innovative firm and the imbalanced: (i) withdrawal of the party with less
acquirer could be seen as a negative resource, power from the relationship; (ii) extension of the
resulting in less present positive resources from power network, leading to bonding with and creat-
the innovative firm. The negative resource in terms ing new relationships; (iii) emergence of status,
of the ownership ties with the new owner resulted where the party with less power is given status
from competition between those other network recognition;, or (iv) coalition formation, meaning
partners and the owner, or was a consequence that alliances are created with other actors.
of other network parties intending to acquire the Based on Table 1, certain issues would need
innovative firm. Such an acquisition would not to be addressed compared to RDT. For one thing,
take place, since the innovative firm had found it is not certain that it is the party that negatively
another owner. The network parties did not au- experiences an imbalance is the one to act.
tomatically choose another party to compensate Rather, as seen in the decline phase, the stronger
the loss, which underlines how, while they were party was the one withdrawing from the relation-
the parties taking the initiative to dissolve the ship. Secondly, relationships of the network
relationships, they did not dissolve the relation- partners may need to be considered, thus extend-
ship as a result of other options. ing the focus beyond the dyadic level of analysis.
Two of the companies reached the decline Here, they are introduced as positive and negative
phase. Such a phase is marked by less competi- resources, depending on whether they bring cred-
tion and also decreasing customer interest (Levitt, ibility to the innovative firm or lead to competition
1965). This affected network relationships in between such parties and the acting network
terms of how customers dissolved their relation- party.
ships with the company, a consequence of them
not thinking that the innovative firm provided
resources that were sufficiently attractive. At this CONCLUSION
point, network relationships had been increasingly
distanced during the maturity phase, and were This chapter discussed how INRs are affected by
also marked more by business-related buyer-seller PDPs of innovative firms. Findings of a literature
conditions than by financial resource provisions. review on RDT and case studies were:
The decline phase can be described as how business
partners dissolved their relationships as a conse- 1. the specific resource needs of the innovative
quence of their dependence on the firm actually firm during various phases of development
decreasing. Other alternatives were indeed avail- leads to new INRs being established while
able, but such dissolutions resulted rather from previous ones are dissolved,
disappointments in the present relationship than 2. during the development, the network be-
from the attractiveness of other options. While comes increasingly complex, also leading
decreasing dependence would normally make a to competition between network parties, and
company more inclined to continue its relation-
198
Table 1. Innovative Firms and Network Parties in the Various Phases
Innovative firm Network parties Balance/Imbalance

Introduction Dependent on resources (finan- Expectations on future returns Balance
cial and idea generation) as resource
Growth (ii) extension of the power net- (i) the party with less power Imbalance: network parties
work, leading to bounding with withdraws from the relationship power decreased.
and creating new relationships Incubators, universities with-
Decreased dependence on indi- drew
vidual parties as network grew
Maturity (iv) coalition formation, mean- (i) the party with less power Imbalance through acquisi-
ing that alliances are created withdraws from the relationship tion: network parties perceived
with other actors Parties dissolved their relation- acquirer as negative resource of
ships as the innovative firms the innovative firm, leading to a
connection with its acquirer decrease in resources.
was considered negative, also
increasing uncertainty
Decline Here the party that became less Imbalance through network par-
dependent withdrew (in contrast ties decreased dependence.
to (i)).
3. the development of INRs cannot be cap- similar considerations would be anticipated: the
tured on a dyadic level, but various parties network parties would keep their relationships with
relationships with one another needs to be the innovative firm as long as they provide them
considered, where relationships as positive with relevant resources (presumably in terms of
and negative resources become a means innovations or returns on investments), and they
to capture network parties impact on a would spread their risks to other parties if their
relationship. dependence on the innovative firm becomes too
strong.
RDT suggests that the reason that the dyadic While resource dependence theory may be
relationships are there in the first place is the used to explain changes on a dyadic level, as
companys needs for resources provided by others, well as why additional network relationships
since it cannot make everything itself. If relating are established (and indeed dissolved), indirect
this to INRs during various PDPs of an innova- effects in networks are not as easily explained.
tive firm, this would suggest that the innovative Such effects include how changes in one dyadic
firms resource needs vary with the PDPs. As a relationship affect others, and may be seen as
consequence, the innovative firm would choose domino effects along a supply chain or how indi-
to establish yet also dissolve relationships with rect business relationships affect one another on
different network parties (Alajoutsijrvi, Mller a network level (Havila & Salmi, 2000; Hertz,
& Thtinen, 2000; Dwyer, Schurr & Oh, 1987) 1998). To exemplify the latter, this includes how
as it develops. Such changes in resource needs a dissolved customer relationship may lead to
would consequently affect the INRs. Secondly, the other customers dissolving their relationships
innovative firm would establish new relationships with the same supplier. Such other relationships
to outweigh possible imbalance in existing ones, could be accounted for as positive or negative
and the firm would aim to decrease its dependence resources of a firm, but this has not previously
on individual parties through either alliances with been addressed in RDT. It could also be described
other firms or by dissolving relationships in im- as how increased uncertainty is introduced into a
balance. From the network parties perspectives, relationship, but this is somewhat different from
199
how uncertainty is usually dealt with based on a FUTURE RESEARCH DIRECTION

resource dependence view. It is the business partner
that becomes embedded in increased uncertainty, This chapter is based on a literature review and em-
rather than describing uncertainty on behalf of pirical findings of four case studies on innovative
the acting firm. This chapter hence introduces firms of software solutions. For future research, it
the discussion on negative resources, where these would be interesting to perform complementary
describe how relationships of one party through studies related to other products and services. It
competition between actors may be negative for would further be of interest to measure innovation
other firms. When judging the balance or imbal- performance related to various parties participa-
ance in a relationship, these relationships become tion, to conclude whether or not certain parties
negative resources of the party and hence lead to are more important than others.
an imbalance between dependence and resources
in the relationship.
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consists of three or more interrelated firms.
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plaining development and change in organizations. developed by Levitt (1965), PDP the stages of
Academy of Management Review, 20, 510540. products and markets consisting of introduction,
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202
203
Chapter 12
Maturity in Innovation
Network Management
Caspar Van Rijnbach
TerraForum Consulting, Brazil
Gustavo de Boer Endo

Suzana Monteiro Leonardi

ABSTRACT
Companies are focusing increasingly on the creation and maintenance of external networks for innova-
tion. The purpose of this chapter is to introduce the reader to the concept of network management and
demonstrate the principal attributes that impact the formation and optimization of innovation networks,
based on the networks objectives, the combination of the characteristics of the networks participants
as well as the networks organizational format to attract and maintain the partnership. To reach this
purpose, we present the results of a benchmark study undertaken in Brazil, the United States of America
and Europe between March and June 2009. In this study, we interviewed executives at 24 leading com-
panies known as innovators in their industry. Through the results we were able to identify a maturity
model consisting of four levels for innovation network management: initiators, explorers, established
and world class.
INTRODUCTION This situation has stimulated companies to

create innovation models based on collaboration
The complexity of current Research, Development with external sources, such as universities, clients,
and Innovation activities (R,D&I), ever increas- companies from other sectors, or even competitors,
ing cost of these activities, more sophisticated searching to improve their innovative capacity
customer demands and shorter product life cycles, and performance. This new framework is being
have raised the gap between the need for innova- referred to as Open Innovation.
tion and what companies can deliver internally. With the concept of open innovation becoming
common, companies are focusing increasingly on
DOI: 10.4018/978-1-61350-165-8.ch012
Maturity in Innovation Network Management
the creation and maintenance of external networks Our research was undertaken amongst 24
for innovation. Unfortunately, this often occurs Brazilian, European and American based firms.
without using a holistic approach to the archi- Our method was based on testing our theoretical
tecture of networks and individual participants. framework mainly through structured, partially
Companies often look at specific competencies qualitative, partially quantitive interviews. This
that need development and do not evaluate the study was for a large part concluded in 2009 and
network composition and its effectiveness based preliminary results of the research were presented
on the specific networks objectives and its con- during the International Society of Professional
tribution to the overall company strategy. This can Innovation Management (ISPIM) conference in
create malfunctioning of the networks, not being Austria in 2009.
able to obtain the networks goals and thereby not Our research amongst the 24 international
having the impact as expected on the companies organizations, showed that some common good
strategic objectives. practices exist among companies when it comes
Much has been written about innovation net- to open innovation management. Although some
works and their management. Literature includes practices partly depend on the companys industry
discussions of how management of external net- or R,D&I investment levels, we see that many
works differs from the more traditional way of practices are common and their use depends on
managing strategic alliances (a.o. Gulati, 1998) the companys level of maturity regarding open
as well as how to measure the effectiveness of innovation networks. The main results from our
specific networks (a.o. Segil, 2004). We identified study therefore was the construction of a matu-
an opportunity to research more extensivily how rity model for open innovation, based on four
organizations link different types of networks dimensions: strategic, relational, support and
to organizational strategic goals and define organization.
methodologies to optimize network composition We hope this study will contribute to a better
and architecture. It requires a portfolio view of understanding of how innovation networks work
networks, as already indicated by Vanhaverbeke and how to develop them. The maturity model
e Cloodt (2006). should contribute to the debate around best prac-
For this research we developed a theoretic tices in network management for open innovation.
framework on the ways companies are managing
the composition and structure of their innovation
networks, measuring the fit between the networks INNOVATION NETWORKS
objectives and the management activities of the
company in regards with the network. To develop Traditionally, Research and Development at large
this theoretical framework, we combined and organizations have been handled internally. Large
adapted several theoretical models developed in R&D organizations were seen as important assets
books and articles from renown authors in this to their companies and focused on discovering,
area. The main references we used were: Al- developing and commercializing technologies and
liance portfolios: designing and managing your products internally. This type of R&D is called
network of business-partner relationships (Parise closed innovation (Chesbrough & Vanhaver-
& Casher, 2003), Open innovation: researching beke, 2006).
a new paradigm (Chesbrough & Vanhaverbeke, However, the complexity of current Research,
2006) and Effective practices for sourcing in- Development and Innovation activities, ever
novation (Slowinski, 2009). increasing cost of these activities, more sophis-
ticated customer demands and shorter product
204
life cycles, have raised the gap between the need Licensing agreements
for innovation and what companies can deliver Networks for Subcontracting
internally (Slowinski, 2009; Chesbrough, 2007; Research associations
Van de Vrande, 2007). Joint research programs sponsored by
This situation has stimulated companies to governments
create innovation models based on innovation Computer databases and networks for
networks: a set of external sources, such as uni- exchanging technical and scientific
versities, clients, companies from other sectors, information
or even competitors that collaborate to improve Informal networks
their innovative capacity and performance. This Other networks
new framework is being referred to as Open In-
novation (Chesbrough, 2007). Networks refer to Since open innovation primarily refers to
inter-organizational relationships and can range establishing of intra and inter organizational rela-
from sparse dyadic, to dense multilateral relations tionships, Vanhaverbeke e Cloodt (2006) suggest
where actors tend to cluster in alliance blocks that the analysis of such relationships should be
(Lemmens, 2004). undertaken in five different levels, with growing
Innovation networks can be formed through degrees of complexity between them, as demon-
various forms of cooperation, as stated by Terra strated in the following figure.
(1999): The first level treats the relationship between
individuals of the organization for innovation.
Joint ventures and research corporations This level permits us to understand how compa-
Shared agreements for R&D nies organize themselves internally to take the
Agreements for technology exchange most advantage of external knowledge acquired
Direct investments: minority shareholding and referes to the internal culture of the company
driven by technology factors which either stimulates or prevents the usage of
Figure 1. Complexity in intra and inter organizational relationships (Fonte: Vanhaverbeke e Cloodt (2006))
205
this knowledge and technologies from outside of be managed to some extent a network orga-
the company. nization perspective (Moller & Rajala, 2007).
The second level treats the benefits that a Our research was undertaken based on the latter
company can obtain with open innnovation and view and focuses specifically on the capabilities
is related to the types of partners and the com- of the firm to manage its networks. We tried to
panys strategic objectives in relation to its open use a more holistic approach to the management
innovation model. of networks, or what might be called a portfolio
The third level considers the benefits and view, taking into consideration the five levels as
interests between two or more companues to cre- described by Vanhaverbeke e Cloodt (2006), with
ate links between them. This level is quite well emphasis on the fourth and fifth level, or what we
discussed in academic literature about strategic called, a portfolio view.
alliances by authors like Gulati (1998), Parkhe and
Miller (2000), Arino, de La Torre e Ring (2001), A Portfolio View of
and Parise and Casher (2003). They discuss how Innovation Networks
to select partners for innovation, evaluate risks
and returns, evaluate strategic alignment between Different innovation processes and innovation
two partners and how to generate a strategic al- activities demand different type of innovative
liance over time. capacities. Therefore, typically a company is in-
The fourth level considers inter organizational volved with various partners in different alliances
networks and studies how a leading company inte- or contracts. Increasing sharing of knowledge and
grates its external relationships within a coherent information between these different alliances is a
strategy and manages this over time. This level of great challenge. The various alliances with mul-
analysis takes in consideration that every specific tiple partners, form interdependent networks that
alliance is part of a network of interactions that often compete with each other - both internally
can either optimize or restrict diadic relation- and externally - for limited resources (Parise &
ships. Literature by authors such as Das and Teng Casher, 2003). In this situation it will be necessary
(2002), Ozkan (2007), Wixted e Holbrook (2008), to develop a portfolio approach to successfully
e Vanhaverbeke et al (2009, focuses on how to implement innovation network management.
manage the portfolio of allianes and partners. A portfolio of partners can be defined as a
The fifth level consists of understanding how collection of direct partners of a company that
innovative companies are embedded in insti- are the central components of a collaborative
tutional arrangements and are able to leverage network. In knowledge-intensive sectors, they
and optimize the innovative efforts of a group have become significant drivers for innovation
of companies gathered in an innovation system (Dyer & Nobeoka, 2000; Doz; Olk; Ring, 2000;
that can be can be of local, regional, national, Das; Teng, 2002; Oskan, 2007).
supranational or sectorial dimension. To be able to define a preferred portfolio of part-
When discussing innovation networks one ners one should answer the following questions:
should contemplate and manage relationships
at all five levels, a systemic approach to open For which part of the innovation process a
innovation. partner is required?
Some authors pledge that networks connect Which type of partners would be ideal to
naturally, that they are emergent a network obtain the companies objectives within the
of organizations perspective, others argue that specific part of the innovation process?
they are created intentionally and therefore can
206
Which combination of partners and com- Establish different strategies for each type
mercial type of relationships will optimize of network collaboration
knowledge exchange and results within the Understand how each partner selection and
network? its position in the network will affect both
individual relationship and overall network
The portfolio approach provides a clear view of performance
how to manage the network of partners - formed
both by allies and rivals. It allows minimizing and When it comes to managing partner networks
diversifying portfolio risk and leveraging syner- for innovation, and management of individual
gies of the network of partners as it permits the partnerships and alliances, one must take into
reflection on the future needs of potential partners account that these agreements lead to the creation
and developing processes that enable the sharing of dense networks of partners linked by direct
of information and knowledge among the network and indirect relations. External collaboration with
participants. different organizations brings with it a high level
of complexity related to culture, organizational
characteristics and trust. Partnerships are difficult
MANAGING AND FORMATION to manage, especially when there are cultural
OF INNOVATION NETWORKS differences between partners (Arino et al, 1997;
Camisn; Boronat, Villar, 2007). Understanding
Innovation network management refers to a sys- the concepts and implications of the formation of
tematic approach to work with external partner- strategic alliances to find the best setting and the
ships along the innovation processes. It includes appropriate partners for the innovation network
monitoring and managing the network created by is a major challenge for open innovation (Van de
all these relationships, evaluating its performance Vrande, 2007; Lichtenthaler, 2008).
and results and formulating strategies to improve One of the factors of complexity in managing
their performance (Harbison & Pekar, 1998; Man; partnerships and alliances is that it involves non-
Duyster, 2002; Nielsen & Mahnke, 2003). With hierarchical relations between different institu-
greater involvement and collaboration in the in- tions and demands an unusual combination of
novation process, a more strategic approach to skills from traditional managers: entrepreneurship,
management of innovation networks becomes business intelligence, cross-cultural diplomacy,
necessary, since the agreements governing the and the ability to establish mutual trust and in-
relationship between the partners can bring sig- terdependent relationships (Arino; De la Torre &
nificant risks to the company. Ring, 2001). In the next few paragraphs we will
There are many challenges of managing a explore four dimensions of innovation network
network of collaboration among partners. Ac- management one needs to take into consideration
cording to Parise and Casher (2003) the principal to guarantee that these critical and strategic factors
challenges are to: are handled correctly: strategy setting, relationship
management, support and services and organiza-
Understand the collaborative and competi- tional structure.
tive dynamics between partners
Monitor and understand changes in the
business environment which may alter
these dynamics
207
Dimension 1. Strategy Setting firms might be reluctant to open up their innova-

tion process in technologies that are strategic to
To make open innovation successful, it is neces- the company, while others do exactly the opposite
sary that its objectives are aligned with company with the objective to diminsh risks.
strategy and innovation strategy. Five main busi- External collaboration can be used in different
ness objectives are common in the development parts of the innovative process, from the generation
of partner networks for collaboration, as shown of ideas through the development of solutions and
in the Table 1 (Chesbrough & Schwartz, 2007). commercialization of products and technologies,
There are some steps in developing the strat- as shown in the following model adapted from
egy for the formation of innovation networks Chesbrough (2003).
(Schlange & Jttner, 1996 apud OJASALO, 2008): Specific partners work better in different parts
of the innovation process. For example, universi-
Understanding of the context: what is the ties are good at scientific and basic research
strategic situation to be reviewed? normally, but not considered the right partners for
Definition of the actors: which types of ac- commercialization of technologies.
tors the network should focus on? Last, but not least, companies should take
Creation of an interdependent matrix: into consideration the strategic impact of adding
who determines the nature of network certain partners to their portfolio. For example,
relationships? a current partner could become a future competi-
Creation of the desired portfolio of part- tor. It will be necessary to evaluate the risks that
nerships: where must each partner act? accompany the decision to involve this partner
Creation of a strategic matrix: what poten- in onces network. Also, companies will need to
tial must each actor possess for directing or understand the dynamics and the potential issues
leveraging the network? that a combination of certain partners might bring
(companies of different size, different culture etc.).
Once having determined the strategic objec- Part of the innovation network strategy, is the
tives for open innovation, companies should decision on where to locate innovation activities.
define what partners are best to reach their goals The logic behind the decision on where to locate
and targets. Some partners are better in helping is to be either close to innovation competencies,
to reduce risks whilst others are better in bringing when one seeks more radical innovation and closer
cost of development down. Another decision that to manufacturing when it comes to incremental
will direct which partners to choose, is the deter- innovations (so as to be able to quickly deliver
mination in which technology or business areas small improvements to existing products). Also,
to collaborate for innovation. For example, some innovation activities could be near the customer
Table 1. Objectives for external collaboration in research, development and innovation
Objectives Business Requirement

Increase profitability Lower cost
Shorten time to market Incorporate already-developed component
Enhance innovation capability Increase the number and variety of front-end technologies
Create greater flexibility Share risks with partners
Expand market access Broaden the pathways to market for products and services
208
Figure 2. Framework for open innovation
so to understand trends and needs. Therefore, the of a complex portfolio of partnerships, with many
decision on where to locate innovation activities different elements and geographic locations. In
must take in consideration, besides the network this sense the diversity of partners is even more
strategy, some other factors, such as: access to re- important to the success of innovation than the
search structure, ease of recruitment and selection number of partnerships (Duyesters & Lokshin,
of skilled labor, potential R&D cooperation with 2007). However, the greater the variety and number
Universities, access to new consumers, access to of elements in a portfolio of partners the complex-
equipment, promoting the image of the company, ity of their management increases (Duyesters &
among others (Westhead & Batstone, 1999). Lokshin, 2007).
So, defining clearly what the company objec- Although the criteria for inclusion of a partner
tives are and what it wants from its portfolio of in the network should be related to the companys
partners is central to the success of the network, strategic objectives, it is also important to examine
because only then the process for search and selec- potential synergies between different partners that
tion of partners can be successfully implemented can be leveraged and how network limitations and
(Slowinski, 2009). Defining the strategy forms the conflicts can be reduced through development
basis for the next steps, including the definition on of partners or termination of partnerships. The
how to manage relationships between company objective behind these criteria is to ensure that
and its partners and between partners. the portfolio value is greater than the sum of the
values created by each individual alliance (Parise
Dimension 2. Relational & Casher, 2003).
Mutual trust between partners is a central as-
Diversified portfolios, rich in resources and diverse pect in the management of partnerships (Parkhe
capabilities enhance the innovative capacity of & Miller, 2000; Arino, De la Torre & Ring, 2001;
a company (Ozkan, 2007; Vanhaverbeke et al., Suseno & Ratten, 2007). However, its constitution
2009). There is a positive relationship between is not immediate, it occurs gradually, as the inter-
the most innovative companies and the existence actions between partners happens. This process of
209
building mutual trust is called relational quality continue participating in the network requires the
and is considered the foundation of a successful analysis of other two dimensions for network
partnership (Arino, de la Torre, Ring 2001). management as shown next.
During the process of partner search and selec-
tion for participation in the innovation network Dimension 3. Providing
and even before the partnership has really devel- Adequate Support and Services
oped, confidence is more related to the sense of for the Innovation Network
security, or reliability. Only with time and several
interactions confidence will increase and take the Innovation practitioners constantly disagree about
full meaning of faith in ones partner, or trust. The the importance of physical location for fostering
level of trust in a partnership is directly related innovation. Nevertheless, no one neglects the fact
to previous experiences of partners in other alli- that innovation and knowledge transfers occurs
ances, as well as their organizational capacities in space (Polenske, 2007).
and technical skills. The relationship of integrity, Oerlemans, Meeus e Boekema (2003) when
reputation and ethical behavior are also extremely discussing the reasons why innovative companies
important in building trust between partners. This involve themselves in innovation networks state
relational quality is constantly measured by the following motives:
participants and plays a significant role in the pro-
cess of building mutual trust (Arino et al., 1997). Get access to complementary resources
Another attribution of portfolio management (knowledge, information, financial and
is to understand and manage synergies and con- physical resources);
straints that may be generated by the relationship Share risks;
between the partners themselves, also called the Create synergies through the sharing of
interdependencies (Parise & Casher, 2003). resources;
Interdependencies exist when one partner is
not fully in control of all the conditions necessary To be able to attain these goals, it is important
to achieve the expected result and is dependent that the company offers the potential partners the
on other partners to gain access to resources, necessary conditions for sharing of knowledge and
capabilities and competencies. (Vasudevan et al., experience to happen smoothly (Kratzer, 2007).
2001). Interdependencies can be facilitators when For this reason, leading innovative companies
they bring positive impacts to the network and are have ended up focusing on specific geographic
directly related to the success of the portfolio and areas, because proximity makes it easy and less
can be restrictive and bring negative impacts on expensive to provide access to physical space,
other partnerships. Table 2 shows possible facilita- components, machinery, personal and business
tive and restrictive interdependencies. services, knowledge and information and also of-
These reflections on the ideal design of a fers quick access to institutions and public services.
partnership portfolio and understanding of pos- In addition, a population of companies and orga-
sible impacts of the relationship of partners be- nizations geographically interconnected facilitates
tween them should be the basis for the search and complementarity between the activities of network
selection of partners. On the other hand, mecha- participants. It also facilitates the understanding
nisms for attracting and retaining participants of the needs of partners and increases face-to-
should be created, enabling the development and face contacts (Oerlemans, Meeus, & Boekema,
maintenance of optimal innovation network. The 2003). In summary, geographic proximity affects
need to attract and keep the partner interested to
210
Table 2. Partners interdependencies
Facilitative interdependencies Restrictive interdependencies

Partners are part of the same collaboration network Partners are members of competing networks of collaboration
Partners provide additional resources Partners are strong competitive rivals in the sector
Partners seek similar technology standard or infrastructure to in- Partners seek rivals technology standards
novation Exclusivity required by a particular partnership that prevent effec-
Partners see opportunity and have the desire to learn from each tive collaboration with other partners
other
Partners perceive other network members as a way to mitigate their
own risks
the ability to receive and transfer knowledge and Table 3 shows some types of support services
improve network performance. utilized to attract, develop and retain partners in
However, to attract potential partners for a innovation networks.
specific geographic space, the arrangement should Clearly, all these services and support, physi-
offer facilities and services that complement the cal facilities, as well as the management of the
partners capacities for innovation, to facilitate individual and network relationships require
joint technology development and transfer of processes, governance and legal structures, as we
knowledge and enable the development and com- discuss in the following paragraph.
mercialization of innovations.
The Support and Services dimension consists Dimension 4. Legal and
of defining the type of infrastructure and services Administrative Organization to
necessary to attract and complement skills and Foster Innovation Networks
capabilities of potential partners as well as to create
conditions that facilitate learning, creativity and After deciding which partners to work with, what
sharing of information and knowledge. for and where (Strategy), defining the working
In this dimension are included: the supply of relationship with individual partners and the
buildings and facilities to host partners, laboratory network as a whole (Relational), developing the
infrastructure, equipment, communication sys- services, physical structures and support required
tems, technical services, finance, management and to attract and retain the preferred partners (Support
technology. When taking into consideration the and Services), a company needs to organize man-
support and services dimension, companies will agement of the network to guarantee systematic
make sure that the physical and virtual structures and sustainable results.
are designed to encourage the flow of knowledge
and creativity. Governance Structures
To decide which set of infrastructure and sup-
port services to offer to their network partners, With a wide range of potential services avail-
companies that lead innovation networks will able to support their network and with a number
need to consider: of partners located in the same area, it will be
necessary to establish governance capable to
The networks strategic objectives; manage relationships, offer services to partners
Characteristics of the participants that they and maintain the infrastructure created to support
want to attract; the network.
Activities that they wish to facilitate or According to Bibliardi et al (2006), a single
reinforce. model of governance does not seem appropriate,
211
Table 3. Types of support services
Type of Service Description

Technology services Companies that lead innovation networks can offer a suite of technology services to its partners, such as sup-
port for testing and technical analysis and help for partners to obtain certifications or technical documentation,
among others.
Access to capital Given that funding for innovation is still faced as a challenge to companies, leaders of innovation networks
can promote conditions for the partners to become fit and attractive to receive investment funds from Venture
Capital (Romera, 1998) or government. To do so, the leading company offers aid to the development of busi-
ness plans, business meetings and submissions of projects to government funds for innovation.
Intellectual Property Since the transfer of technology is a goal for the network, it is necessary that the network leader offers services
support to support such activity (Gower, Harris, 1996). Such services are usually performed by specialized partners
such as offices or agencies for innovation. The objective is to assure the protection and commercialization of
intellectual property for the network.
Training The network leader can also provide business, technical or technology training directly or through partnerships
with educational institutions, according to specific demands presented by the partners (Gower, Harris, 1996).
Support services for Services such as management support - strategic planning, business plans, management, marketing, sales,
business development finance and accounting, human resources management, project management and legal counseling can also
be provided by network leaders in order to develop the business skills of its partners (Gargione; Loureno;
Plonski, 2005; Figlioli, 2007).
Operational facilities Although there are many innovation networks that work without an established physical structure, the prox-
imity of the partners facilitates knowledge and technology transfer and business development. In order to
increase this capability it might be necessary to build a specific structure to host not only the partners, offering
offices or structure for the operation of business, as well as spaces and infrastructure to conduct its projects
and research.
since networks with different objectives and differ- understand the objectives of the various partici-
ent players, such as the innovation network lead- pants, so to optimize gains for itself as well as for
ers, network partners, governmental institutions the network as a whole.
and investment companies, will have different
characteristics and therefore different require- Legal Forms of Innovation Networks
ments. A large Innovation network with a lot of
partners and innovation projects requires forms The legal form or arrangement between the players
of governance capable of promoting the interests of the network is important because it will be able
of the participants. The definition of governance to influence and limit the strategic objectives of
for the network partners must take into account, the network and influence directly the relations
primarily (Figlioli; Porto, 2007): between partners. The type of legal form will also
influence its governance, how the arrangement
The partners leadership; will be evaluated and the indicators to be used
The objectives of the partners; (Bigliardi et al, 2006).
The intensity and importance of According to these authors, to facilitate lead-
partnerships; ing and managing a companys network, different
The legal solution found to accommodate types of legal structures might be required or pre-
the interests of the actors of the initiative. ferred. Many legal and administrative formats are
possible, such as: managing organizations without
Important here is that, although the leader has legal personality - being tied to a department of
a central role in the network, it should see itself the organization leader - associations, foundations,
as part of the network and therefore will need to
212
private companies (publicly traded and privately Prospecting of potential partners;

held) and public companies. Managing partnerships in R&D projects
The leader of the network might become the including issues of intellectual property
single shareholder of this separate legal entity and commercialization of technology gen-
or might divide the ownership with some of its erated by the project;
principal partners, or even governmental institu- Managing partnerships, including evalua-
tions. All depending on the interest of the different tion, feedback, development and eventual
parties involved, regional or national government disconnecting from partners
incentives and regulations and optimization of Management of support services offered
long term value. - such as management services, finance,
The great variety of formal legal structures marketing and project management to the
and consequently of governance in innovation participants of the network;
networks is explained by Arranz, Fdez. de Ar- Management of technology services of-
royabe (2007) as a result of two main factors: the fered to network members and support for
level of applicability of the type of activity (how intellectual property protection, the valua-
easy it is to deploy the technology in the market) tion and transfer of technology.
and the networks goals. Management of the innovation network
Activities as applied research and product de- portfolio aligning the partner portfolio
velopment possess a high degree of applicability with corporate and innovation strategy.
(easiness to deploy the technology in the market)
and their evolvement through R&D networks can Funding of Network Projects
lead to opportunistic behaviors among the network
participants. In this case, formal structures are In general, financing of innovation networks in
established due to the fact that new products and literature discusses cases of projects promoted by
patents can be implemented immediately. In the public institutions, either directly or through uni-
case of activities with low applicability such as versities, foundations, among others. According to
basic research or pre commercial applied research, Rosenblum (2004), the most common sources of
and activities related to the diffusion of knowl- funding for innovation networks are universities,
edge such as training, scientific publications and banks, government grants, philanthropic funds
research databases, formal structure mechanisms and venture capital.
do not seem to be as important (Arranz, Fdez. de Regardless of the nature of the promoter of
Arroyabe, 2007). the venture, opportunities for financing of inno-
vation is influenced by both the legal framework
Processes and Roles in Managing that supports innovation network and by the
Innovation Networks goals, business model and the results expected
by the network: the prospect of future income,
Networks should be governed by adequate the guarantees offered and the revenue stream
mechanisms and roles to ensure the achievement (Figlioli, 2007).
of desired outcomes (Rampersad et al, 2010).
Managing networks will require the implementa-
tion of a wide variety of processes and involve
the following roles and responsibilities:
213
Communication, Marketing and leader, the structure of the network of partners,

Promotion of the Innovation Network their physical infrastructure and services and the
solutions used for organizational governance,
In order to attract potential new partners, to roles and responsibilities of actors and their legal,
receive government support and community ap- managerial and financial formats.
proval, it is desirable to promote the innovation During our research we searched to understand
network through marketing actions. These might the following questions:
include propaganda via different media, but also
promoting debate around the networks objectives How do renowned companies form and de-
at regional or national level, as well as sponsoring velop their networks for innovation?
of specific events and initiatives related to the Are there common practices among the
networks focus. companies that lead to success (a common
Also, efficient communication between players ground)?
is crucial to the effectiveness of the innovation Are there logical phases when building
network. It can be obtained making information ones open innovation practices (common
and knowledge available to all network collabora- building blocks)?
tors (Rampersad et al, 2010), besides promoting
collaborative forums and network meetings. The Companies Selected
for our Research
Innovation Network
Management Model Our study was undertaken between March and June
2009. The study involved 24 companies, of which
The important aspects discussed above led to the twelve in Brazil (three Brazilian companies, nine
construction of a theoretical model which sum- Brazilian based foreign multinationals), five based
marizes the main points for the formation and in Europe and seven based in the United States of
maintenance of networks for innovation. This America. The companies for our research were
model, with four dimensions is shown in Figure 3. selected based on the following criteria:
The dimensions Strategy, Relational, Support
& Services and Organizational were used in our Known as innovators in their industry;
research to determine how companies and institu- Possess their own research center; and
tions organize their innovation networks. Work together with several partners.
All of them where large companies and they

OUR RESEARCH invested between 1,5% and 6,5% of their revenue
in R,D&I. Various sectors were represented in
Objectives of the Study the research, such as the energy, agribusiness,
automotive, computer, chemical, electronic con-
The study aimed to determine how companies sumer goods and telecommunications sectors.
and institutions organize management of their These companies, in 2008, all together spent more
innovation networks within the four dimensions. than US$ 18 billion on R,D&I, employed around
We visited and interviewed managers responsible 85,000 people in technology development and
for innovation networks to describe the practices worked together with over 2,000 partners in their
of companies in Brazil, Europe and the United R,D&I processes. Four of the companies (Philips,
States, verifying the network strategy of the group Nokia, Siemens and DuPont) were ranked among
214
Figure 3. Innovation network management model
the most innovative companies as selected by deployed in the partnership. Furthermore, we

Business Week (2008). discussed where the company located its R,D&I
Although our selection process focused on activities and the rationale for such placement.
companies with research facilities and large net-
works, very few companies in Brazil have a long The Role of Innovation in Strategy
history of extensive and intensive external col-
laboration. All Brazilian based companies showed In each of the companies we examined, innova-
a tendency towards more investment in research tion plays a key role. The purpose of innovation
and more intensive external collaboration along is sometimes to support current operations; more
the various phases of the innovation process, even often, though, companies have loftier purposes for
outside Brazil within the near future. innovation. For many, innovation is the motor of
the companys future, with pioneering innova-
tions being sought to generate groundbreaking,
RESULTS high-impact products and services that facilitate
entering new markets. Partnering plays a vital
Strategy role in this process.
In this dimension we endeavored to understand Open Innovation Objectives

the role of innovation in a company, the objectives
for partnering in R,D&I, the areas in which the Objectives for corporate partnering are myriad,
company partnered and the type of technology but one stands out: companies partner to obtain
215
specific competencies and technologies that they Open Innovation Strategy

do not possess. The reasons are twofold. In some
cases, companies seek outside competencies and Over the course of our study, we used the basic
technologies because they do not recognize any definition of research and development as set forth
strategic reason to develop them internally. On by the OECD, which includes basic research, ap-
the other hand, there are technological compe- plied research, and experimental development.
tencies that companies want to master but do not To that definition we added scientific research
possess. By partnering, a company can acquire while also expanding the other side of the R&D
these competencies and knowledge. equation to include advanced development and
The second-most cited objective for partnering commercialization. This brings together all the
is to enhance the execution capacity of the com- fundamental aspects of the technology innova-
panys R,D&I. It is well known that companies tion process.
seek partners to aid them in bringing technologies In examining the stages of the innovation
and products to market more rapidly. This partner- process in which companies opt to partner, we
ing practice is closely related to another significant discovered that all interviewees collaborate with
driver: the search for complementary capabilities partners in various parts of the R,D&I process,
in the R,D&I value chain. We touch more upon with most focusing on basic and applied research
this below, but for now we can confirm that, as to develop breakthrough technologies. Some inter-
companies position themselves within the R,D&I viewees focus on partnering in development and
value chain, they focus their partnering activities testing to accelerate implementation of technolo-
mostly on less-strategic parts in that chain. gies. A few partner with competitors in technology
Firms mentioned risk reduction as another research in the pre-competitive stage but not in
partnership objective, but did so less often than the more competitive developmental stages. One
expected, given that it is well established that of the companies interviewed mentioned that its
partnering can reduce risk substantially. However, approach to initiating research is to join or partner
this may be because most interviewees are not with research being conducted at one of the ma-
especially capital-intensive in their R,D&I invest- jor research institutes to see what is hot. That
ments and no pharmaceutical companies, which way, the company shares the risk while working
ordinarily make major investments in R,D&I, on research projects that are industry-strategic.
were included in the study. None of the companies interviewed collaborates
A more surprising outcome from our findings in scientific research, nor does any even contem-
was that various companies recognized important plate investing in this type of research with third
benefits in partnering with universities and insti- parties (or at least none explicitly acknowledged
tutes, such as being known as an innovative and doing so). Only a few interviewees partner in
collaborative company. This reason was especially the stages of commercialization and licensing of
cited by Brazilian companies, where collabora- technologies.
tion in the innovation process is still reasonably In terms of partnering in technology, companies
new to many. largely do not outsource research and development
The reasons for partnering and the frequency of strategic technologies because of the potential
they were mentioned can be seen below, distin- risk in loosing legal control and technological
guishing between Brazilian based companies and know-how. However, there is one particular
European and American based firms. exception: companies do outsource research and
development of their strategic technologies so
216
Figure 4. Main reasons for partnering
long as their staffs monitor their partners closely, In general, most companies distribute their
allowing the firms to acquire beneficial knowledge R,D&I activities over multiple locations. Some
while maintaining control of intellectual property have created their own technology parks beside
matters related to their technologies. their own research laboratories. These companies
are doing more than just searching for competen-
Defining Strategic Location cies worldwide; they prefer to have them located
nearby, thus creating their own local technology
Our interviewees revealed that the location of innovation systems with third parties close at
their R,D&I activities differs widely. Some hand. It seems counterintuitive in todays highly
companies R,D&I locations have been deter- connected world with ready access to people
mined historically, usually near their production and information anywhere around the globe,
facilities. Other companies take a more deliber- but research, development and innovation still
ate approach, preferring development to be close seem to function best with face-to-face real-time
to their factories in order to be able to fine-tune interaction.
solutions for production, and research to be close The strategy dimension gives direction to all
to world renown universities or world-class tech- other key dimensions. For instance, partnering
nology parks. Technology monitoring normally objectives define the type of partners sought, the
occurs closer to the end customer. For example, infrastructure and services necessary to support
one of the companies interviewed spoke about its them, and the format for collaboration. The con-
antennas across the globe to monitor what local figuration of the other three dimensions depends
competitors are developing in their field and what on what is practiced in this dimension.
local universities are working on.
217
It can be concluded that all the interviewed not necessarily ensure a more effective network.
companies seek to optimize their decision making On the contrary, some interviewees mentioned
based on strategic objectives, business constraints the importance of having fewer network partners
(such as budget) and open innovation logic. Not with whom they could execute a wider range of
every company has the opportunity to define projects.
exactly how to set up its Open Innovation Sys- One can argue for either many or few partners.
tem, but all are well aware of the many potential Many partners can facilitate direct access to tech-
opportunities. nologies by creating more choices and fewer
difficulties in targeting specific competencies
Relationship when needed. But a larger network also brings
the complex task of managing many relationships.
In this dimension we explored the composition On the other hand, a network with fewer partners
of the R,D&I networks, specifically with how gives the firm more control over its network, al-
many and which type of partners the companies lowing for more fine-tuned relationships and less
collaborate, the role and location of partners and intellectual property risks. Although both models
the nature of the partner relationship, and the have their advantages and disadvantages, col-
handling of intellectual property rights. laborating with fewer partners is preferable for
strategic technologies because trust and control
Network Composition are critical in such situations. Less strategic tech-
nologies can be outsourced to a wider range of
Companies work with a wide range of partners. potential partners to capture more extensive ben-
The firms we interviewed cited partnerships with efits
universities, research institutes, clients, suppliers, In terms of the location of partners, even though
consultancies, specialists in technology develop- some companies prefer a local country partner,
ment, companies that commercialize technologies most partners are global. Companies seek partners
and governments. Several companies also lever- that are best in class and may in fact be on the
aged virtual networks, such as Innocentive, as other side of the globe. To locate the best partners,
partners. The most common partners are univer- our findings indicate that various interviewees
sities and research institutes. Collaboration with use patent and article databases to initiate their
other types of partners often depends on the length searches. Based on their initial findings, they
of time the company has been working with open converse via telephone to secure worldwide rec-
innovation. Firms that have a longer history of ommendations in the target technologies.
open innovation collaborate with partners across Nevertheless, most of the interviewees reiter-
a wider range of categories. ated the importance of being close to their partners.
Firms tend to have an abundance of partners One of the interviewees claimed that interaction
when they collaborate in several different stages with the university improved significantly when
of the R, D&I process and when they outsource they moved close to the university, instead of
research and development activities for a range having to travel 20 miles, because of the ease of
of technologies. Our research unveiled some having face-to-face meetings with students and
companies that accumulate hundreds of partners, professors. This again indicates the relevance of
with one company even boasting more than 1,000 proximity and real-time interaction.
partners (including international research pro-
grams). Although a vast quantity of partners may
seem very impressive, having many partners does
218
Figure 5. Types of partners
Role of Partners in Open Innovation that still prefer universities for their deep-rooted
research expertise.
Partners can play varied roles in the R,D&I process. Partners also are sought as potential sources
As expected, universities and research institutes for ideas and insights, although very few compa-
are increasingly utilized for basic and applied re- nies in our study rely on this approach. They are
search. Universities are primarily sought for their more focused on searching for solutions to their
infrastructure, their exceptional competencies in research or operational challenges than receiving
research, and their ability to generate graduates new ideas from their partners.
with masters degrees and PhDs. Institutes are Virtual networks, like Innocentive, increas-
targeted for their specialization and expertise on ingly are being leveraged to solve specific, targeted
general technological industry challenges. problems in applied research and early develop-
In research partnerships, companies also turn ment. Suppliers also play a role by providing new
to major corporations as development partners. instruments for laboratories and at times can be
In the context of pre-competitive research, these co-developers. In a few instances clients them-
partners at times may even be competitors. In selves are co-developers. Consultancies also are
such cases, the overriding objective is to share enlisted at various stages of the process, depend-
risks. Competitors also are selected as partners ing on their expertise in R,D&I.
at national or international consortia that are Companies that partner in the commercial-
convened to set industry standards. ization of technologies rely on a wide variety of
Companies exhibit certain strong preferences actual and virtual partners.
in collaborative habits. One of our interviewees Firms that are more advanced in open innova-
explicitly mentioned that it prefers working with tion go further and utilize supporting partners,
other multinationals, since it finds them more reli- such as venture capitalists, intellectual property
able than universities. When partnership objectives agencies, and the government in support of a
are more profit-oriented, partnerships seem to be broader open innovation effort.
more effective. Nevertheless, there remain those
219
Type of Relationships experience) in partner relationships. Therefore, the

more mature a company is in its relationships, the
The types of relationships vary widely: there are more types of relationships it normally will have
one-off contracts, master agreements, joint devel- in the various stages of the process, the better it
opment contracts, licensing agreements, equity usually defines its relationships and its intellectual
participation and co-participation in national and property policies, and the more it will broaden its
international programs, among others. The type horizons in search for potential partners.
of commercial relationship logically is defined
by the type of relationship sought (for example, Support and Services
strategic or non-strategic, formal or informal) and
the objective of the relationship (such as research, In this dimension we discussed with the compa-
solution provisioning, investment, commercializa- nies how they attract partners and develop the
tion of technology, etc.) network as a whole. What support and services
A valuable insight here is that some companies do they offer their partners? Do they give partners
seek out a close relationship with their strategic access to their laboratories and/or invest in their
partners not only through master agreements but partners infrastructure? Do they provide business
also through involvement in their daily affairs in support and other services to their partners? Do
order to facilitate their partners understanding companies proactively manage their networks?
of their business. In fact, one of our interviewees And do companies stimulate collaboration and
calls together its key suppliers to share its strategic learning between participants in the networks?
top needs list.
Partner and Network Management
Intellectual Property Rights
To attract new partners, the interviewed companies
All companies generally place great importance on generally rely on their strong reputations, which
protecting intellectual property rights. Companies they all possess in their respective industries.
that are more sophisticated in their open innova- Some use their top-tier facilities to attract part-
tion efforts not only have clear policies in place ners, whereas others attract partners via ongoing
but also have educated their employees on these public relationships, for instance through articles
policies. This reduces R,D&I employees hesita- authored by individuals within the company. Some
tion to participate in open innovation and helps companies also open their research departments
them define what to share and what to withhold. to interns during the summer months of school
In terms of distributing intellectual property vacation.
rights, most companies focus on protecting only Companies rarely invest in the development
strategic property rights. According to one of the of their partners. Except for investing in infra-
interviewed firms, We must guard strategic tech- structure and sponsoring some research projects,
nology, but non-strategic technology can be made there is little evidence that they intentionally aid
available to generate extra value for the network. in developing their partners capabilities. Longer-
Finally, patents also play a role in negotiating term relationships certainly benefit partners, but
co-development projects when the various parties even those companies that seek out longer-term
are expected to leverage some of their own patents relationships remain reluctant to set up plans for
to develop a new technology. developing their partners.
Best practices in this dimension are mainly Nevertheless, companies in more advanced
a function of a corporations maturity (time and stages of open innovation occasionally possess a
220
clear partner-development strategy that usually stimulate a sense of community and to facilitate
encompasses infrastructure projects, IP policies, collaboration and well-being onsite.
business services and other activities, as explained Other companies also provide partners with
below. apartments and comprehensive support for for-
eign specialists. Overall, however, the majority
Infrastructure of companies do not provide advanced business
support and services to their partners.
All companies generally support their partners
with some degree of access to their laboratories. Collaboration Incentives
This seems to be a basic, given provision in part-
nership agreements. Most also offer engineering In terms of partner collaboration, companies
know-how or other expertise to assist partners in that are focused more on generating a network
executing their projects. One of the interviewees than on a simple set of individual relationships
trains its customers in its laboratory so that they generally maintain, at a minimum, periodic meet-
learn to use the laboratory on their own. ings often informal meetings with their network
Many companies invest in the infrastructure of partners. Most companies invite their partners
their partners, especially universities. Some firms annually, but some companies organize events
also invest directly in their partners equity, mostly several times a year. Also, some companies have
in the case of technology-based companies. During technical meetings in which a technical expert
our study in Brazil, several companies mentioned on a certain subject gives a presentation to the
to face some problems with investing in Universi- partnership network. Some firms even go further
ties, since many of the universities do not have by promoting Dream Days with their partners,
the funds for maintenance of the investments. prompting them to think together about the types
of products that might be relevant to the future.
Business Support and Services Some firms two in this study specifically
attempt to stimulate collaboration through the
Business support and services is the area in which physical layout of their facilities and campus
companies most differ in innovation manage- regulations. Since transportation on campus is
ment. On one hand, there are companies that only on foot or by bicycle because cars are not permit-
provide their partners with basic access to labo- ted, the partners benefit from interaction through
ratories. On the other hand, there are companies spontaneous encounters. Furthermore, with only a
that construct a comprehensive local technology single central restaurant, because restaurants are
innovation system by bringing together, within not allowed in other buildings, people inevitably
one physical space, suppliers, consultants, patent meet one another. Similarly, large, centrally lo-
offices, venture capitalists, governmental research cated meeting rooms also promote collaboration
organizations, contractors, research specialists, and interaction.
etc. In an example of the latter case, one inter- Encouraging participation in and leading
viewed company offers its partners office space regional, national and international research ini-
(for a fee), an incubator for technology startups, tiatives is another approach companies employ
and a laboratory to conduct experiments and test to stimulate collaboration among partners. One
equipment (in the case of suppliers). In addition, of the interviewees, for example, encourages the
some companies also provide access to a restau- formation of groups to collaborate on important
rant, a fitness center and childcare facilities to societal priorities, with the objective of promot-
ing knowledge exchange among partners. These
221
groups assemble in meeting rooms and virtual Only a few companies have specific organi-
spaces, and their work often earns the approval zational structures with open innovation objec-
and appreciation of the government. Another tives. Organizational structures to seek and select
firm gives their partners access to wikis and other partners and manage and support partnership
collaborative tools to stimulate interaction and networks are generally rare. Most companies
knowledge exchange via a virtual platform. embed roles in their routine R,D&I organizational
Overall, companies provide basic support to chart. In organizations with larger structures and
their partners and networks. The major distinction headcounts, searching for partners seems to attract
between companies that give strong support and more focus (i.e., more staffing resources) than
companies that do not appears to be a function of managing partnerships. The latter seems to be
their experience and confidence in open innova- handled principally through project relationships.
tion, their ambition and their resources to invest. In order to identify new partners, some com-
Certain best practices, such as access to labora- panies deploy a dedicated team. Technical experts
tories and office space and periodic meetings, are inside the firm, for example, can be responsible
practices to which any firm can commit. However, for targeting potential new partners in their fields.
firms that aspire to offer a higher level of partner One of the interviewed companies, in fact, has
support will need to invest not only financial but set up a scouting group that searches globally for
also human resources and possess a passion to new technologies and, consequently, new partner-
strengthen their open innovation systems. ships. Another firm has developed a worldwide
network through which it seeks external partners
Organizational to complement and accelerate its innovation ef-
forts. In addition, there are companies that have
In this dimension we focused on the various or- established a dedicated M&A department to invest
ganizational structures to support the innovation in technology-based firms.
networks as well as governance and processes to Few companies allocate exclusive full-time re-
manage open innovation. We also looked briefly sources to partnership management. One company
at how companies promote their open innovation that has partnered with a university provides ex-
initiatives. tensive staff to facilitate the relationship between
the university, the companys internal business
Organizational Structure & units, and students by offering technical support
Governance for Open Innovation to all parties in the partnership.
The strategic management of open innovation,
There appear to be basically two different types including open innovation strategy and partners
of legal organizational structures. Some R,D&I selection, normally rests with the Chief Technol-
organizations are a department within their mother ogy Officer, with business unit heads maintaining
company while others are a separate legal entity a degree of involvement as well.
but remain part of the business group. There are
reasons for choosing a specific format. One is the Innovation Processes
quest for tax benefits; another is the desire for the
R,D&I organization to function as a profit center; Very few companies have official open innova-
and a third relates to the organizations objective tion management processes. With the exception
to serve a variety of clients. There does not ap- of contractual and legal processes, the selecting,
pear to be a single preferred practice, because the developing and evaluating of partners and the
choice depends on national laws and corporate network as a whole are all done informally.
structures and policies.
222
Selecting partners is normally done on a case by Funding

case basis. Companies can sometimes be selected
for an individual project, but as well to build long Regarding the funding origins, much of the fund-
term relationships. However, our interviewees did ing for projects developed by the network of in-
not mention that they selected their partners based novation comes from their own network leader.
on a portfolio view of their network, specifically Although few would consider the use of venture
where one evaluates if the current network sup- capital, the search for subsidized funding and
ports the companys strategy, not only in technical local government incentives were quite common
terms, but in structure, culture and results. in both surveys. The participation in national and
A good management practice, as stated by one international research programs is quite common,
of the interviewees, is mapping the entire R,D&I especially in innovation networks outside Brazil.
partnerships requirements for a technology, not
just by partner for an individual project. This com-
pany, when starting a new research project, looks THE MATURITY MODEL OF
practically from the start at what partners might be INNOVATION NETWORKS
involved in development and commercialization.
The evaluation of partners is generally done The result of this study shows different practices
quite informally by companies. Most companies adopted by companies in regard to open innovation
have year-end reviews with their partners, often around the world. The analyses of these results
discussing informally their project(s), the progress were consolidated and the practices observed
and results. There also are companies that conduct adopted a pattern.
a more formal review on agreed upon objectives Therefore, with the data gathered on this
and results within contracts. But it appears rare study was possible to develop a Maturity Model
that a company (only one company interviewed) regarding Open Innovation activities grouping
would evaluate their partner using a quantitative and classifying the practices around the world
approach, such as based on grades. This company into four different maturity stages.
also put a high premium on cultural alignment as The maturity stages describe good practices
an important evaluation point. adopted by companies taking in consideration
the different stages of development considering
four groups: beginners, explorers, established,
world class. These stages are described next.
Figure 6. Maturity model in innovation networks
223
Beginners technologies that are substantially or even radi-

cally innovative to support the companys future
These companies are at the very beginning of competitiveness.
open innovation. They are at times reluctant to Characteristics of companies in this stage:
advance with Open Innovation Systems because
of worries about intellectual property rights, a Using open innovation to search for sub-
strong belief in the old closed innovation model, stantial and radical innovations;
or only waking up to the benefits of open innova- Partnering mainly with universities and re-
tion. It does not mean that these companies have search institutes;
never worked with partners, for they never did Mapping technology needs and potential
this deliberately to systemically explore external partners (technology strategy);
knowledge and competencies. The objective of the Adapting umbrella contracts are increas-
companies in this stage is to create cheaper and ingly common;
faster ways to generate incremental innovation Intellectual Property policies clearly de-
for their current markets. fined and shared with staff;
Characteristics of companies in this stage: Accessing infrastructure and some engi-
neering support;
Partnering focus on improvement in exist- Setting up the management for individual
ing products; partnerships;
Using partners for particular knowledge, Looking across borders for potential part-
mainly suppliers, and sometimes clients or ners (outside the country).
universities;
Engaging when required (per project) with Established
few partners;
Worrying excessively about loss of These companies use open innovation as a strategic
Intellectual Property; tool in their technology development process. They
Majority are one-off contracts; manage their open technology innovation system
Some partner access to company in an organized and structured manner, utilizing
infrastructure; a number of strategic partnerships in the various
Resistance from within the company to the parts of the R&D& I process. The objective of
open innovation model; these companies is to maximize value generation
No specific governance model set up to from a wide range of partnerships.
manage partners; Characteristics of companies in this stage:
Searching for external funding just starting.
Searching for breakthrough technologies
Explorers together with partners;
Partnering in long-term contacts with
These companies are deliberately searching to universities, research institutes and other
utilize all the opportunities of open innovation partners;
to their advantage, seeking partnerships in their Pre-competitive research with competitors,
various technology needs, especially focused on suppliers and universities;
being able to generate innovation with an impact Investing in the infrastructure of partners;
on the company. The objective of these companies Use of external venture funds to invest in
is to search for partners that help them create technology based companies;
224
Business support for partners, including CONCLUSION

management and patent advisory;
A governance structure in place with indi- The results of the research show a diversity of
vidual partnership management and devel- approaches, practices and maturity levels between
opment, while scouting for new partners; the interviewees, but we are able to identify some
Commercializing technology with key findings.
partners; There are some common practices utilized by
Participating in national and international the interviewed companies, in all very much in
research programs. line with what one can find in published literature
about open innovation.
World Class There were clear differences, however, among
companies concerning the following: the business
These companies are the leaders in open (technol- model for a partnership; the location of research
ogy) innovation, managing their systems deliber- and development facilities; the processes out-
ately to grow in value over time. These companies sourced; the number and type of partners; the
look beyond their own short-term benefit, instead working format; the commercial relationship
searching to optimize the value of the whole sys- with partners; the investment in partners or base
tem by giving strong support to their partners and technology companies; the use of intellectual
encouraging constant collaboration and learning property rights; the business support for partners
within the system. In this manner they are creat- and access to infrastructure; the legal format and
ing a self-regenerating and expansive system that level of organizational preparation to manage the
interconnects across other innovative networks. partnership networks.
Characteristics of companies in this stage: We found that the differences were primarily
related to the following forces:
Creating their own physical structure in- Maturity in open innovation practices (the
stead of just participating in collaborative time period in which open innovation has been
systems and infrastructure; practiced);
Leading national and international research Need for open innovation (how much the
programs; company needs to involve 3rd parties in the in-
Maintaining strong services to attract, sup- novation process);
port and develop new partners;
Stimulating constantly the collaboration Due to quick and major changes in the
and learning between participants; technological environment;
Searching for network expansion, services Relevance of technology as a competitive
and clients of the R,D&I center; differentiator;
Governance to manage partner port- Nominal investments in technology inno-
folio, besides individual partnership vation or the ability to invest more in inno-
development; vation and thereby open innovation.
Strong feedback mechanisms and Ambition to be a technology innovation
evaluation. leader.
225
In summary, we found that the longer the ACKNOWLEDGMENT

company works with open innovation, the more
the company needs to innovate, the more money This research was developed for the Companhia
the company has available to innovate and the Paulista de Fora e Luz (CPFL), within the Aneel
more ambitious the company is in relation to in- R&D Programme in Brazil.
novation. Consequently these companies invest
more in open innovation, involve more partners
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230
Chapter 13
Science Parks and Their Role
in the Innovation Process:
A Literature Review for the Analysis
of Science Parks as Catalysts of
Organizational Networks
Renata Lbre La Rovere

Federal University of Rio de Janeiro, Brazil
Leonardo de Jesus Melo

Federal University of Rio de Janeiro, Brazil
ABSTRACT
This chapter investigates the contributions of Science Parks (SPs) to innovation. In particular, we discuss
whether the literature on innovation and SPs consider the fact that SPs can be catalysts of Organizational
Networks (ONs). We consider that ONs are elements of knowledge production and can contribute to the
development of core competencies to pursue dynamic innovation and sustainable competitive advantage.
This chapter is based on a literature review of scientific papers and theses which are included in indexed
databases related to SPs and their contributions to innovation. Preliminary analysis of the literature
shows that SPs have been mostly studied as part of innovation systems, and that less attention has been
given to the role of ONs and SPs in the processes of technological learning and innovation.
DOI: 10.4018/978-1-61350-165-8.ch013
Science Parks and Their Role in the Innovation Process
INTRODUCTION Zissimos, 2006), all the authors who have analyzed

these agglomerations have pointed to the benefits
In accordance with the International Association that companies may obtain. Proximity provides
of Science Parks (2002), a Science Park is an or- economies of scale, possibilities for development
ganisation managed by specialised professionals, of production chains, accumulation of knowledge
whose main aim is to increase the wealth of its com- and innovative activities, reduces transport costs
munity by promoting a culture of innovation and and, in the case of urban areas, provides access to
the competitiveness of its associated businesses sophisticated clients. We define proximity not only
and knowledge-based institutions. To enable these as geographical proximity but also as relational
goals to be met, a Science Park stimulates and proximity. Therefore, the research question ad-
manages the flow of knowledge and technology dressed in this chapter is the extent to which SPs,
amongst universities, R&D institutions, compa- as spaces that can combine benefits related to geo-
nies and markets; it facilitates the creation and graphical and relational proximity, contribute to
growth of innovation-based companies through the generation and strengthening of organizational
incubation and spin-off processes; and provides networks for innovation and how these networks
other value-added services together with high deal with the processes of creation, dissemination
quality space and facilities. and appropriation of knowledge in order to develop
The SPs literature considers those institutions sustainable competitive advantage.
as ways of organizing enterprises in a territory that This subject is directly related to the theme of
foster innovative activities (Squicciarini, 2008). innovation, since in the current techno-economic
Innovation in SPs is related to positive exter- paradigm the ability to create and sustain competi-
nalities that result from geographical proximity. tive advantages in a particular territory is related
Nevertheless, the fact that firms are close to other to learning ability, the quality of products and
firms and universities in a Science Park does not processes, productivity, and companies capacity
necessarily mean that interactions among them for technological development. In this paradigm,
will occur. Furthermore, the fact that the Science companies seek to meet requirements for flexibil-
Park promotes the development of organizational ity and speed by involving themselves in networks.
networks among its firms does not mean that Studies of local development highlight a variety
firms located in the Park will develop relations of forms of association and network integration
only with other firms in the Park. Rather, SPs of these networks in global markets. Networks
should be viewed as spaces that not only allow for are key elements for the creation and diffusion
the creation of organizational networks but also of knowledge that underlies the generation of
strengthen organizational networks that existed innovations.
before firms moved to the Park. As organizational The processes of creation, dissemination
networks have a role in promoting and organizing and appropriation of knowledge are enhanced
interactions between firms and institutions, they when organizations are linked in a network and
should be considered in studies of SPs, especially develop mechanisms for governance and man-
because organizational proximity may be as, or agement aimed at coping with the knowledge
even more, important than geographical proximity assets generated and traded in their context. After
in the development of innovations. a review of the literature on business networks,
Networks can be formed by clusters of firms in Britto (2002) identifies three possible types of
the same territory or in different territories. Despite network: subcontracting networks, where a com-
the variety of concepts and low level of accuracy pany outsources part of its activities; Marshallian
of studies about clusters of firms (Hasenclever & industrial districts, where the interaction between
231
the components of the network allows for the BACKGROUND: SCIENCE PARKS
acquisition of static and dynamic advantages AND THEIR ROLE IN INNOVATION
related to geographical proximity, and technol-
ogy networks, where the interaction between the The theoretical framework of this chapter is in
components takes place with the specific purpose line with the Evolutionary Studies approach.
of developing innovations. These studies assume that firms have limited
In SPs the actors involved are located in the rationality and asymmetric information, so their
same area and they are influenced by an institu- decisions concerning innovative activities and
tional initiative whose main objective is to foster production will be affected by the decisions of
technology networks. In this type of network other firms and institutions. The interactive pro-
geographical proximity is not necessarily more cesses that shape the decisions of the firms are
important than organizational proximity. self-organizing and will determine the properties
This chapter assumes that SPs, as innovation of local networks (Vicente, 2000). The chapter
environments, stimulate and manage flows of also draws on literature from the New Institutional
knowledge and technology between universities, School, as it assumes that networks of companies
research institutions, companies and markets, and and their worlds of production can be organized in
are presented by current literature as a mechanism different ways with different impacts on territory
for local development capable of catalyzing the (Markusen, 1996). Furthermore, we assume that
generation of organizational networks that act as the interaction between companies, institutions
means of articulation among the principal agents and local community in a given territory affects
of innovation. the spread of knowledge and innovation (Storper
The methodology used is a review of the litera- et al., 2007, Storper, 2008).
ture. This chapter will present the main results of SPs originated in the United States during the
a search in scientific papers and theses included 1950s, as a consequence of the emergence in the
in indexed databases related to SPs and their con- postwar period of a large number of high-tech
tributions to innovation. Our discussion will be companies, many of which were created to sup-
based on concepts drawn from the Evolutionary port ongoing research activities in universities. In
and New Institutional Schools, which have made accordance with IASP (2007), the second half of
the most significant contributions to the literature the 1980s was the period when the largest amount
regarding innovation and regional development of SPs was created (23%), as Figure 1 shows. But
in the Post-Fordist period. one can see that the curve rises steeply in the first
The study of the relationship between SPs and decade of the 21st century; this period of just five
organizational networks will primarily contribute and a half years is responsible for 26% of all the
to the debate about the role of organizational prox- SPs in the sample.
imity and geographical proximity in the creation According to IASP (2007), Science Parks are
of sustainable competitive advantages. Secondly, mostly an urban (or semi-urban) phenomenon,
we will analyze the existing potential and the main with 66% of the Parks surveyed being within a
challenges involved in the generation of networks city and 27% being quite close to one (25 km or
capable of dealing with the processes of creation, less). Furthermore, 36% of SPs worldwide are
dissemination and ownership of knowledge as- located on a university campus or adjacent to one,
sets; in addition, we also aim to understand the while 8% are located on land owned by a univer-
challenges and opportunities faced by companies sity, although not on a campus or adjacent to it.
regarding the management of their resources and However, the majority of SPs (53%) are located
cooperation with other members of the network. outside university campuses and on land not owned
232
Figure 1. Global creation of science parks (%) (Source: IASP)
by a university. In Brazil the physical spaces Clusters are also institutional forms in which
chosen for the deployment of SPs usually comes loyalty relations are easily built, because, ac-
from public agencies or universities (ANPROTEC, cording to Frigant (2001), agents have a sense of
2007). embeddedness. Therefore the territory is relevant
SPs may be analyzed as clusters that are delib- as a locus of social capital and entrepreneur action.
erately promoted by local institutions to enhance Positive effects of entrepreneurship and agglom-
innovation and learning in a particular territory. eration on innovation were verified by Acs and
Therefore, to discuss the role of these institutions Varga (2005), in an econometric study using data
as catalysts of networks we must first look at the from the European Union. They came to the con-
literature on the benefits of proximity for firms. clusion that knowledge spillovers are positively
Zander (2004) argues that entrepreneurs prefer related to clustering and entrepreneurship. This
to be geographically close to their clients, sup- is why SPs are built: institutions promoting them
pliers and competitors for several reasons. First, expect that Parks will generate benefits in terms
they need to identify their competitors and learn of the stimulation of new businesses, develop-
to prepare adequate competitive strategies from ment of innovative activities and generation of
their competitors movements. Second, there is a local knowledge.
demonstration effect on the territory, whereby suc- Studies of innovation that emphasize the role
cessful enterprises influence local entrepreneurs of territory suggest that enterprises are rooted in
perceptions of socially desirable businesses. Third, institutional arrangements consisting of social
the educational level of entrepreneurs, conditioned relationships that feed creativity and adaptability.
by the territory, will affect local entrepreneur Innovation is seen by these studies as an island of
choice of business. Fourth, when recognizing activities determined locally (Amin & Cohendet,
an opportunity local entrepreneurs will establish 2005). The formation of clusters of firms is seen as
new businesses by assimilating local knowledge the result of a selective mechanism that provides
and recruiting members of their social network. favorable conditions to meet the demands posed
by technological change. Growth opportunities are
233
shaped by the legacy of accumulated knowledge at all costs, and acceptance of partnership as a
and learning that is geographically determined long-term investment, are also the ones identified
(Iammarino & McCann, 2006). as success factors for territorial agglomerations.
More recent studies, however, propose the The authors then conclude that knowledge is not
concept of another type of proximity, which is confined to particular sites, as networks may be
independent of territory: relational proximity. formed with firms in different locations. Adher-
Amin and Cohendet (2005) argue that relational ence (stickiness) of knowledge to specific places
proximity, whose concept was developed from the derives from unique combinations and interactions
text of Nonaka and Konno (1998) on space-sharing of bodies, minds, languages, technologies and ob-
relationships (ba) is fueled by travel, common jects that can be found in territories, crystallized in
routines, databases and common software and attitudes. Thus, a specific cluster is not restricted
provision of training to communities through tem- regionally, but it is rather a container of relations
porary project groups and task forces. Relational that combine and transmit knowledge, which
proximity can be achieved through a variety of may come in pieces, with a number of different
regional mobilizations. distances and directions. Clusters with high rates
Some authors, such as Lemari et al. (2001), of innovation are characterized by the existence
use the term organizational proximity to describe of dense relations among different professional
relational proximity. They contrast geographical communities (engineers, entrepreneurs, financ-
proximity, which is space-related, with organi- ing professionals, computer professionals). The
zational proximity - related to affiliation (same growth of these clusters results from the success-
relational area) and similarity (from an organi- ful management of diverse knowledge assets of
zational point of view). For these authors, both the local professional community. Relationships
forms (geographical and organizational proximity) between these communities occur in certain places,
increase the sharing of tacit knowledge in the in- but the networks of these communities extend
novation process (Davenport, 2005). Kaufmann et beyond the territory, therefore the knowledge de-
al. (2003) carried out a study of innovative firms veloped within the territories depends on internal
in Austria with similar purposes. They argue that, and external mobility and connections.
as the principles that guide innovative process Davenport (2005) confirms Amin and Co-
are learned, face to face communication is no hendets propositions and shows the results of
longer a prerequisite for innovation, and geo- a survey of innovative firms in New Zealand.
graphic proximity may be replaced by relational He observes that firms do not draw on local or
proximity. The authors suggest that geographical national knowledge to be innovative; since they
proximity is important in the beginning of the provide competitive solutions their products are
innovation process (in design) and in its end (in designed to meet customer needs and building
testing phase), whereas in the intermediate stages knowledge comes from strong relationships with
of development and prototyping communication networks of customers, distributors, employees
can take place remotely. of international companies, consultants with
Amin and Cohendet (op.cit.) note, from a re- complementary skills, as well as with networks
view of previous studies, that the same attributes of sister (similar) companies. He suggests that
of networks of firms identified as success factors companies which seize opportunities presented
for innovation, such as flexible learning expecta- by the external market go through a process of
tions, commitment to partnership, trust of partners, rapid internationalization and present few linkages
excessive tolerance, ability to manage conflicts, with the territory.
cancellation of myopia linked to performance
234
The existence of relational proximity may help on local enterprises will depend largely on their
to explain why clusters of firms differ. Markusen capacity to absorb technology, thus conditions in
(1996), in her work on industrial districts, identi- each site will differ.
fies four types of agglomerations of firms, each It should also be noted that if the company
one with different configurations of firms and decides to locate in a given territory to be close
governance structures: hub-and-spoke districts, to other companies, it will generate positive
satellite platforms, state-anchored districts and externalities that will benefit other companies
Marshallian districts. She contests the idea that (free riding effect). According to Meyer-Stamer
Marshallian districts will prevail as the dominant (2005), companies, particularly large ones, take
form of clusters and points out that in hub-and into account free riding when making location
spoke districts and satellite platforms, knowledge decisions, and seek to limit it through contracts.
diffusion among members of the cluster is very Contracts may limit the diffusion of knowledge
limited. Iammarino and McCann (op.cit) also to local firms that is highlighted as one of the
propose three forms of agglomeration of firms: advantages of clusters.
the first is pure or Marshallian agglomeration, Studies of relational proximity and of dif-
where firms do not have market power, continu- ferent types of knowledge diffusion related to
ously change their relations with other firms and diverse types of clusters support our proposition
exploit market opportunities. Entry and exit costs that to understand how innovation takes place in
in this market are low, and these agglomerations a territory, analysts have to consider networks of
often occur in urban spaces. The second is the firms. Lawson et al. (2009) point to the relevance
industrial complex, characterized by long-term of networks for innovation with their study of
relations between stable and predictable firms in knowledge sharing in inter-organizational product
the cluster. Access to this cluster is limited by entry development teams. These authors did an empirical
and exit barriers, and their location is regional but study of 111 manufacturing organizations in the
not necessarily urban, and dependent on transport UK and found that relationships between firms,
costs. The third form is the cluster that arises from buyers and suppliers are crucial in new product de-
a social network with ties of trust and cooperation velopment. Furthermore, the inter-organizational
among enterprises. Geographical proximity is nec- teams that are formed to develop new products
essary in this type of agglomeration, but access is are strongly influenced by informal socialization
limited by the relations of trust, built on a common mechanisms, therefore face-to-face contacts are
culture. Iammarino and McCann suggest that all crucial to share sticky and tacit knowledge.
agglomerations may have characteristics of the To summarize, the available literature on the
three models, but one model will always prevail benefits of territorial agglomerations of firms ex-
over the others. Arguments about the spillover of plains the reasons why SPs are viewed as spaces
knowledge between firms implied by the models of for innovation and thus are promoted by institu-
pure agglomeration and social networking are not tions that want to enhance learning and knowledge
always applicable when dealing with multinational production in a territory. However, if we consider
or oligopolistic firms with many affiliates. This that what is relevant for innovation is not the terri-
argument is confirmed by Crespo and Fontoura tory per se but the networks that are located in the
(2007), who made an extensive review of literature territory, an analysis of SPs governance structures
on the externalities generated by multinational (including the hierarchy structure of local networks
companies and showed that there is not enough and contracts) is needed to assess whether SPs are
empirical evidence to argue that these externali- catalysts of organizational networks. Our survey
ties will in fact occur. In particular, the impact
235
of scientific papers on SPs found that few authors dependency in Park activities that creates first-
have been working in this direction. mover disadvantages. SPs, in her words, look
Recent literature on SPs may be divided in unable to learn and improve their performance
two broad categories: studies that focus on firms over time (Squicciarini 2009:187). This result
as the main object of analysis and studies that may be explained by the fact that Park manage-
focus instead on the Science Park as an institu- ment must define their objectives in goals that
tion located in a region, using therefore a Meso are measurable. Therefore, they use the same
approach. While in the former view innovative traditional measures of performance mentioned
activity is seen as a competitive tool for firms above (Link and Link 2003). If directors use
and traditional indicators are focused on, such traditional measures, the governance structure of
as productivity of firms, job creation and value the Park will have a limited scope concerning the
generation, the latter view focuses on a particu- creation of knowledge.
lar region, policy or technology. In relation to Papers that take a Meso approach focus on dif-
methodology, studies use statistical models, case ferent countries and present results complementary
analysis or a combination of both. to the findings of those focused on firms. Dettwiler
Studies focusing on firms investigate whether et al (2006) indicated that cost of facilities is an
SPs generate spillovers (Squicciarini, 2009), if element considered by firms in deciding to locate
they have significant patenting activity (Squic- in a Park, a result also found by Sun et al. (2009)
ciarini, 2008), how they compare with firms and Hu (2007). Tan (2006) found evidence of
located outside the Park (Squicciarini, 2008, aging in a Beijing Science Park that gives further
Yang et al., 2009), and identifying the conditions support to Squicciarinis ide (2009) that Park man-
for their growth (Link & Link, 2003, Lofsten & agement must take into account the Parks path
Lindelof, 2005, Yu et al., 2009). These issues dependency. Bigliardi et al. (2006) suggest that, in
are explored because, as Squicciarini (2009) and addition to the life cycle of firms, Park managers
Hansson (2004) observe, empirical evidence on must also consider proximity to universities and
the effectiveness of SPs regarding the development legal conditions. Proximity of universities and
of technology is mixed. The mixed results may adequacy of management are considered crucial
derive from the fact that the traditional indicators by Ratinho and Henriques (2010). Zhang (2004)
such as revenue, survival of firms, job generation found that the critical factors for the success of
and patents used in most analysis fail to properly a Park are location and management. Chen et al.
measure knowledge creation in the Park and (2006) also consider the importance of the sector
related benefits (Hansson, 2004). Dettwiler et in the performance of firms located inside a Park.
al. (2006) tried to measure knowledge creation Whether the focus is on the firm or the Park,
by comparing firms located inside a Park with what appears to be the common element in all the
firms located outside it and concluded the former studies reviewed is that they try to investigate Park
have a slightly superior performance. Squicciarini efficiency by assuming that innovation depends on
(2009) suggests that knowledge creation may be active interaction between universities, industry
assessed by comparing the patenting activity of and government, a concept known as the Triple
firms before and after entering a Science Park Helix (Etzkovitz & Leydesdorff, 1997). As Hans-
and by analyzing patenting activity of incubated son (2004) and Wicksteed (2004) observe, the
firms. Her model used a database of Finnish firms dimension of knowledge creation and networking
and confirms that size, sector and time elapsed crucial for innovation in the creative economy
before joining the Park are all relevant for patent is frequently lost in these studies. Some studies of
capacity. She also suggests that there is a path knowledge creation in SPs use patents as a proxy
236
for knowledge creation. However, patents mea- the role of organizational networks in the process
sure only codified knowledge. Case studies like of technological learning and the generation of
those of Grassler and Glinnikov (2008) provide innovation. The result of this analysis involves
better insights into codified and tacit knowledge a series of issues relevant to the theoretical field
diffusion in SPs. Nevertheless even case studies of organizational networks. The first issue is that
may not take into consideration organizational within the literature it appears that companies
networks as spaces for knowledge creation and in Science Parks, while noting the possibility of
diffusion, which are essential to understand growth establishing and strengthening networks as a fac-
and innovative activities of firms inside Science tor of attractiveness, use Parks mainly to obtain
Parks. Grassler and Glinnikov (2008), for instance, benefits related to financial/operational issues and
mention in their work that partnerships found in not as a differentiating factor related to the ability
their case are far from exploiting promising op- to create and disseminate knowledge and promote
tions. This result may be explained by the fact (environmental, social and economic) sustain-
that firms, in establishing partnerships, take into ability. As mentioned above, the self-organizing
consideration their organizational networks to set process that shapes firms decisions concerning
the boundaries of these partnerships. innovation and production limits the ability of
Also revealed by the literature review was that firms to have independent long-term strategies
in making the choice to locate in SPs, firms tend to that may ensure sustainability of activities. Firms
prioritize physical infrastructure and financial and tend to recognize more easily static advantages
tax incentives, to the detriment of the creation and of location, such as access to financial benefits,
strengthening of organizational networks which than dynamic advantages, such as knowledge
can generate sustainable competitive advantages. generation.
When networks are mentioned in studies, they are The second issue is that understanding that we
seen as providers of specific advantages to the firm. must go beyond the use of networks to achieve
This observation is supported by Manella certain and specific short-term goals implies that
(2009) in a study of factors that limit the attractive- we must understand them as mechanisms for
ness of Science Parks for innovative firms. The generating business opportunities, relationships
investigation of these factors in five Brazilian SPs and learning. Therefore, to study networks that
in highlighted certain factors of attraction, such as are formed within a Science Park analysts have
main source of capital accessibility, partnership to look not only at the number of networks and
with universities, transportation facilities, infra- the number of interactions each firm has in the
structure and common services, local incentives. network, as suggested by the authors from the New
Of the fifteen most important factors considered, Institutional literature that we reviewed. Network
seven were directly related to the arrangement of analysis must also look at the specific sector of
financial support by the Park and the rest were the firms in question to assess the potential of the
directly or indirectly linked to locational factors. creation of business opportunities and the learning
The companies surveyed gave little importance generated by the network to develop innovation.
to the presence of universities and R&D, with the Osajalo (2009) mentions other elements, such
establishment of research projects in partnership as duration, planning, control and trust, as being
with research centres being an uncommon practice. essential to the analysis of innovation networks.
The analysis of the SPs literature shows that The third issue is that the current evaluation of
although they have been studied as part of an in- firm performance located in SPs is based on tradi-
novation system, little attention has been given to tional indicators such as patenting and value-added
237
generation and does not consider intangible assets, integration between networks and organizations
such as organizational networks. This is because, within their own companies, suggesting they are
as noted above, authors implicitly assume in their important elements when proposing some form
analysis that the presence of institutions that form of governance knowledge. Nooteboom (2009)
the Triple Helix in the Park will be a sufficient also observes that governance and competencies
condition to develop innovation. This may be true are complementary and essential for innovation.
in those cases where geographical proximity is Therefore, more research is needed on Science
sufficient to develop the necessary interactions Parks with the aim of assessing the contribution
required for innovation, but as observed above of organizational networks to the creation of
the literature on clusters suggests that relational knowledge and how SPs can develop governance
proximity must be considered as well. mechanisms that contribute to the creation and
Finally, more studies are needed not only to strengthening of organizational networks. As
understand the role of the relational proximity Hansson et al (2005) observe, a possible role for
of the firms located in Science Parks for their in- SPs is the development of the social capital neces-
novation activities, but also to contribute to the sary for enabling and facilitating entrepreneurship
development of SP governance mechanisms that in networks.
ensure their sustainability. Although the literature
confirms that Science Parks are environments for
the development of skills aimed at building sus- ANALYSIS OF SCIENCE
tainable competitive advantage, few studies point PARKS AS CATALYSTS OF
to the need to develop mechanisms that allow the ORGANIZATIONAL NETWORKS
use of the benefits generated by intangible assets.
In this sense, Zhang (2004:1) calls attention to To conduct an analysis of Science Parks as cata-
the fact that intangible aspects of Science Park lysts of organizational networks, certain research
management such as marketing, services and the steps must be followed.
quality of Park management team emphasized The first step is the assessment of the role
were in the third decade of Science Park develop- that organizational networks play in the genera-
ment. Hansson (2004) suggests that the concept tion of business opportunities, learning, training
of ba, which combines three central elements and empowerment in the specific sectors of the
of knowledge creation process, learning and firms that are located in the Science Park being
complexity, should be used in the Science Park analyzed. This can be done by a literature review,
literature. However, we found few recent studies to understand differences and similarities between
dealing with knowledge creation or about how the experiences based in specific contexts, and also
tacit and social elements of knowledge creation to assess how organizational isomorphism is
pose challenges to SPs governance structures. related to involvement in institutions with global
These results are not surprising. Grandori representativeness (Dimmagio & Powell, 2005).
(1997, 2001) indicates that there is some neglect The second step is an assessment of organi-
of governance mechanisms as antecedents of zational networks prevalent in the Science Park.
knowledge processes (creation, dissemination This can be done by applying a questionnaire to
and appropriation). Developing this argument, the firms in the Park. The relevant research questions
author analyzes the different types of governance in this step are: do the firms in the Science Park
mechanisms and management that contribute belong to networks? If yes, how many? Are the
to the coordination of knowledge sharing and networks local, national or global? Do networks
238
involve formal or informal contacts? What are SUMMARY AND CONCLUSION

their aims? What is the frequency of relationships?
How interactions take place (emails, meetings, By having a systemic profile, Parks present a
workshops, videoconferences, social events etc.). great challenge for their managers: to intensify
What are the results of interactions? Did the firm their role in coordinating activities related to the
enter new networks after entering the Park? Is the processes of the creation, dissemination and pro-
purpose of new networks different? To understand tection of knowledge, and developing governance
the process of network creation and strengthen- mechanisms that take into account the creation
ing is crucial for Park managers, because they and strengthening of organizational networks.
can enhance this process by tapping their own Based on a review of cluster characteristics,
networks and extending benefits of networks to we suggested that organizational networks are
all organizations located in the Park. important to develop innovation since they allow
The third step is an assessment of the role of for benefits that stem from relational proximity.
Park services in the fostering of organizational Therefore, the research question dealt with here
networks. This can be done by interviewing Park was how SPs, as innovation focused clusters, can
managers. The relevant research questions in this contribute to the generation and strengthening of
step are: what are the specific services provided organizational networks and how these networks
by SPs to disseminate knowledge? What is the deal with the processes of knowledge creation, dis-
role of each Park agent in the provision of these semination and appropriation in order to develop
services? The services provided will differ ac- sustainable competitive advantages.
cording to the stage of maturity of the firm. For We tried to answer these questions by review-
instance, services provided to mature firms such ing in scientific indexed papers studies of Science
as research laboratories of transnational compa- Parks. As clusters are created with the specific
nies will focus on the strengthening of networks goal of innovation development, we expected
that already exist so that risks associated with the to find papers that included in their analysis an
entrance of new partners attracted by their location assessment of organizational networks as core
in the SP are mitigated. competencies that sustain the organization in
The fourth step is an assessment of the gover- the pursuit of dynamic innovation. However, the
nance mechanisms and their relation to knowledge analysis of the SPs literature showed that although
generation in the Park. This can be done through they have been studied as part of an innovation
interviews with firms and Park managers. The system, little attention has been given to the role
relevant research questions in this step are: how of organizational networks in the process of tech-
are information flows in the network organized? nological learning and generation of innovation.
How are the results of interactions disseminated Science Park literature, therefore, should
through networks? How is it possible to control broaden its scope. While studies focusing on
results of interactions and their appropriateness? performance of firms and the attractiveness of
These questions are important because the demand SPs are important to assess their relevance as tools
for high speed and quality businesses deals gen- for regional development, studies of knowledge
erated by existing networks. Clear and efficient creation inside the Parks are needed to assess
governance mechanisms can provide a significant whether SPs provide a relevant contribution to
reduction of transaction costs for the enterprises innovative activities and can thus meet the original
and for the Park itself. objectives of the Park. As Parks seem to have a
path dependency and can present signs of aging
239
with declining performance, understanding how Britto, J. N. P. (2002). Cooperao interindustrial e

innovation is created inside the Park may provide redes de empresas. In Kupfer, D., & Hasenclever,
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ability. The contributions of the New Institutional Tericos e Prticas no Brasil. Rio de Janeiro,
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Chen, C. J., Wu, H. L., & Lin, B. W. (2006). Evalu-
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suggest a step-by-step method to analyze Science para as empresas nacionais Que concluses?
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Clusters: Agglomerations of enterprises in a

same territory that may develop relations between
them.
243
Section 3
Entrepreneurship and
Innovation
245
Chapter 14
Entrepreneurial Learning
and Innovation:
Building Entrepreneurial Knowledge
from Career Experience for the
Creation of New Ventures
Jonas Gabrielsson
Lund University, Sweden
Diamanto Politis
Halmstad University, Sweden
ABSTRACT
The relation between entrepreneurial learning and innovation is poorly understood especially with
respect to how entrepreneurs build up their capability to create new ventures. In this chapter we employ
arguments from theories of experiential learning to examine the extent to which entrepreneursprior career
experience is associated with entrepreneurial knowledge that can be productively used in the new venture
creation process. We relate entrepreneurial knowledge to two distinct learning outcomes: the ability to
(1) recognize new venture opportunities, and (2) cope with liabilities of newness. Based on analysis of
data from 291 Swedish entrepreneurs, we provide novel insights into how and why entrepreneurs differ
in their experientially acquired abilities in different phases of the new venture creation process.
DOI: 10.4018/978-1-61350-165-8.ch014
Entrepreneurial Learning and Innovation
INTRODUCTION intermediate learning processes that link inputs

to outputs (Reuber & Fischer, 1999; Minniti &
The important role of entrepreneurs in bringing Bygrave, 2001; Corbett, 2005; Politis, 2005).
innovations into the economic system has been Although convenient, such an approach treats
emphasized at least since the workings of Schum- the important issues of knowledge accumulation
peter (1934). A question that still intrigues schol- in entrepreneurial contexts as a black box and
ars is why some individuals are more successful thus overlooks both the sources and outcomes
than others in the practice of entrepreneurship. of entrepreneurial learning. As a result, there is
Past research has shown that it is difficult if hitherto limited scholarly understanding of how
not impossible to point out a single factor that enterprising individuals can build up their ability
explains entrepreneurial success. The most widely to spot and seize opportunities for entrepreneurial
acknowledged viewpoint, however, is that suc- profit throughout their professional careers.
cessful entrepreneurs have acquired relevant and A change in focus towards individual-level
valuable experiences throughout their professional learning outcomes, however, necessitates a dis-
careers (e.g., Minniti & Bygrave, 2001; Rae & tinction between experience on the one side and
Carswell, 2001; Shane, 2003). This experiential knowledge on the other. One way to distinguish
base in turn enables the development of personal between the two is to follow Reuber, Dyke and
and unique knowledge structures and insights that Fischer (1990) and consider experience as a
can be put into productive use in the new venture direct observation of, or participation in, events
creation process (Politis, 2005; Corbett, 2007). while the practical wisdom resulting from what
Yet despite this general inference, there have been an individual has encountered represents the
very few empirical studies that have examined knowledge derived from this particular experi-
the extent to which various career experiences ence (see also Kolb, 1984). If we accept this, then
lead to entrepreneurial knowledge that can be a relevant question is to what extent there is an
used in the practice of starting up and managing association between particular career experiences
new innovative ventures. So far, the bulk of past and the acquisition and development of valuable
research has instead primarily been concerned with knowledge that can be put into productive use in the
examining associations between entrepreneurs process of new venture creation. Prior studies are
career experience and the performance of their unfortunately of little help to answer this question.
new ventures (e.g., Cooper, Woo & Dunkelberg The two concepts experience and knowledge
1989; Brderl, Preisendorfer & Ziegler 1992; have instead most often been used interchangeably
Reuber & Fischer 1993; Butt & Khan 1996). The with an implicit assumption that entrepreneurs
focus in past research has thus primarily been on prior career experience automatically leads to
firm-level outcomes, while learning outcomes entrepreneurial knowledge. Whether this implicit
among individual entrepreneurs on the other hand assumption bears some (or any) truth is however
have been largely neglected. an empirical question and something which up to
Scholars with an interest in learning and knowl- date has received very limited empirical attention
edge accumulation in entrepreneurial contexts despite its relevance for both theory and practice.
have recently started to explore individual-level Based on the discussion above, the purpose
learning outcomes (e.g., Harrison & Leitch, 2008). of this chapter is to examine the extent to which
The main argument emphasized for doing this entrepreneursprior career experience is associated
is that previous studies have made great infer- with entrepreneurial knowledge that can be put
ential leaps from career experiences directly to into productive use in the process of new venture
firm performance, without any attention to the creation. In the study we treat entrepreneurial
246
knowledge as a theoretical construct proxied by role in this process as they are the ones who make
two distinct learning outcomes that have been ideas for new or better ways of serving customers
emphasized in recent entrepreneurship research: and markets come into existence by identifying
their ability to (1) recognize new venture op- and acting on opportunities for entrepreneurial
portunities and (2) cope with liabilities of new- profit (Shane & Venkataraman, 2000). Several
ness. Through our literature review we identify scholars emphasize the role of knowledge for the
four career experiences that can be expected to pursuit of entrepreneurial activities, by relating the
lead to these two learning outcomes: industry- opportunities that people recognize and exploit to
specific experience, small business management information and knowledge asymmetries in the
experience, varied management experience, and economy (e.g., Venkataraman, 1997; Shane, 2000;
cross-functional experience. Based on statistical Ardichvili, Cardozo & Ray, 2003; Shane, 2003;
analysis of empirical data gathered from 291 De Clercq & Arenius, 2006; see also Kirzner,
practicing entrepreneurs in Sweden, we find that 1973). A common argument in their writings is
entrepreneurs differ in their ability to perform that only a few people have knowledge about in-
in different phases of the new venture creation ventions, inefficiencies or resources that currently
process depending on their prior career experi- are not put to their best use, and that by making
ence. In all, the findings support our conjecture productive use of this knowledge they are able to
that there is a need to distinguish between the spot and seize opportunities for entrepreneurial
two concepts experience and experientially profit. This knowledge is moreover based on the
acquired knowledge in future research on en- education and accumulated career experience they
trepreneurial learning. have obtained throughout their professional lives
The rest of the chapter is structured as follows. (Shane, 2000).
The next section presents the background where In this study we have set out to examine the
we review relevant literature and define our key extent to which entrepreneurs prior career experi-
concepts. The literature review is followed by a ence is associated with entrepreneurial knowledge.
section where we present the hypotheses guiding By this, we mean knowledge that entrepreneurs
our study. Once the hypotheses are outlined, we can put into practical use to produce or create
present the method section with a description of a desirable outcome in the process of new ven-
the sample and variables used. Thereafter follows ture creation. Shane and Venkataraman (2000)
the analysis and a presentation of the results. The delineate entrepreneurship as an activity that
study ends with a discussion of the findings and involves the discovery, evaluation and exploita-
suggestions for future research. tion of opportunities to introduce new goods and
services, ways of organizing markets, processes
and raw materials through organizing methods
BACKGROUND that previously have not existed. This definition
helps us to identify two distinct phases in the
Innovation involves a complex evolutionary new venture creation process the first being
process, where many actors and institutions in- opportunity recognition where opportunities for
teract in the creation of new entities of economic new ventures are discovered and subsequently
significance (Edquist, 1997) from the initial evaluated (Ardichvili et al., 2003), and the second
embryonic pieces of information and knowledge being opportunity commercialization where a
that create opportunities for doing novel things, new venture is formed and established (Delmar &
to the innovations ultimate diffusion in society Shane, 2004). Individuals may in reality engage
(Fagerberg, 2005). Entrepreneurs play a crucial in both phases simultaneously, for example if they
247
are involved in several concurrent projects that with liabilities of newness when organizing and
are in different stages of development. However, managing new ventures.
the initial organizing and development of a new Extant research points toward the importance
venture centers on a new venture opportunity that of personal first-hand work experience for devel-
must have been recognized and evaluated at some oping the ability to recognize and exploit new
earlier point in time. Thus, from a theoretical point venture opportunities (Politis, 2005; Corbett,
of view, opportunity commercialization cannot 2007). For example, empirical studies suggest
take place without prior opportunity recognition. that experienced business founders throughout
In line with this discussion, we relate entre- their career develop a unique knowledge cor-
preneurial knowledge to two distinct learning ridor through which they interpret the outside
outcomes that have been emphasized in recent en- world, which in turn enhances their ability to
trepreneurship research (Politis, 2005; Huovinen recognize and evaluate additional new venture
& Tihula, 2008). The first learning outcome refers ideas (Ronstadt, 1988; Venkataraman, 1997). It
to knowledge that increases entrepreneurs ability is this knowledge corridor that enables them to
to effectively recognize new venture opportunities. use their experientially acquired knowledge base
A successful entrepreneur is in this respect often to assess the potential benefit in an opportunity in
described as an alert person who is aware of, or either a positive or negative light (Park, 2005). The
receptive to, unevenly distributed information ability to make sense and use of new information
about market imperfections (Kirzner, 1973; Shane to find ideas for new venture opportunities, to as-
& Venkataraman, 2000). This personal and highly similate them and apply them to commercial ends
localized information can then be used as a basis can hence to a large extent be seen as a function
for developing the first entrepreneurial insights of an individuals prior experience (Cohen an&d
into a more developed idea of how the market Levinthal, 1990; Rae, 2000; Shane, 2000).
need might be served and resources deployed Based on the reasoning above, it seems fair
to yield profit (Ardichvili et al., 2003). The sec- to argue that the extent to which individuals are
ond learning outcome refers to knowledge that effectively involved in recognizing and exploiting
increases entrepreneurs ability to organize and new venture opportunities can be expected to be
manage new ventures, which in practice means highly dependent on their prior career experi-
coping with liabilities of newness (Shepherd, ence. A conceptual foundation for understanding
Douglas & Shanley, 2000). The term was origi- how individuals acquire and develop knowledge
nally coined by Stinchcombe (1965) who in his based on their career experience can be found in
seminal study reported that the risk of business theories and models of experiential learning (for
closure is highest at the point of founding of an applications of experiential learning theory in
organization, and decreases with growing age of entrepreneurship studies, see e.g. Bailey, 1986;
the organization. The reasons for this risk were Johannisson, Landstrm & Rosenberg, 1998;
certain liabilities that newcomers suffer compared Baum et al., 2003; Corbett, 2007). A key tenet
to already established players, such as the lack of a in theories of experiential learning is the need to
stable portfolio of clients and the time required for draw a distinction between the experience of an
learning new organizational roles to be performed individual and the knowledge he or she acquires
by their members. In sum, entrepreneurial knowl- from that experience (Reuber et al., 1990; Politis,
edge can from this discussion be conceptualized 2005). This observation can be related back to
as knowledge facilitating the ability to recognize Kolb (1984) who argues that experiential learn-
new venture opportunities, and to effectively cope ing requires at least two interrelated dimensions,
namely the grasping of experience, and then some
248
transformation of this particular experience into opportunities and to organize and manage new
knowledge. Hence, the simple perception of an ventures. For example, studies have shown that
experience is not sufficient for learning to hap- entrepreneurs tend to start businesses in industries
pen, which requires that something must be done in which they were previously employed, because
with it. Similarly, transformation alone cannot this allows them to take advantage of important
represent learning for there must be something to information and knowledge gained during this
be transformed, some state or experience that is period (Aldrich, 1999). Entrepreneurs with prior
being acted upon. This distinction means, at least industry experience also generally have a better
conceptually, that the experience of an individual understanding of how to meet demand conditions
will not automatically represent the knowledge in the market place (Shane, 2000). Moreover, the
derived from this particular experience. Further, products, services, customers and suppliers of
it can be conjectured that some career experiences surviving ventures have been found to be more
are more beneficial than others for the acquisition closely related to the products, services, custom-
and development of entrepreneurial knowledge. ers and suppliers of the entrepreneurs previous
Thus, the conceptual distinction between experi- employers, compared to non-surviving ventures
ence and knowledge that is made in theories of (Cooper, Dunkelberg & Woo, 1988; Bates &
experiential learning intensifies the question of Servon, 2000). Industry-specific experience can
how different kinds of career experiences may lead hence be expected to provide entrepreneurs with
to the development of entrepreneurial knowledge valuable insights about relevant contacts, reliable
that can be productively used by entrepreneurs in suppliers, viable markets and product availability,
the process of new venture creation. all of which could influence their ability to rec-
ognize new venture opportunities and cope with
liabilities of newness (Cooper et al., 1993; Politis,
DEVELOPMENT OF HYPOTHESES 2005). Based on these arguments, the following
hypotheses are proposed:
In the following section we will develop hypoth-
eses which associate particular career experi- H1a: Prior industry-specific experience is posi-
ences with the two learning outcomes that were tively associated with a higher number of
previously identified. For this discussion we recognized new venture opportunities.
have deliberately chosen career experiences that H1b: Prior industry-specific experience is posi-
have received limited empirical attention in past tively associated with an ability to better
research, even though they are often expected to cope with liabilities of newness.
be conducive to entrepreneurial learning. Theo-
retically, the hypotheses are grounded in the con- Small Business Management
ceptual discussion above together with empirical Experience
literature and research on entrepreneurial learning
and development. Another kind of career experience that has been
highlighted in research on entrepreneurial learn-
Industry-Specific Experience ing is management experience (Cooper, Woo &
Dunkelberg, 1989; Duchnesneau & Gartner, 1990;
Past research suggests that prior industry-specific Reuber & Fischer, 1994). Management experience
experience can facilitate the development of may in this respect provide entrepreneurs with
valuable knowledge that enhances entrepre- knowledge of markets, ways to serve markets,
neurs ability to both spot and seize new venture and customer problems, all of which are impor-
249
tant dimensions in the process of entrepreneurial activities (Reuber 1997; Reuber & Fischer 1994).
discovery (Shane, 2000). A consistent finding Varied management experience refers to experi-
from previous reviews of management studies ence from managing people in different firm
is however that managerial work is contextually contexts. Individuals with such experience are
dependent, rather than task-dependent (Hales, for example generally used to dealing with sub-
1986; Whitley, 1989). This implies that managerial ordinates in the organization and it may also bring
work requirements vary considerably, depending valuable knowledge about a wider set of potential
on functional area, management level, and orga- customers and reliable suppliers, as well as valu-
nizational attributes such as type, structure, size able social contacts with important stakeholders
and industry (Reuber, 1997). Empirical studies (Baucus & Human 1994; Hambrick & Crozier
suggest that small firms are the most typical setting 1985). Moreover, varied management experience
where entrepreneurs carry out their managerial may provide exposure to a wider variety of situa-
work (Butt & Khan, 1996; Cooper et al., 1989; tions and problems, and it is often through surviv-
Gimeno et al., 1997; Lee & Tsang, 2001; Reuber ing and understanding such novel situations that
& Fischer, 1994). Previous experience from learning takes place (Fiol & Lyles, 1985; Reuber,
managing a small business can thus be expected 1997). Varied management experience from firms
to provide budding entrepreneurs with training with different sizes may in this respect increase
in many of the skills needed for recognizing and entrepreneurs ability to handle problems that are
acting on entrepreneurial opportunities, including taken for granted in the small firm context, as
negotiating, leading, planning, decision-making, diversity in cognitive inputs often reduces the risk
problem-solving, organizing and communicating of home-blindness, path-dependence and lock-in
(Romanelli & Schoonhoven, 2001; Shane, 2003). (e.g., Krueger, 2009). Thus, having management
Entrepreneurs with previous management experi- experience from businesses of varied sizes can
ence are moreover generally found to have a higher be an additional dimension that also may be
likelihood of success, implying that they are better fruitful to consider when investigating sources
prepared to cope with traditional obstacles facing of entrepreneurial knowledge (Dyke, Fischer &
new ventures (Cooper et al., 1989; Duchnesneau Reuber, 1992). Hence, the following hypotheses
& Gartner, 1990; Stuart & Abetti, 1990). Based are proposed:
on these arguments, the following hypotheses
are proposed: H3a: Varied management experience is positively
associated with a higher number of recog-
H2a: Prior small business management experience nized new venture opportunities.
is positively associated with a higher number H3b: Varied management experience is positively
of recognized new venture opportunities. associated with an ability to better cope with
H2b: Prior small business management experi- liabilities of newness.
ence is positively associated with an ability
to better cope with liabilities of newness. Cross-Functional Experience
Varied Management Experience Another experience dimension that has attracted

scholarly interest is the functional experience of
In addition to small business management ex- the entrepreneur (Cooper, 1985; Reuber & Fischer,
perience, there are also indications that varied 1994; Stuart & Abetti, 1990; Sykes, 1986; Vesper,
management experience may be beneficial for 1980). This type of experience relates to profes-
individuals that are involved in new venturing sional experience from various functional areas,
250
such as management, production, product develop- the empirical study as a questionnaire survey.
ment and R&D, marketing and selling, accounting, The measures were derived from a careful review
finance, etc. Previous research has failed to find of previous theoretical and empirical work on
any consistent associations between particular experiential and entrepreneurial learning. Before
types of functional experience and new venture sending out the questionnaire, it was pilot-tested
performance (Stuart & Abetti, 1990). Rather, the on a smaller group of practicing entrepreneurs
empirical findings indicate that entrepreneurial and entrepreneurship scholars. Based on this
learning stems from having functional experience feedback, the questions were honed and clarified
across different kinds of business functions. In for the final research instrument.
a study of success factors of new ventures, Ves- The initial sample included 1000 randomly
per (1980) found that experience from different selected entrepreneurs who each started an
functional areas was an indicator of better new independent new firm in 1998-2002. We col-
venture performance. In line with these findings, lected information about contact addresses from
Cooper (1985) found that the participation in or Statistics Sweden and the questionnaire was sent
observation of a wide range of business functions out in early fall 2004 addressed to the CEOs of
was an experience relevant to successful venture the targeted firms. To verify that the person who
formation in his study of incubator organizations. answered the questions had experience of starting
Moreover, Sykes (1986) found a very strong cor- up a new firm, we included a control question in
relation between new venture financial success the questionnaire. After the first mailing round we
and having both previous management and sales immediately received 15 envelopes in return, due
experience. Experience from a broad array of to problems of finding the individual entrepreneur
functional areas seems consequently to result in (unknown address, ownership changes, liquida-
the consideration of more alternatives and more tion etc.). This reduced the total number of cases
careful evaluation of alternatives cognitive to 985. After one postal follow-up we received
processes that generally also are considered to 303 complete questionnaires, corresponding to a
contribute to the quality of decision-making in valid response rate of approximately 30.8%. This
uncertain environments (Milliken & Vollrath, response rate compares favorably to similar studies
1991). Based on these arguments, the following of entrepreneurial learning (e.g. Dyke, Fischer &
hypotheses are proposed: Reuber, 1992; Reuber & Fischer, 1994; Ucbasaran,
Westhead & Wright, 2008). Before making the
H4a: Cross-functional experience is positively as- final analyses we excluded responses from 12
sociated with a higher number of recognized individuals who had no experience of starting up
new venture opportunities. a business. This led to a final sample of 291 cases.
H4b: Cross-functional experience is positively We conducted chi-square and t-tests to assess
associated with an ability to better cope with whether the results from the sample could be
liabilities of newness. generalized to the population. These tests revealed
no statistically significant differences between
respondents and non-respondents with regard
RESEARCH METHOD to industry, geographical location, firm size and
age of their current business. In addition, we con-
Sample ducted chi-square and t-tests to examine if there
were any differences between first-round (69.6%
To answer the research question and test the hy- of total responses) and second-round (30.4% of
potheses developed in this chapter, we designed total responses) respondents. No significant dif-
251
ferences could be found between the early and the quantity rather than the quality of new venture
late responses with respect to the same variables. opportunities. However, in a larger pool of new
Moreover, no significant differences were found venture opportunities there is greater likelihood
between early and late respondents with regard to that one or some of them can develop into a vi-
the variables used in the study (see next section able business concept (Ucbasaran, Westhead, &
below). Hence, on these criteria we have no reason Wright, 2008). Based on this argument, we thus
to suspect that there are any significant response posit that there is a value in generating more rather
biases in our sample. than fewer new venture opportunities.
The second learning outcome variable was
Variables and Measures the entrepreneurs self-assessed ability to cope
with liabilities of newness. This variable was
Dependent Variables constructed using the mean of four items on a
Likert-type scale, where respondents were asked
In the study we treat entrepreneurial knowledge as to rate the extent (1 = very low extent, 5= very
a theoretical construct, proxied by the self-assessed high extent) to which they would consider the
ability to recognize new venture opportunities following obstacles as problematic if they were
and cope with liabilities of newness. In line with currently involved in creating and organizing a new
our frame of reference, the first learning outcome venture: (1) convincing potential clients about the
variable was constructed by an item measuring the new venture, (2) uncertainty regarding the market
number of new venture ideas which the entrepre- potential for the product or service, (3) lack of
neur had in the last year and which could lead to stable relationships with key stakeholders, and
a potential new business or a significant part of a (4) uncertainty regarding roles and functions in
business. This conceptualization is consistent with the organization that a new venture would require.
previous research on opportunity development, The responses were then reverse-coded so that a
suggesting that the process starts with the percep- higher score on the scale indicates an ability to
tion of opportunities for recombining resources better handle liabilities of newness. These ques-
on the market that the entrepreneur believes will tions were developed expressly for this research
yield profit, and where the idea for a new venture based on prior theoretical work on the liabilities
continually develops as individuals shape these of newness (Aldrich, 1999; Shepherd et al., 2000;
elemental insights into a notion of an emerging Starr and Bygrave, 1992; Stinchcombe, 1965).
business concept (i.e., Bhave, 1994; Ardichvili Cronbachs alpha () for this construct was.59.
et al., 2003; Klofsten, 2005). We validated the However, as can be a relatively weak indicator
measure against an item measuring the number of of internal consistency when few variables are
business opportunities (defined as unmet customer employed in a composite measure, we also checked
needs) that the entrepreneur had seized during item-to-total correlations by applying the rule-of-
the last five years. The result shows that the two thumb procedure suggested by Hair et al. (1998).
items are positively and significantly associated at Here we found that the item-to-total correlations
p <.01, which also supports our conceptualization were between.59 and.71, which was well above
of the opportunity development process described the suggested limit of above.50. Moreover, to
above. A higher score on this item indicates a higher assess whether our measure could be associated
number of recognized new venture opportunities. with any firm-level performance advantages when
Due to a skewed distribution, the variable was exploiting new venture opportunities, we initially
transformed using a logarithmic transformation. set out to collect information about firm survival.
We acknowledge that this item is biased towards These data were collected in 2007 by identifying
252
the number of firms in the sample that were still Control Variables
operating during 2006. However, we could locate
only a handful of firms (n=27) that had closed We also included three control variables in the
down. This rendered us unable to correlate our research model. The first control variable was
liability of newness measure against a measure of related to the individuals experience of discon-
survival. Instead, we made analyses with respect tinuing their earlier ventures due to bankruptcy.
to firm sales growth (the year-to-year average We included this control as research has shown
change in sales). Through this procedure we found that owners often believe they learn significantly
that entrepreneurs with a higher reported ability from a business closure process so that they are
to handle liabilities of newness to a significantly better equipped to run businesses in the future
higher extent were in a high-performing group (Stokes & Blackburn, 2002; Politis & Gabriels-
(with a sales growth which was 2.5 or higher, p. son, 2009). Experience from business closure
>.05), which may be a sign of an ability that the may moreover affect the entrepreneurs ability to
entrepreneur can cope with traditional obstacles attract further resources in his or her subsequent
more effectively in the early development of a firm. venturing activities (Cope, Cave and Eccles,
2004). Bankruptcy experience was measured as a
Independent Variables dichotomous variable, indicating if the respondent
had previous experience from discontinuing an
The research model involves four main indepen- earlier venture due to bankruptcy (0= no, 1= yes).
dent variables. Industry-specific experience was The second control variable was the prior start-up
measured as the entrepreneurs total number of experience of the respondent. We included this
years of experience from the industry they now control as it is widely acknowledged that prior
operate in. Small business management experi- experience from starting a new venture increases
ence was measured as the number of years that the probability that an individual will continue
the entrepreneur has had a management position to identify and exploit new venture opportuni-
in a small firm. Here, we followed the EU defini- ties (Duchesneau & Gartner, 1990; Shane, 2003;
tion of a small firm as a firm with less than 50 Shane & Khurana, 2003). The primary reason for
employees. Experience from varied management this expected association is that the experience
positions was measured as a dichotomous vari- gained from starting up one business enables the
able, indicating if the entrepreneur had experience entrepreneurs to recognize and act on further en-
also from management positions in medium-sized trepreneurial opportunities they could neither see,
or large firms (0= no, 1= yes). Cross-functional nor take advantage of, until they had started their
experience was measured as the number of dif- initial venture (Ronstadt, 1988; see also Shepherd,
ferent business functions that the entrepreneur had Douglas & Shanley, 2000; Starr & Bygrave, 1992
experience from. Based on the work of Stuart and for similar findings). Prior start-up experience was
Abetti (1990), McGee, Dowling and Megginson measured as a dichotomous variable, indicating
(1995) and Entrialgo (2002), we used six func- if the respondent had previous experience from
tional areas to identify and distinguish between starting up a new venture (0= no, 1= yes). The third
different work functions: (1) general management, control variable was related to the entrepreneurs
(2) R&D, (3) manufacturing/production, (4) sales/ experience from working in high-growth indus-
marketing, (5) finance, and (6) law. tries, i.e. sectors of the economy that experience
a higher-than-average growth rate (Storey, 1994).
High-growth industries are generally characterized
by rapid changes and fast technological progress,
253
which in turn can influence the level of opportunity working in two or more industries. About 85%
present in those industries (Shane, 2003). New had experience from having a management po-
business opportunities are hence more likely to sition in a small firm (i.e., firms with less than
occur in growing markets. Studies of managers 50 employees), and the average number of years
operating in high-growth industries have moreover in this position was 9.6 years (min=0, max=35).
suggested that these individuals often are more About 62% of the entrepreneurs had experience
alert in acting on opportunities while repressing from three or more functional areas of expertise,
environmental threats (Covin & Slevin 1989). where functional expertise in general manage-
Studies have furthermore indicated that the ment, marketing/sales and accounting/finance
environment can be highly heterogeneous both was the most common. The number of years of
within and across industries (Keats & Hitt, 1988; experience from these three functional areas were
Zahra, 1993). Therefore we chose to measure the highly correlated with the number of years from
entrepreneurs perception of this type of experi- working as a small business manager (r.=69, r.=45,
ence, rather than to classify specific industries and r.=44 respectively). Over two thirds of the
that we thought could be considered high-growth entrepreneurs (69.6%) had experience as board
industries. We measured industry growth as the members, and 34.5% of the entrepreneurs had
entrepreneurs experience from working in high- experience from investing their own money as
growth industries on a Likert-type scale (1=minor risk capital in unlisted firms in which they have
experience, 5=major experience). no previous family connections.
Sample Characteristics
ANALYSIS AND RESULTS
The individuals in the final sample represent a
broad cross-section of entrepreneurs. Their mean In our research model we have metric measures
age was 47.3 years (min=24, max=73), and the as dependent variables and several metric or
average total years of work experience was 25.4 dichotomous independent variables, so we con-
(min=4, max=50). About 12% of the entrepreneurs sidered linear multiple regression analysis as an
had compulsory school education (7 or 9 years) appropriate statistical technique (Hair et al., 1998).
as their highest education level, 33.7% had edu- A description of the variables used in the analysis
cation also from gymnasium/senior high school, (correlations, means and standard deviations) is
and 50.8% had some sort of higher education displayed in the table in Figure 1.
(university studies). The majority of these indi- We expected some difficulties with using
viduals (68.7%) were moreover entrepreneurs with variables connected to entrepreneurs career ex-
multiple start-up experience, so-called habitual perience in the study. For example, individuals
entrepreneurs (MacMillan, 1986; Westhead & with prior start-up experience also generally have
Wright, 1998). The average number of start-ups experience from managing these ventures. As we
was 2.51 (min=1, max=15), and the average total expected, there were inter-correlations among
work experience of self-employment was 12.8 some of the independent variables even though
years (min=1, max=41). they are well below threshold levels for multicol-
The most common industry-specific experi- linearity problems. All correlation coefficients
ence was from consulting and other business are less than r =.70, which according to Nun-
services (49.3%), followed by wholesale and nally (1978) is the standard threshold used to
retail (28.5%), and construction (28.2%). About determine high correlation. Moreover, all ex-
69% of the entrepreneurs had experience from planatory variables in the regression analysis had
254
Figure 1. Pearson correlation matrix, means and standard deviations
VIFs between 1.02 and 1.35, which lead us to Hypothesis 2b is supported as there is a positive
conclude that no problems of multicollinearity and significant association between small business
exist in our data set. management experience and the ability to cope
To identify the separate effects of the control with liabilities of newness (p <.05). There is no
variables and the four experience variables, we significant association between varied manage-
conducted a stepwise multiple regression. First ment experience and a higher number of recog-
we entered the control variables (Step 1). This nized new venture opportunities, indicating no
step is presented as Equation I. Then we included support for Hypothesis 3a. The data in Figure 2
the four experience variables (Step 2). This step support Hypothesis 3b, however, as there is a
is presented as Equation II. Additional analyses positive and significant association between var-
of the data controlled for the possibility that the ied management experience and the ability to
control variables moderate the relationship be- cope with liabilities of newness (p <.01). The data
tween independent and dependent variables, but in Figure 2 also support Hypothesis 4a, as cross-
these tests did not reveal any significant results. functional experience was positively associated
The results of these analyses will therefore not be with a higher number of recognized new venture
reported. The result of the final multiple regression opportunities (p <.01). But there was no significant
analysis is presented in Figure 2. association between cross-functional experience
The final regression model (Equation II) shows and coping with liabilities of newness, indicating
that there is no association between industry- no support for Hypothesis 4b.
specific experience and a higher number of rec-
ognized new venture opportunities. There is also
no association between industry-specific experi- DISCUSSIONS AND CONCLUSION
ence and the ability to cope with liabilities of
newness. Hence, the empirical data do not support Entrepreneurial learning is a key ingredient in
either Hypothesis 1a or 1b. We can also see in successful innovation, as it supports the produc-
Figure 2 that Hypothesis 2a is not supported, tion and transformation of knowledge into the
showing no association between small business creation of new ventures. It is in this respect
management experience and a higher number of widely acknowledged that different career paths
recognized new venture opportunities. However, create knowledge asymmetries which in turn lead
255
Figure 2. Regression analysis
individuals to value resources differently (Shane, experience, on the other hand, are of value for the
2000). Opportunities for entrepreneurial profit oc- entrepreneur after the formal establishment of the
cur on the basis of such asymmetries when some new venture, as they influence his or her ability to
people, throughout their careers, learn to discover effectively cope with liabilities of newness. Our
and develop ideas for new products or processes empirical findings contribute to current research
that other people are willing to pay for. The ability on entrepreneurial learning where experienceand
to make productive use of their personal stock of knowledge often have been used interchange-
knowledge that entrepreneurs develop from career ably with the implicit assumption that career
experience is thus a key ingredient in the overall experience automatically leads to entrepreneurial
process of innovation where new ideas are com- knowledge. The findings thus suggest that there is
mercialized and diffused in society. a need to reconsider this implicit assumption, and
In this study we add to past research on en- future research will hopefully use these insights to
trepreneurial learning and innovation by showing advance our understanding of how entrepreneurs
that entrepreneurs differ in their ability to make develop knowledge from experience. In addition,
productive use of their knowledge in the new our findings provide valuable insights into the
venture creation process, depending on their practice of new venture creation, specifically
prior career experience. The value of different suggesting that different career experiences may
kinds of career experience can in this respect be lead to different kinds of knowledge advantages
related to different phases in the process of new among entrepreneurs. As such, our study supports
venture creation (Shane & Venkataraman, 2000). the importance of experiential learning for the
Professional experience from various functional development of knowledge that can be produc-
areas is of value for the entrepreneur before the tively used by entrepreneurs in the new venture
formal establishment of the new venture, as it creation process.
influences his or her ability to come up with en-
trepreneurial ideas and insights. Small business
management experience and varied management
256
Limitations riences and learning outcomes, there were some

entrepreneurs who seemed to learn more than
Some potential limitations of the present study others from the same amount of career experi-
should be mentioned. First, we have used a ence. Interestingly, this may suggest that there
simplified model with the aim of examining per- exist not only knowledge advantages depending
sonal experience-related factors that are located on differences in their prior career experience, as
extensively in the entrepreneur. However, new we point out in this study, but also some kind of
venturing activities are in many ways also a so- learning advantages among entrepreneurs with
cial exchange process (Pittaway & Cope, 2007), similar amounts of career experience. If so, this
and entrepreneurs have frequently been found to would imply that some entrepreneurs are more
base their decisions on personal and professional effective in transforming their experience into
advice through their personal networks (Birley, knowledge that can be productively used in the
1985; Aldrich & Zimmer, 1986; Brderl & Pre- practice of starting up and managing new ventures.
siendorfer, 1998). Their personal networks seem However, this discussion is highly speculative
in this respect to provide them with critical and and an examination of these issues would require
essential information, and also expose them to additional variables and more rigorous statistical
new and different ideas and worldviews (Johan- analyses. Nevertheless, it provides some interest-
nisson, 2000; Singh, 2000; Ozgen a&d Baron, ing and relevant ideas for further research which
2007). Our findings are hence only part of the may increase the explanatory power of our theo-
story, and further research should also consider retical model.
dimensions of experience related to entrepre-
neurs social surroundings when investigating the Implications
relationship between prior career experience and
entrepreneurial knowledge. Despite the above-mentioned potential limita-
Second, our two measures of entrepreneurial tions, we believe our study has some important
knowledge were based on the self-assessed ability implications for the practice of entrepreneurship.
to recognize new venture opportunities and cope A general conclusion that can be drawn from our
with liabilities of newness respectively. Although findings is the important role that an individuals
self-perceptive measures can be a fairly good prior career experience plays for the successful
indication of an individuals ability to perform acquisition and development of entrepreneurial
certain tasks (Gist, 1987), this is not necessarily knowledge. The professional career seems in
the same as the actual long-run performance of this respect to expose enterprising individuals
these tasks. To examine this issue further we sug- to distinct learning opportunities (van Gelderen,
gest developing, combining and comparing both van de Sluis & Jansen, 2005) that can enhance
subjective and objective measures in future studies. their ability to recognize and exploit new venture
Third, we should also like to mention that we opportunities. In addition, the findings suggest
are aware of the potential limitations in measuring that different kinds of career experience lead
only the amount or quantity of career experience to different kinds of entrepreneurial knowledge
of entrepreneurs. The reason why we bring this up (Politis, 2005). Cross-functional experience seems
is that we could observe that some entrepreneurs to provide individuals with productive knowledge
derived greater, and others less, benefit from that improves their ability to recognize new ven-
their career experience. Hence, even though the ture opportunities. Small business management
regressed mean in our analyses showed significant experience and varied management experience
associations between some particular career expe- seem on the other hand to provide individuals
257
with productive knowledge that increases their ing, we provide empirical evidence suggesting
ability to handle liabilities of newness in the new that different career experiences are associated
venture creation process. with different kinds of knowledge, which in turn
Interestingly, the empirical findings also show provide the basis for performance differentials in
that there are no significant associations between the new venture creation process. Conceptually,
the ability to effectively recognize new venture we also argue that there is a need to distinguish
opportunities and the ability to effectively cope between experience and knowledge in future
with liabilities of newness. This implies that studies of entrepreneurial learning. In all, we
individuals who have developed one kind of believe that our arguments and findings in this
knowledge advantage have not necessarily de- study contribute a more detailed understanding
veloped the other type of knowledge advantage. of entrepreneurship as an experiential learning
This should be kept in mind, as it implies that an process, which also provides some general impli-
individual entrepreneur is generally not able to cations for future research.
cover all the skills and knowledge areas necessary
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entrepreneurship, and financial performance: than their cost of production (Shane & Venkata-
A taxonomic approach. Journal of Business raman, 2000).
Venturing, 8(4), 319340. doi:10.1016/0883-
9026(93)90003-N
263
264
Chapter 15
Innovation and Corporate
Reputation:
Britains Most Admired Company
Surveys 1990-2009
Michael Brown
Birmingham City University, UK
Paul Turner
Anglia Ruskin University, UK
ABSTRACT
As much as 75% of a companys value derives from its intangible assets. One of the most important
of these intangible assets is corporate reputation. The Britains Most Admired Company surveys into
corporate reputation includes nine characteristics, one of these is a companys capacity to innovate.
Surveys between 1990 and 2009 show that a good reputation for innovation does not guarantee a good
overall reputation; nor does a reputation for innovation lead to business success. However, where a
company has a reputation for innovation and is able to manage other characteristics, there is a better
chance that this company will develop its innovation capability into long-term competitive advantage
and profitability. Central to this conclusion is converting innovation into enhanced processes, products
or services through effective implementation. The research identifies key attributes of companies that
combine a reputation for innovation, with a good corporate reputation overall and business success.
DOI: 10.4018/978-1-61350-165-8.ch015
Innovation and Corporate Reputation
INTRODUCTION or a superior, sustainable, corporate reputation,

either in the medium or long term.
This chapter discusses the relationship between The analysis of the relationship between in-
innovation and corporate reputation. It analyses novation and corporate reputation is intended
peers perceptions of the capacity to innovate as to provide insight into the paradox between the
measured in the Britains Most Admired Company objective of innovation as a route to prosperity and
(BMAC) surveys of corporate reputation, against the actuality of innovation practice, which can be
other measures of reputation such as leadership fraught with difficulty (Dougherty & Heller, 1994).
or financial soundness. Between 1990 and 2009, Do those companies that achieve a high reputation
the surveys produced data on nine measures for innovation have philosophies or practices that
of reputation from 761 British companies. The can help in the solution to this paradox?
perceptions of business leaders who participated There has been research into the relationships
in BMAC surveys provide a perspective on the between innovation and profitability (Xin, Yeung
value of innovation in determining a companys & Cheng, 2010); firm performance (Artz, Norman
overall reputation; and offer insights into the & Cardinal, 2010) and the role of institutional
practices of those companies that achieve a high investors (Kochhar & Parthiban, 1996). Other
rating in the surveys. areas of interest include the relationships between
We use Fombruns (1996) definition of corpo- innovation and the dynamics of organisational in-
rate reputation as the net affective reactions of novation (Monge, Cozzens & Contractor, 1992;
customers, investors, employees and the general the effectiveness of knowledge management
public. Reputation is an internally owned, ex- (Vaccarro, 2010) cooperation and collaboration
ternally evaluated, intangible asset that emanates (De Faria Lima & Rui, 2010); and organisational
from a companys history, location, culture, and change and renewal (Dougherty, 1992). Tzeng
from its distinctive capabilities or competencies. (2009) identified three classifications, or schools
(Kay 1993). One of these competencies is the of thought about innovation from this research,
capacity to innovate. namely those of capability, corporate entrepre-
neurship and culture.
There is less research into the linkages between
BACKGROUND innovation and corporate reputation. The findings
from the BMAC surveys suggest that there are ele-
The Schumpeterian assumption that static firms ments from each of Tzengs three classifications.
rapidly face losses and thus bankruptcy, (Kurz
2007) provides a compelling case for organisations
to be innovative. However, Repennings (2002) BRITAINS MOST ADMIRED
view that the history of management practice is COMPANIES SURVEYS INTO
filled with innovations that failed to live up to CORPORATE REPUTATION (BMAC)
the promise suggested by their early success is
indicative of the case against. Hawn (2004) echoes The Methodology of the
the view suggesting that; some of the most in- BMAC Surveys
novative companies in the history of American
business have been colossal failures. Innovation Since 1990, the BMAC survey has polled senior
alone is insufficient; it does not guarantee delivery executives in companies with the highest market
of corporate objectives, competitive advantage capitalisation on the British Stock Exchange. This
process has provided data over a 19-year period
265
producing approximately 3 million observations. A Longitudinal Analysis of

The BMAC surveys provide continuity of data the Capacity to Innovate
since 35% of the companies that have taken part Characteristic in the BMAC
were in both the first (1990) and the latest (2009) Survey: A Period of Stasis
survey.
These data offer insights as to how a reputation Figure 1 shows the average ratings of each of
for innovation (an intangible asset) translates into the nine characteristics measured in the BMAC
the practice of innovation, leading to successful surveys from 1990-2009. Financial soundness,
business performance and hence profit (a tangible the quality of goods and services and the quality
asset). Heil (2008) makes the case for an ontologi- of management are the three characteristics that
cal enquiry with respect to organisational reputa- have consistently received the highest ratings.
tion, identity and innovation, whilst Courtright Financial soundness has finished in number one
and Smudde (2009) propose a process of identity, position for 12 out of the 19 years of the survey
image and reputation that situates message design and the quality of goods and services on six occa-
in the context of diffusions of innovations theory. sions; and both shared the highest position in 2000.
In both cases, there is an implied link between The quality of management is normally in second
innovation and corporate reputation, though em- or third place. At the other extreme community
pirical evidence does not consistently support this and environmental responsibility is consistently
relationship at the company level. (Brito, Brito the lowest rated of the reputation characteristics.
& Morganti, 2009). British executives and business analysts who
Senior executives of each participating com- contribute to the BMAC surveys rate the capac-
pany provided their perceptions for other com- ity to innovate as less important than other busi-
panies in the sector in which they operated (e.g. ness attributes. For most of the period between
finance, retailing, engineering) across each of nine 1990 and 2009, the relative performance of in-
characteristics that determine a companys reputa- novation as a perceived strength in British com-
tion. namely; the quality of management (QM); panies was consistently low. In 1990 the capac-
financial soundness (FS); the quality of products ity to innovate was in the bottom third of the
(QP); the ability to attract retain and develop top characteristics and remained so for most of the
talent (AADRT); value as a long term investment years of the survey. There have been few periods
(VLTI); the capacity to innovate (CI); the quality of when innovation achieved a high ranking or high
marketing (QMar); community and environmental performance scores. The notable exception was
responsibility (Cer); and the use of corporate assets during the dot.com boom of 1999-2001 when the
(UCA). A companys characteristics are scored capacity to innovate was a more desirable objec-
on a Likert scale of 0-10, (0 = poor, 5 = average tive for businesses than it had been in previous
and 10 = excellent). Bipolar scales in the form years and British companies raised their perfor-
of opposite adjectives, poor to excellent, capture mance. The innovation characteristic was 4th out
the respondents attitudes towards each company of nine in 2001. This was the highest position in
within the sector, for each of the characteristics. the history of the surveys. However, by 2003,
The results are a most admired company for each capacity to innovate again rated sixth or lower.
of the characteristics, and for each sector and a From 2006-2009, only the quality of marketing
Britains Most Admired Company overall. and community and environmental responsibility
ranked below the capacity to innovate in the
BMAC survey.
266
Figure 1. Average ratings for the nine BMAC characteristics 1990-2009
There is further evidence for innovation sta- the relationship between innovation and other
sis when reviewing executive responses to the characteristics using a series of survey correlation
importance of BMAC characteristics between coefficients. The table shows the correlation results
2000 and 2008. Table 1 shows responses concern- at two points in time, 1992 and 2009.
ing the importance of the nine characteristics in In the first year of the analysis, (Saunders,
the BMAC surveys in two years and, whilst the Brown & Laverick, 1992) innovation (CI) is shown
innovation score has increased marginally, it has to be most strongly associated with the ability to
remained in sixth position. attract talent and the quality of marketing. At this
time, a reputation for innovation was dependent
The Correlation between Innovation upon having innovative people in the company
and Other Characteristics in the rather than having innovative processes. In addi-
BMAC Survey tion, the association between innovation and
quality of marketing, the second highest correla-
The rating of innovation in the BMAC surveys tion in 1992, points to innovation being recognised
appears counter to the belief in the importance through a companys external projections, its
of innovation. An explanation for this may be to advertising or PR or through other aspects of the
do with perceptions of actual performance rather marketing mix such as distribution.
than a critique of innovation as an objective for In the second year, however (2009), the rela-
the future. Nevertheless, the BMAC surveys offer tionships had changed. The capacity to innovate is
insights as to how an organisation can convert its associated strongly with the quality of a companys
innovativeness onto practical value added. They products though once again having a strong people
do this by showing the characteristics most closely relationship. Given that employee engagement
associated with innovation. Table 2 identifies and participation in innovation implementation
267
Table 1. The importance of BMAC characteristics 2000 and 2008
Senior executives importance of BMAC characteristics Senior executives importance of BMAC characteristics
- 2000 - 2008
BMAC Characteristics Score BMAC Characteristics Score

1 Quality of Management 8.83 1 Quality of Management 8.79
Ability to Attract, Develop and Retain Top
2 Quality of Products/Services 8.20 2 8.23
Talent
3 Financial Soundness 7.99 3 Financial Soundness 8.13
Ability to Attract, Develop and Retain Top
4 7.84 4 Quality of Products/Services 8.12
Talent
5 Value as a Long Term Investment 7.53 5 Value as a Long Term Investment 7.63
6 Capacity to Innovate 7.23 6 Capacity to Innovate 7.30
7 Use of Corporate Assets 6.78 7 Use of Corporate Assets 7.03
8 Quality of Marketing 6.76 8 Quality of Marketing 6.78
Community & Environmental Responsibil- Community & Environmental Responsibil-
9 5.67 9 6.36
ity ity
Average 7.43 Average 7.60
Standard deviation 0.94 Standard deviation 0.79
Table 2. Comparison of correlation coefficients between BMAC characteristics in 1992 and 2009
1992 2009
QM FS QP Aat Vlti CI QMr CER QM FS QP Aat Vlti CI QMr CER
QM
FS 0.75 0.77
QP 0.64 0.58 0.72 0.67
AAT 0.83 0.71 0.70 0.83 0.80 0.81
VLTI 0.80 0.89 0.63 0.76 0.79 0.83 0.76 0.86
CI 0.58 0.40 0.64 0.71 0.46 0.74 0.65 0.80 0.80 0.75
QMr 0.61 0.41 0.69 0.69 0.48 0.75 0.68 0.61 0.73 0.77 0.66 0.79
Cer 0.41 0.45 0.61 0.45 0.52 0.35 0.40 0.50 0.54 0.57 0.65 0.59 0.60 0.66
UCA 0.85 0.73 0.57 0.77 0.79 0.52 0.55 0.45 0.79 0.77 0.72 0.79 0.79 0.73 0.67 0.62
QM = Quality of management, FS = Financial Soundness, QP = Quality of Goods and Services, AAT= Ability to attract, develop and
retain top talent, VLTI = value as a long term investment, C2I = Capacity to innovate, QMr = Quality of Marketing, Cer = Community and
Environmental Responsibility, UCA = Use of corporate assets
268
is a complex role (Cadwallader, Jarvis, Bitner sors with this leadership style before initiating the
& Ostrom, 2010) there is sense in seeing the implementation of innovations. The BMAC data
strength of the relationship between the people give further credence to this finding.
characteristic and innovation. Furthermore, Fidler The following sections will test some of the
and Johnson (1984) argued that: changes in strength of association by highlighting
the type of company and business sectors that have
The capacity of a decision unit to induce innova- performed well in the innovation characteristic and
tion implementation within an adoption unit is drawing lessons from their experiences.
crucial to organizational success. Risk and com-
plexity are characteristics of innovations that can The Ranking of Companies and
lead to resistance within organizational adoption Business Sectors in the Capacity
units. Communication costs, types of power, and to Innovate Characteristic
communication channels are structural charac- in the BMAC Survey
teristics that can be used by a decision unit to
overcome this resistance. The interaction of these Since 1990, only two companies that finished
factors can determine the degree of successful top in the innovation characteristic of the BMAC
innovation implementation within organizations. survey also came top overall (Tesco and BSkyB).
Others have fared less well. The 1995 innovation
The results of the BMAC surveys suggest winner for example, British Land, came in 20th
that effective people management, culture and in the overall positions for corporate reputation
communication are critical success factors to suc- and Burford, 1997s most innovative company,
cessful innovation. Indeed, Klein and Sorra (1996) came in 36th overall. Technology company ARM
proposed that implementation effectiveness, the Holdings, the 2006 innovation characteristic win-
consistency and quality of targeted organizational ner also came in 36th in the overall assessment of
members use of an innovation, is a function of (a) corporate reputation. The American Most Admired
the strength of an organizations climate for the Company surveys mirror the discrepancy between
implementation of that innovation and (b) the fit a reputation for innovation and overall reputation
of that innovation to targeted users values. The performance. In 2007, for example, Apple, Google
increasing strength of association between innova- and FedEx were the top three in the innovation
tion and people management in the BMAC survey category but did not make the top five overall. In
between 1992- 2009 is further recognition on the 2006 only Apple and in 2005 only FedEx from
importance of this association on the part of those the top three most innovative companies made
executives who participated in BMAC surveys. the top 20 overall in the Americas Most Admired
There are two other areas where the association Company surveys. The conclusion from these
appears to be strong. In the first, the correlation comparisons is that a reputation for innovation is
between innovation and value as a long-term no guarantee of a reputation for overall business
investment has increased markedly (an increase reputation.
in correlation from 0.4 to 0.7). Secondly, the There is further evidence of this ambivalence
association between innovation and the quality when looking at sector analysis for innovation
of management characteristic has also increased reputation. Between 1994 and 2009, innovative-
markedly (from 0.5 to 0.7) thereby giving support ness was a feature of many industries rather than
to Michaelis, Stegmaier and Sonntags (2010) view just one showing a broad sweep of innovation in
that companies should invest in transformational the British economy. On the other hand, there is the
leadership training and in the selection of supervi- negative connotation that few industries appear to
269
have built a sustained competitive position through shown excellence for reputation in innovation,
innovation. For example, the finance sectors share overall and backed this up with strong financial
of vote for innovation over the period 19962006 results, British Banks, and other business sectors
increased from 1% to 13%. However, after 2008, failed to convert innovation into business success
there was a collapse in the sectors reputation for with any consistency (and the banks failure was
innovation. This may have been a backlash at dramatic).
too much innovation and too little governance or
financial control, especially in the area of dealing The Challenges of Innovation
with sub- prime mortgage financing and derivative in Larger Companies
products. The highest rated Bank in the BMAC
survey in 2009 was Banco Santander at 44th place Why is innovation such a challenge? The evi-
for innovation. Royal Bank of Scotland was the dence from the BMAC surveys seems counter
170th most innovative company in Britain in 2009 to perceived wisdom about the importance of
(29th in 1999); Lloyds Banking Group was the innovation in organisations. There are several
176th most innovative company (24th in 1998). The possible explanations for this. First, executives
British financial services sector, once perceived regarded innovation in the lower range of critical
as one of the most innovative of all the business management activities and therefore not deserv-
sectors was, by 2010, an innovation laggard. ing of the higher scores given to, say, financial
Other sectors have been able to build more sus- management or quality of management. Second,
tainable reputations for innovation. The chemicals they regarded innovation as important, but did
and engineering sectors have had high reputations not rate the performance of British companies as
for innovative practices. The technology sector, being particularly innovative. A third possibility
on the other hand has had a variable performance, however, is that the executives had insights about
though in recent times, BSkyB has enhance that the challenges of innovation in the type of large
reputation considerably. Telecommunications organisation that made up the constituents of the
increased its share of the innovation vote re- BMAC surveys and this was reflected in their
flecting developments in the mobile business and assessment. There is research evidence to support
recently there was recognition for Autonomy (4th this hypothesis.
in 2009) and Qinetiq. Both the media and retail On the one hand, there are arguments in fa-
sectors, however, saw their shares of innovation vour of the scale advantages of large companies
votes fall over the period of the survey. In the and innovation success. Research has shown, for
period 2000-2002 Tesco, Iceland, Dixons, Next, example, that the financial rewards of innovation
Selfridges, French Connection and Morrisons vary dramatically across firms and are tied closely
were amongst those retailers rated highly for their to firms resource base. Firms that provide higher
innovative qualities (retailers received 23% of the per-product levels of marketing and technology
votes for innovation.) By 2009, only Tesco, from support obtain much greater financial rewards
the retailing sector, made the top 20 companies, from their radical innovations than do other firms
though some of their suppliers Britvic, Diageo and (Sorescu, Chandy & Prabhu, 2003). Those organi-
Cadbury were all in high positions in this year. sations that have resources to back up innovation
Results of the BMAC survey from 1990-2009 are more likely to reap the benefits. Large organi-
show that a reputation for the capacity to inno- sations, though not exclusively, would feature in
vate is difficult to sustain and furthermore is not this category. On the other hand, research has also
a guarantee of a reputation for overall business shown that there are barriers to innovation in large
performance. Whilst Tesco and BSkyB have established firms. (Dougherty & Heller, 1994)
270
and that fostering innovation and supporting a Deconstructing the total reputation into its con-
culture in practice...is easier said than done (Jas- stituent parts provides an opportunity to undertake
sawalla & Sashittal, 1993). In addition, even when a more detailed analysis of the performance of
a company was successful in innovation and had these two companies.
achieved a reputation for innovation, there was
no guarantee that this would filter through to the Innovation Paradox: The
companys wider reputational standing. Case of Pilkington Glass
Further analysis of the performance of specific
companies that have featured in BMAC surveys Pilkington Glass is a successful company that
may shed some light onto the subject of innovation achieved sustained recognition for its capacity
and its conversion into business success. to innovate between the years 1990-2006 in the
BMAC surveys. However, their experience also
confirms that achieving an excellent reputation
INNOVATION AND PERFORMANCE: in a single characteristic will not necessarily
KEY LESSONS FROM THE RESULTS filter through to an excellent overall reputation.
OF THE BMAC SURVEYS The reason behind this may be that a good deal
of the companys strategic effort and resource is
Innovation Stasis perceived as being allocated to a single area. Such
focus may well detract from other important busi-
Research from BMAC data has suggested that ness activity, whether this is through a dilution of
innovation is not as highly regarded as other management effort or an imbalance in resource
business attributes such as financial soundness allocation. This observation supports Teeces
or quality of management in determining a com- (1988) finding that the competitive potential em-
panys reputation. Moreover, over the period of bedded in new technology is difficult to capture.
the BMAC surveys, the results for innovation The experience of Pilkington demonstrates this
remained in stasis. Why should this be the case point to some extent and we refer to this as the
given the strong assumption that innovation is Pilkington Paradox.
such a critical aspect of sustained performance? Pilkington Glass was established in 1826 and,
One hypothesis is that the challenge of convert- during the years of the BMAC survey from 1990,
ing innovation reputation and, by implication, achieved an international reputation for innova-
innovation actuality into business performance is tion. Figure 2 outlines its composite scores. Over
difficult. There are exceptions, such as Tesco, Rolls each of the years of the survey, Pilkington achieved
Royce and Johnson Matthey, but other companies high ratings from executives within the business
are not able to sustain a reputation for innovation, sector in which the company operated for both the
nor are they able to develop a wider reputational capacity to innovate and the quality of its products.
or indeed a better business performance, The companys innovations included developing
There are further insights when deconstruct- a universal process for the manufacturing of flat
ing the total reputation score and analysing the glass, the development of K glass with coatings,
capacity to innovate component against other automotive glass, laminated glass, fire resistant
components that make up total reputation. Two glass, bullet proof glass, energy saving glass,
companies, Pilkington Glass and BSkyB, provide solar controlled and thematic insulation glass and
key lessons. Both companies were repeatedly top self cleaning glass. Because of this combination
within their respective sectors (Building Materials of invention and innovation, Pilkington Glass
and Media) in terms of their capacities to innovate. was highly regarded. The company was able to
271
translate this innovation into quality of products gain. In 2001, the companys profits fell 38 per cent
backed by successful marketing. to 132m, and between 1996 and 2000; Pilkington
However, whilst acknowledging an outstand- shares underperformed the market by more than
ing performance for innovation, executives and 50 per cent. Pilkington Glass is an example of a
analysts in the BMAC survey did not rate Pilk- company that had excelled in innovation but less so
ington highly for other important business attri- in its reputation for financial management. Figure
butes, the most notable of which were value as a 3 shows that the two financial characteristics were
long-term investment and financial soundness. consistently amongst the lowest rated.
The Financial Times carried an article reinforcing Pilkington Glass was acquired by Nippon Sheet
this point: Glass in June 2006 for 2,2bn (Blitz, 2006),
thereby ending a long run in which the company
The companys inventions include energy-saving had attempted to stave off takeover. A focus on
and fire-resistant glass and advanced processes for economies of scale and scope for innovation
making car windscreens in complex shapes. But, enabled Pilkington to increase its Group revenues
like many UK companies, Pilkington had failed to 588bn in 2010, with a profit of 0.9bn.
to turn its inventiveness into financial success Pilkington were able to report that, controlled
(Skapinker 2001). cash management and cost reduction continue to
mitigate the impact of the challenging conditions
Whilst being at the forefront of innovation in our markets (Pilkington Group, 2010).
in the sector, and whilst achieving international
recognition for the advances made, difficulties re-
mained in converting these successes into financial
Figure 2. The composite scores of Pilkington Glass in BMAC surveys 1990-2006
272
BSkyB: A Holistic Approach Royce, Autonomy, Unilever, GSK, Tesco and

to Innovation and Business Marks and Spencer.
Management BSkyB has also achieved high ratings in the
important stabilising characteristics of financial
BSkyB had similar recognition to Pilkington as a soundness and value as a long-term investment,
company rated by executives in the BMAC surveys even though in the early years of their existence
for its capacity to innovate. In 1997, the company the company suffered poor perceptions in both.
was in tenth position behind such companies as In 2000, for example, BSkyBs highest score in
Orange, Glaxo, Reuters and Tesco, but the follow- the BMAC survey was for its capacity to innovate;
ing year BSkyB was in third position and in 1999 its lowest was for financial soundness. BSkyBs
at number one in the survey. In 2000, 2001 and performance was similar to that of Pilkington (see
2004 and again in 2007, 2008 and 2009, BSkyB Figure 2) at the time, i.e. it was highly regarded
was the most innovative company in Britain. as being a company with a propensity to innovate
The philosophy of the company is to tie in but not one with a strong financial performance.
innovation to customers needs. This isnt inno- Both BSkyB and Pilkington Glass had the chal-
vation for its own sake. Its first, last and always lenge of balancing reputation for innovation with
about our customers. Its about what new tech- the financial characteristics of financial soundness
nology can do for them and how we can use it and value as a long-term investment. Of the two
to make Sky better (BSkyB, 2006). The impact companies, only BSkyB were able to address this
of these innovations on the rating by executives challenge to the satisfaction of executives and
in BMAC surveys is shown in Figure 3. Other analysts and ultimately shareholders. By 2009,
facets of the companys performance include both innovation and financial soundness were
collaborative partnerships to maximise a broad highly ranked. In addition, value as a long-term
range of innovation capability and continuous investment was also on an upward trajectory. In
improvement as part of the innovation process this latter year, BSkyB was a company that was
(Brown & Turner, 2008). A critical success fac- able to be both innovative and profitable.
tor in achieving a reputation for innovation is
the ability to execute ideas effectively and to al-
locate sufficient resources to enable innovation CONCLUSION
in practice. BSkyB has this capability (Huston &
Sakkab, 2006; Lafley & Charan, 2008; Brown & The analysis of peer perceptions of the innovation
Turner, 2008). Often this requires a company to be data from the BMAC surveys between 1990 and
very specific about which innovations it decides 2009 gives interesting insights. On the one hand,
to back. As Steve Jobs, of Apple, put it, success achieving a good reputation for innovation does
comes from saying no to 1,000 things so as to not guarantee a good overall reputation; nor does a
concentrate on the really important creations reputation for innovation lead to business success.
(Burrows, 2004). However, where a company has a reputation
Figure 4 shows the performance of BSkyB in for innovation and is able to manage stabilising
each of the characteristics from its introduction characteristics - such as financial soundness and
into the BMAC survey until 2009. In a similar value as a long-term investment, there is a better
way to Pilkington, BSkyB is highly rated for its chance that this company will be able to develop
capacity to innovate. The company was Britains its innovation capability into long-term competi-
Most Admired Company for innovation in 2007, tive advantage and profitability. A key facet of this
2008 and 2009 ahead of such companies as Rolls conclusion is a focus on converting innovation into
273
Figure 3. BSkyB innovations and CEOs, plus their capacity to innovate scores on BMAC surveys, and
comparison with average innovation scores for all companies
Figure 4. The composite scores of BSkyB in BMAC surveys 1997-2009
274
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277
278
Chapter 16
Natural Resource
Dependency and Innovation
in the GCC Countries
Thomas Andersson
Jnkping University, Sweden & The Research Council, Sultanate of Oman
ABSTRACT
Whether the current strong performance displayed by the Gulf Cooperation Council (GCC) countries
proves sustainable for the long term will cast new light on the extent to which natural resource abun-
dance can be turned into a blessing, rather than a curse, and then the requirements for that. This
chapter synthesizes new evidence on the conditions for innovation in these economies, including through
examination of innovative performances at firm level, collected through the first Community Innovation
Survey (CIS) carried out in the GCC countries. Whereas strengths are recorded in some respects, e.g.,
Information and Communication Technology (ICT), education and some conditions for start-up activity,
challenges remain in others, including with regard to governance. The chapter ends with recommen-
dations what further action is required to enable better conditions for innovation both in the natural
resource sector itself, and broadly in the economy.
INTRODUCTION to the productivity performance of a particular

country relative to others. Although there has
Explaining the determinants of cross-country been somewhat more convincing outcomes of
variation in economic growth has proven a severe the analysis of education and human capital, the
challenge for economists. The availability of unexplained residual in studies of productivity
capital, land or labour contributes only marginally growth has continued to account for the bulk of
cross-country variation. This residual, or so-called
DOI: 10.4018/978-1-61350-165-8.ch016
Natural Resource Dependency and Innovation in the GCC Countries
total factor productivity growth (TFP)1, has been richness. This is despite the fact that the prime
interpreted as associated with technical progress initial outlier in terms of economic expansion
(Solow, 1957). in the region, the Emirate of Dubai, is basically
Economists traditionally viewed natural lacking a natural resource base. More recently,
resources as an essential building bloc for devel- on the other hand, Dubai has been saved from
opment. Once systematic empirical work was the outlook of economic collapse, brought about
undertaken, however, most evidence pointed to by the radically altered conditions for real estate
a significant negative impact. A good deal of re- investment, by the helping hand of the oil-rich
search has subsequently been devoted to further Emirate of Abu Dhabi, which also represents the
substantiating whether such a curse, as opposed capital of the United Arab Emirates (UAE).
to a blessing, actually exists, and what then The question remains, however, whether the
might explain it, worsen it, or make it go away. economic surge of the GCC countries is sustain-
The conditions that may create such a negative able, and what wider implications their record will
relationship will be further reviewed below. have for our understanding of the role played by
Gradually, however, the performance of sev- natural resources in economic growth. The an-
eral so-called Natural Resource-Rich Economies swer to such questions will much depend on their
(NRE), has led to questioning whether it is actually ability to create conditions that are conducive to
correct to speak of a curse for growth. At least, it innovation in a genuine sense, beyond reliance on
has been demonstrated that no universal negative already established winners and brand names, both
relationship exists. The starkest examples of ex- as a basis for furthering their performance in and
ceptions are now to be found within the category of around the incumbent (natural resource related)
the oil & gas producers, notably among the GCC industry, and for the rise of new high-value added
countries2. This is because this country grouping, goods and services.
despite exceptional dependence on their natural According to mainstream perspectives, innova-
resource base, has displayed very high economic tion is the more or less linear output of expenditures
growth over the last couple of decades. Over a on Research and Development (R&D). With the
relative short time span, they have all moved be- recent exception of Qatar, the GCC countries are
yond the middle-income economy status. A few known to have invested only scanty resources in
of them now rank among the richest and most R&D thus far. It cannot be taken for granted, how-
stable economies in the world. ever, that R&D is the main source of innovation,
On the whole, these countries have advanced neither in these countries nor elsewhere. On the
from a state of hardly populated Middle Age contrary, there is by now plenty of evidence that
desert land into an era marked by modern infra- innovation does not emanate from investments
structure and institutions, notably in urban areas or actions undertaken by individuals or firms in
but also, in several cases, with wealth diffused isolation, but that, linkages between different kinds
to the countryside as well. The GCC region now of often complementary actors and competencies
stands out as the worlds second most important are greatly important.3 So far, the lack of data
source of excess savings and capital exports, af- has prevented any systematic examination of the
ter East Asia. Although there are also significant situation in the GCC countries when it comes to
downsides to their development, and yet outstand- innovative performance beyond R&D.
ing challenges, the performances displayed must In this chapter, after having reviewed more
be viewed as nothing short of spectacular. general aspects of the link between natural resource
This development would clearly not have abundance and economic performance, we take
been possible, had it not been for their oil & gas stock of relevant conditions and policies related
279
to innovation in the GCC countries. While start- including periods of low returns. Not only may
ing out with the available aggregate statistics, we this in itself hurt growth performance (van der
extend by drawing upon a unique set of micro data Ploeg & Poelhekke, 2010). High volatility further
reporting innovative behaviour and practices at undercuts the support of long-term investment,
firm level. This data, which has become available such as R&D.
through the first Community Innovation Survey Gradually, it has become clear that consider-
(CIS) carried out in the GCC countries, covers a ations of macroeconomic aspects, while relevant
representative sample of enterprises in Abu Dhabi. in many situations, convey only part of the story.
On this basis, we attempt to broadly character- Influences on the directions of human effort are
ize the state and nature of innovation in the GCC critical. Rich natural resources serve as a lure for
countries today, and how their performances relate rent-seeking, i.e. for gaining privilege and a share
to natural resource abundance. We take note of of the gains through political clout rather than
outstanding issues, and what may be crucial for economic achievement, as well as complacency
these countries to go the whole way in overcom- when it comes to pushing for competition and
ing the looming risk of ending up with a natural economic efficiency (Corden, 1984; Auty, 1990;
resource curse after all. In this, we argue the GCC Sachs & Warner, 2001). Even where regimes make
countries need to take further action both so as the effort to distribute the returns more widely
to generate innovation which can increase their among the population at large, there is the danger
returns from the hydrocarbon sector itself, and of picking up the habits of a cosy life.
as a source of diversification and renewal of the Because natural resource riches tend to accrue
wider economy. directly to the government, the latter may obtain
an inflated status relative other stakeholders. The
proportion of national income that flows to the
A CURSE OR A BLESSING? population at large will tend to be smaller as a
consequence. Further, since government revenue is
Whereas traditional development theory viewed not collected through taxes of the general public,
natural capital as a cornerstone for development there is less accountability and pressure on govern-
(Nurkse, 1953; Rostow, 1960), a number of stud- ment to make best use of its financial muscle, and
ies later concluded that natural resource wealth less strive for use of public resources to support
serves as a drag rather than a facilitator (Auty, societal objectives (Devarajan et al. 2010). Also
1990; Sachs & Warner, 1995; Gylfason, 2001; when it comes to the resource basis itself there
Jones, 2002). The notion of the so-called Dutch is generally a lack of investment in supportive
disease was placed at the centre of the stage knowledge generation, both because of the noted
from the outset. As natural resource abundance bias against long-term R&D, and because of a
boosts foreign exchange earnings, it tends to result common failure to inspire the set-up of special-
in an appreciation of the exchange rate and the ized educational institutions and programmes
subsequent crowding out of other activities in that can support its upgrading. In short, there is
the open and tradable part of the economy, while a risk of natural resource wealth translating into
benefiting public sector growth and non-tradable. poor governance. Some have argued this leads to
Adding to this, because the production of less incentive to develop democratic institutions,
most natural resources is capital intensive, high although that notion has been defused in other
fixed costs tend to be required. At the same time, studies, and the relationship to economic growth
commodity prices are generally volatile, bringing in this case appears unclear in any event.
the risk of severe macroeconomic fluctuations,
280
A number of studies have concluded the curse mineral wealth. As for volatility, a well developed
operates through institutional factors (Isham et financial system will cushion the impact (van der
al., 2005; Sala-i-Martin & Subramanian, 2003; Ploeg & Poelhekke, 2009).
Bulte et al., 2005; Arzeki & Bruckner, 2009). The recent experience of several countries,
Part of the impact may emanate from less pres- especially within the group of the GCC countries
sure to undertake needed structural reforms, such but also among some other NRE across the Middle
as those aimed to open up for more competition, East, Africa, Latin American and East Asia, has
sharper frameworks for education, learning and demonstrated there is no generally applicable
merit-based promotion, and the establishment of notion of a curse (Fasano, 2002: Sturm et al.,
new enterprises (Amin & Djankov, 2009). Because 2008; Frankel, 2010). 4 Lending support in this
natural resource generated revenues invariably regard is also the experience of several (by now)
boost the public sector, they tend to inflate the developed countries, including Australia, Canada,
status and rewards associated with public service. Finland, Norway and Sweden. Of these, Finland
There is thus a distinct risk of weak incentives and Sweden displayed important spillovers and
and drive for institutions as well as for individu- spinoffs emanating around the paper/pulp indus-
als to engage in private sector development more try, benefiting the long-term growth potential
generally, and in risk-taking, entrepreneurship, of these economies as a whole (Blomstrm &
and start-up activity specifically. Kokko, 2007).
The causal link between natural resource abun- The GCC countries nevertheless represent the
dance and growth remains contestable, however. most compelling case, which is due both to the
If natural resources earnings, as a share of Gross exceptionally rapid growth they achieved over
Domestic Product (GDP), are used as proxy for a sustained period of several decades by now,
natural resource assets, the group of NRE will coupled with their remaining extreme dependence
by definition include agriculture-dependent and on their natural resource, in this case oil & gas.
undiversified economies. These would probably Whereas their advance has not been unaffected by
be better defined as innovation and human capital the financial crisis of recent years, on the whole
poor, and a high share of natural resource in the there has only been some temporary moderation of
economy is then as much an outcome of slow their performance. The equity and real estate posi-
growth, and a proven inability to diversify, as the tions of the GCC countries in debt-struck overseas
opposite (Smith, 2007). markets took a toll on their accumulated net wealth.
Others have questioned to what extent natural Several of them, including Bahrain, experienced
resource abundance really can be observed to act painful recession. Still, the only economy suffering
as a drawback for a given economy. Lederman from a severe lasting impact is probably that of
and Maloney (2002), for instance, found Sachs Dubai, which had been exceptionally dependent
and Warners results not to hold given a different on capital imports motivated by accelerating real
specification of the studied time period, although estate assets. While the stabilizing counterweight
they did conclude that high export concentra- of oil revenue in this case has been lacking at the
tion exerts a robust negative effect on growth. regional level, that factor has been at force in the
Gylfasons result also depends on a few outliers national economy of the UAE. Thus, Dubai too
that have achieved high growth without natural keeps muddling through, aided by the support
resources. Herb (2005) and Alexeev & Conrad of lending and some unconventional internal
(2009) evaluate a range of recent statistical stud- transfers of equity and intangible investments by
ies and conclude against the presence of a natural Abu Dhabi.5
resource curse, especially when it comes to oil and
281
Figure 1. GDP per capita (Source:World Bank

As seen from Figure 1, several of these coun-
(2010a). Data are from 2008 or latest available.
tries have now attained an income level above that
of a comparable high income European segment
(here labelled EU 12+3)6. The converse distance
to prominent other Middle East and North Africa
(MENA) countries, such as Egypt, Morocco and
Jordan, is stark.7 At the same time, as seen from
Figures 2 and 3, the GCC countries continue to
stand out as markedly undiversified economies.
The share of high tech exports in total exports
is particularly low, suggesting the presence of a
strong Dutch disease effect, i.e., the crowding
out of an open tradables sector. Some observers
of the governance models applied in the Gulf
argue that they suffer from particularly severe
obstacles to instituting needed micro economic ment and entrepreneurial activities relevant to
reforms, suggesting that changing the curse into the creation and use of knowledge in new ways,
a blessing stands a better chance elsewhere, e.g., require high attention, so as to pave the way for
in Africa (Devarajan et al., 2010). competitiveness in potential high-growth new
Further examination is needed to gain a better market-niches and sectors.
understanding of the way in which NRE encounter With regard to aggregate expenditures on
special issues, why that is the case, and what it R&D, Figure 4 draws on a combination of data
may take for a rich supply of natural resources sources to present an estimate as good as we
to be turned away from a hindrance towards be- can get. As noted in previous studies (Aubert &
coming a source of long-term strength. The GCC Reiffers, 2002), in most cases the GCC countries
countries may define the ultimate test case in this demonstrate scanty activity levels. Except for the
regard, due to their high level of natural resource
dependence, combined with their proven strong
growth record.
Figure 2. Economic diversification (share of the
largest sector in total value added) (Source:World
Bank (2010a). Data are from 2008 or latest
THE SCOPE FOR RESEARCH available.
AND INNOVATION
At the cost and income level now attained by the

GCC countries, their ability to shift from a tradi-
tional industrial model based on the availability
of natural resources, combined with routinized
and mature technologies, to one that is nimble,
knowledge-intensive and capable of generating
economic activities with higher value-added, is of
central importance to their total factor productivity
(TFP). This implies that education and training,
R&D, innovation, private enterprise develop-
282
Figure 3. High tech exports as percent of GDP (Source:World Bank (2010a). Data are from 2008 or
latest available.
noteworthy exception of Qatar, whose estimated community. As universities have developed

level is based on unofficial sources8, they are poorly outside the educational agenda, a vibrant
way below the EU-comparator. The figures imply research community, including science-industry
the GCC countries have lagged in R&D growth interface, is largely lacking. In the present situa-
relative GDP per capita. Put differently, in the tion, it will take time before publicly funded re-
context of impressive economic growth, R&D- search starts benefiting the overall economy.
intensity has failed to keep up, even compared Meanwhile, the weight of capital intensive indus-
to the meagre numbers recorded by their peers tries and services weakens private sector rationale
in the MENA region. for investing in R&D.
The low level of R&D spending is mirrored This does not mean that R&D is irrelevant,
in weak scores on traditional measures of research but other factors such as customer relations, the
output, such as scientific publications or patents. mobility and means of incentivizing skilled labour
Table 1 indicates the GCC countries do margin- (domestic and expatriate) and the advance of
ally better than the MENA peers, but with an knowledge brokering and inter-firm collaboration
insignificant lead, compared to the gap recorded in innovation may also matter greatly (Milbergs
in the most advanced industrialized countries. & Vonortas, 2004: Andersson & Formica, 2007).
Here, the implication is higher public investment Innovation may also draw on research in other
did translate into some strengthening in perfor- countries and locations, at least when combined
mance, although not to an extent that corresponds with other factors that help raise absorptive ca-
to the rise in income levels. pacity. On the other hand, own R&D activity at
Naturally, historical and institutional factors, firm level, or in the wider economy, matters for
along with economic structure, need to be taken the ability to source the output of R&D elsewhere
into account. Despite remarkable scientific con- (Andersson, 2009). In order to gauge their actual
tributions in the Middle Ages, the MENA region situation, and how the current R&D effort should
as of late has been basically disconnected from be interpreted, let us take a closer look at some
the rapid evolution of the globalizing research
283
Figure 4. R&D expenditures as percent of GDP (Source: World Bank (2010a), except Oman and Qatar
(unofficial estimates). Data are from 2008 or latest available.
additional factors of relevance for innovation in portfolio, if they are to be effective in enacting
the GCC countries. improved conditions.
It is well understood today that meaningful Among such related factors, human capital
benchmarking of science, research and innovation assumes particular importance. Figures 5 to 8
must take into account the status of complemen- present a few relevant cross-country comparisons
tary and enabling factors (UNCTAD, 2010b). in this area. Judging from the aggregate numbers,
Policymakers must similarly address a broader the rate of primary school enrolment, displayed
in Figure 5, does not appear to have been much
affected by the resource abundance of the GCC
countries, neither compared with the EU nor within
Table 1. Innovation output (Source: Estimates the MENA region. This reflects the fact that the
based on World Bank (2010b). rate of school enrolment at primary level has in-
creased strongly in more or less all the countries
S&E Journal Patents Granted by considered here, reaching close to 100 percent
Articles/Mil. USPTO/Mil. People
Peole 2005 avg 2003-2007 across-the-board.
EU 12+3 634 75.5 Examining enrolment at secondary level, on
Kuwait 92 2.3 the other hand, the GCC countries lead the MENA
UAE 56 1.1 country peers consistently, and with a wide mar-
Jordan 51 0.2 gin in most cases. Adding to the latter observation,
Bahrain 46 0.1
Figure 6 indicates the GCC countries have escaped
Oman 44 0.1
the gravity of the illiteracy problems that con-
Saudi Arabia 25 0.8
tinue to plague the wider MENA region. No doubt,
the hydrocarbon-generated finances have helped
Egypt 23 0.1
fed increased effort in both primary and second-
Morocco 15 0.1
ary schooling, in some cases showing up in enrol-
Algeria 11 0.0
ment numbers, in others as improved results.
Yemen 0 0.0
284
Figure 5. Primary and secondary school level

of national resources that has gone into education,
enrolment (as percent of relevant age group)
whereas the sharply increased size of the econo-
(Source:World Bank (2010a). Data are from 2008
my nevertheless means that education has bene-
or latest available.
fited, at least proportionately, and also a little bit
more than that.
Needless to say, any quantitative considerations
of the amount of resources devoted or the number
of students enrolled, applying to primary, second-
ary to tertiary education, vocational training, or
other forms of investment in human capital, are
unable to fully capture essential aspects of the
quality of education and learning, or how human
resources are put to use. Multiple studies point to
the continued presence of outstanding challenges
in this area for the GCC countries, including those
that are associated with labour market distortions
caused by political motives and market segmen-
Figure 6. Illiteracy rates (percent of adult popula-
tation between indigenous and foreign labour
tion, 15+) (Source:World Bank (2010a). Data are
(Andersson et al., 2010a; Djeflat, 2010).
from 2008 or latest available.
Nevertheless, it appears the availability of
more resources has fed not only the allocation of
greater investment to education, and the provision
of a greater number of teachers, but also created
a drive for raising the quality and relevance of
education as well as to put in place better work-
place training across the GCC countries. To what
extent there has been genuine progress thus far on
this basis, including when it comes to raising TFP,
requires further evaluation and examination. The
development of the media industry adds further to
the picture, as there has been a marked opening
for more competition through new establishments
followed by soaring, diversified content in public
Expenditures on tertiary education vary mark- service communication.
edly, as seen from the comparison between Oman Related to the latter, modern Information and
and Kuwait with the EU-comparator in Figure 8. Communications Technology (ICT), applying to
Here, Kuwait is at a much higher level, while infrastructure as well as services, is now crucial
Oman is behind. Figure 9 shows there are limited for enabling the successful advance of a knowl-
differences in expenditure per student at second- edge-based economy. Figure 10, which shows a
ary and primary level within the MENA region, relatively low presence of secure servers in the
whereas the EU is at a much higher level, espe- GCC countries, indicates a digital gap between
cially in secondary education. the advanced European countries and the MENA
These figures suggest that the hydrocarbon region. Figure 11, on the other hand, conveys a
economy has fed only a slight increase in the share more complex picture. The number of Internet
285
users is higher in the UAE and Bahrain than the of ICT, oil and gas wealth has clearly not stood
EU. Even more impressive, the number of mobile in the way of reforms.
subscriptions is considerably higher in several While a comprehensive examination of regu-
of the GCC countries compared to the EU. The latory reform goes beyond this work, interna-
peers in the MENA region are much behind, with tional ranking of public procurement practices
considerably lower levels of mobile penetration. resulted in a strong upgrading of the GCC coun-
The surge in mobile subscriptions is particular tries in recent years (World Bank, 2008: World
neither to the GCC nor to NRE more broadly, but Economic Forum, 2010). It is also worth taking
applies to a diverse set of emerging and develop- note of a proxy variable for red type, in this case
ing economies (UNCTAD, 2010a). when it comes to hindering the establishment of
However, cross-country variation in the pen- business. This is the number of days it takes to
etration of either Internet use or mobile telephony start up a new company, shown in Figure 13. Here,
is clearly reflective of price levels, which in turn most of the GCC countries offer less burdensome
hinge on the extent to which regulatory reforms conditions than the MENA peers, although the
have been enacted to break the privileges of (cur- difference is modest. Most of them compare fa-
rent, or the legacy of) state monopolies, and open vourably with the EU-comparator. Kuwait is an
for competition in the development and launch of outlier in this respect.
new, rivalling services. To examine the situation
in this respect, Figure 12 compares country scores
derived through an index that weighs together INNOVATIVE ACTIVITIES AT FIRM-
prices for fixed telephony, mobile and Internet LEVEL
services. As can be seen, prices in the GCC coun-
tries are, in most instances, highly competitive Whereas the GCC countries do not appear to have
compared to the MENA peers (Yemen is included increased expenditures on R&D significantly, we
as well here, to demonstrate the discrepancy to do not know whether this ought to be interpreted
many other developing countries). They are also as a sign of complacency and lack of support for
on par with the European comparator. In the case innovation. It may be the status of their innovation
Figure 7. Gross tertiary enrolment (as percent of relevant age group) (Source:World Bank (2010a). Data
are from 2008 or latest available.
286
Figure 8. Expenditure per student, as percent of

A fundamental problem in this regard is the
GDP per capita, primary, secondary and tertiary
lack of data on R&D and innovation. In the fol-
level (Source:World Bank (2010a). Data are from
lowing, we thus examine the single source of
2008 or latest available.
quantitative information that is currently available
on innovative activity at the micro level in these
countries. This is the data generated by the first
Community Innovation Survey (CIS)9 carried out
in the region, namely on a population of statisti-
cally representative enterprises in Abu Dhabi.10
While not necessarily applicable to other GCC
countries, this allows us to examine the state of
firm behaviour in regard to innovation within a
regional economy (the Emirate level) that is as
natural resource dependent (and undiversified)
as any of the national economies (Andersson et
al., 2010a). 11
On this basis, the innovation landscape is seen
to be dominated by three sectors: manufacturing,
Figure 9. Expenditure per student, as percent of
mining and petroleum, and business services. We
GDP per capita, primary and secondary level
find the highest share of innovation active firms
(Source: World Bank (2010a). Data are from 2008
within manufacturing and also the mining and
petroleum sector (Figure 14). Interestingly, on the
whole there is a distinctly higher prevalence of
innovation in new services (38.5 per cent) relative
to new goods (27 per cent), which applies to min-
ing and petroleum as well. Manufacturing firms,
along with those in trade and utilities, on the other
hand, focus on innovation in goods (Figure 15).
Innovation active firms draw on various kinds
of investments, as shown in Figure 16. In-house
R&D represents merely one kind among others,
mirroring the situation in other countries where
CIS surveys have been conducted. Customers are
important partners in innovation, particularly
system, e.g. the dominance of the hydrocarbon when it comes to sharpening design, and for test-
sector and shortage of qualified researches, makes ing new or improved products and services. Among
R&D difficult to justify. In the areas of human firms indicating collaboration with other partners,
resource development, ICT, and conditions for customers and suppliers feature prominently as
starting a new business, the previous sections partners along the value chain. Specialised
pointed to signs of progress in regulatory reform sources of expertise are sourced from consultants
and also, in some cases, associated economic and universities (around 30-35 per cent of times
performances. It is worth taking a closer look identified as partners).
at the status of innovation more broadly in the Meanwhile, manufacturing and the mining
GCC countries. and petroleum sectors are reported to represent
287
Figure 10. Secure internet servers, per million people (Source:World Bank (2010a). Data are from 2008
the most important drivers of innovation in other which firms are innovative or not. The greater
sectors, as measured via the influence of custom- the international exposure, the higher the inno-
er-producer relationships. Firms with a main vativeness. Figure 19 demonstrates that the same
customer in these two sectors tend to be innova- relationship holds with regard to innovations of
tive to a higher degree than firms with main different calibre. Firms that export play a more
customers from other sectors (Figure 17). prominent role especially for innovations that are
Retail and construction come across as par- new to international markets, although they are
ticularly unimportant in customer-led innovation, also more active in introducing innovations that
which is in line with the evidence from other are new to the domestic market.
countries. These two sectors have a general ten- While the above applies to innovation in gen-
dency to be relatively sheltered from foreign eral, Figure 20 highlights how firms across the
competition, and lack of openness tends to be different sectors generate innovations that are new
accompanied by less pressure for generating in- to the domestic market and to international mar-
novative activity. On the other hand, the great kets respectively. As can be seen, manufacturing
weight of mining and petroleum in aggregate in- primarily plays a role as gate-opener to innovation
novative activity clearly distinguishes the Abu in the local market, applying to a lesser extent to
Dhabi innovation system from those of other business services, trade and transport. The clear-
economies for which CIS data is available. While cut exception is the mining and petroleum sector,
we cannot confirm the situation in the rest of the which displays a markedly higher activity level
GCC countries, due to the lack of data, there is when it comes to introducing innovations that are
good reason to believe the situation is similar to new to the international market. This suggests
that of Abu Dhabi in this respect, especially to that the natural resource sector not only represents
the extent hydrocarbon weighs heavily in the the most internationally exposed component of
economy. the Abu Dhabi economy, but that it is also the
Figure 18 illustrates the relationship between leader in regard to the capacity to innovate in
the main market of the firm and the degree to international markets.
288
Figure 11. Internet users, per 100 people (Source:World Bank (2010a) and UNCTAD (2010a). Data are
from 2009 or latest available.
Figure 12. ICT Price Basket (Source: UNCTAD (2010a)
Figure 13. Number of days needed to start a new business (Source: World Bank (2010a). Data are from
2008 or latest available.
289
Meanwhile, in the other leading sectors, such Innovation active firms tend to be con-
as manufacturing and business services, the high centrated in three sectors: mining and
percentage of innovations that are new to the petroleum, manufacturing, and business
national market suggests innovation activities are services.
value chain centred to a high degree. Abu Dhabi Abu Dhabi firms pursue a mix of invest-
innovation active firms tend to serve as suppliers ments related to innovation, with some em-
of goods and services to other firms, rather than phasis on R&D and the acquisition of new
end-consumers. This is verified by Figure 21, technology.
which shows that 65 per cent of innovation active There is a high degree of innovation gener-
firms focus on the business-to-business segment. ated via the supply-chains.
With regard to ownership, Figure 22 shows Innovation in mining and petroleum is
that subsidiaries of Abu Dhabi or UAE firms have more directed to international markets and
a higher propensity to innovate than foreign-owned display relatively high levels of collabora-
firms. However, foreign-owned subsidiaries have tion, and a higher degree of services inno-
a higher propensity to introduce international vation, compared to manufacturing.
market novelties. Subsidiaries of Abu Dhabi or Foreign-owned firms collaborate more in
UAE groups are thus more likely to focus on innovation.
national markets, whereas foreign-owned firms For innovating firms on average, interna-
tackle international markets to a higher degree. tional collaboration is at a relatively low
Foreign-owned firms further have a higher level.
propensity to co-operate in innovation. This prob-
ably reflects the presence of stronger, already
established connections between such firms and CONCLUDING REMARKS AND
research institutes, universities or partner firms RECOMMENDATIONS FOR ACTION
in their countries of origin, as well as in third
markets where their parent companies may have In this chapter, we have taken stock of the apparent
been present for a long time. On the other hand, natural resource curse for development, as well
domestic firms might have been expected to pos- as of divergent views in the literature on its nature
sess better knowledge of viable co-operation and generality across countries. We have noted
partners and enjoy better access to national net- that certain countries managed to perform well
works. based on rich natural resources, and set off lasting
In terms of frequencies, as can be seen from growth processes on that basis. While some today
Figure 23, the average share of large firms that developed economies, such as Australia, Canada,
collaborate with partners in generating innovation Finland, Norway and Sweden, may belong to this
shows up as relatively low in Abu Dhabi compared camp, as they were able to benefit from rich natural
to other countries, based on statistics reported by resources in early stages, the GCC countries now
Eurostat. There is a smaller share of co-operating represent the most compelling case challenging
firms in Abu Dhabi than in most European coun- the notion of a curse.
tries. As already noted, foreign-owned firms and The reason why the performance of the GCC
firms in mining and the petroleum sector are at countries attracts special attention in this context
the high end in this respect. is two-fold. On the one hand, they have attained
Keeping in mind the above data refer only to an exceptionally strong economic position, based
a set of representative firms in Abu Dhabi, the on basically just oil & gas (the prime exception,
following conclusions stand out: the Emirate of Dubai, has recently been bailed out
290
Figure 14. Share of innovative firms across sectors (Source: CIS-IKED Pilot Data Innovation Survey,
SCAD (2009))
Figure 15. Share of new goods and services innovations across sectors (Source: CIS-IKED Pilot Data
Innovation Survey, SCAD (2009))
Figure 16. Investment by innovative firms (Source: CIS-IKED Pilot Data Innovation Survey, SCAD (2009))
291
Figure 17. Share of innovative firms according to customer (Source: CIS-IKED Pilot Data Innovation
Survey, SCAD (2009))
with the help of the oil riches of Abu Dhabi). On All the GCC countries have, however, launched
the other hand, in line with the Dutch disease, their special efforts to boost R&D and/or advance
whereas costs and incomes of the indigenous popu- complementary means for generating innovations.
lation have increased sharply, to date they remain This applies both to those economies, such as
heavily dependent on the hydrocarbon sector. Kuwait, Qatar, Saudi Arabia and the UAE, which
Regardless of the time they have left before this have plenty of time left before their oil & gas
source of revenue will start subsiding, continued revenues subside, as well as Bahrain and Oman
excessive dependence on oil & gas will not do as which have much less time to go.
a basis for sustainable prosperity, in part because To cite and comment briefly on a few ex-
it will perpetuate public sector dominance and amples of pursued policies, Qatar has put massive
costly labour market distortions. resources aside for R&D funding, according to
Success with regard to innovation is now unofficial data, while also engaging in an ambi-
essential for the development and production of tious range of science park activities. Oman has
competitive high value added goods and services initiated a call for open research grants, and has
in the GCC countries. Whether they create condi- taken special initiatives to boost research capac-
tions that are genuinely conducive to innovation ity in prioritized niche areas, such as enhanced
will be crucial for their ability to ultimately break oil recovery, road safety, and biodiversity and
away from the natural resource curse. So far, in genetic resources. Within the UAE, Abu Dhabi
most cases they display a weak standing when it has launched an ambitious agenda to generate
comes to R&D. As for wider reforms, we have cluster-based development, spurred by Mubadala
taken note of strengths in ICT infrastructure and as a publicly-supported but business-minded
services, educational effort, public procurement, investment agency, e.g., in renewable energy
and some conditions of importance for the start-up and cultural activities. Adnoc Technical Institute
of new enterprises. and the Petroleum Institute have been directed
to raise the supply of prioritized technical skills.
292
Figure 18. Share of innovative firms according to geographical market (Source: CIS-IKED Pilot Data
Innovation Survey, SCAD (2009))
Figure 19. Market of the firm and novelties (Source: CIS-IKED Pilot Data Innovation Survey, SCAD
(2009))
The Khalifa Fund has also raised support for on diabetes and related diseases research. Saudi
opportunity-based entrepreneurship, although so Arabia, finally, has invested massively in several
far limited to the Emirati population, and not freed new knowledge cities and research universities.
of the complicating labour market distortions noted In several of these efforts, the GCC countries
above. A research foundation has been introduced, rely heavily on imported expertise, but they also
although its establishment phase was prolonged attempt to ensure domestic capacity building for
due to bureaucratic hurdles. In Dubai, work has the long-term, especially in Oman.
been going on to strengthen and upgrade the Tech- At firm level, keeping in mind the limitations
nopark. Kuwait has launched an ambitious centre in generalizing the results, we have observed a
293
Figure 20. Share of firms across sectors with products new to international and domestic markets (Source:
CIS-IKED Pilot Data Innovation Survey, SCAD (2009))
strong drive for innovation in the oil & gas sec- diversification at aggregate level indicates the
tor itself. Here, innovative firms are relatively presence of remaining hindering factors, which
active in collaboration, and firms innovate at a keep frustrating and delaying tangible progress.
relatively high level. R&D is clearly not sufficient Here, the dominance of public sector activities
for measuring their innovativeness, since several and employment is likely to be a key factor, es-
other activities serve as important sources of in- pecially as it is interrelated with serious labour
novation as well. Further, according to our results, market distortions following from the political
which draw on observations from the population motive of favouring the indigenous population.
of firms in Abu Dhabi, the mining and petroleum This applies especially to those GCC countries
sector takes the lead in pulling innovation more where the locals are in minority, including the
broadly. This situation is likely to be more (less) UAE and Qatar, which in fact possess the larg-
applicable elsewhere in the GCC countries, the est natural resource pool relative the size of the
more (less) the dominance of the hydrocarbon population, resulting in special disincentives for
sector in the economy. Sectors that are relatively genuine risk-taking, entrepreneurship and private
more oriented towards the domestic market, and to sector development in the most well-off natural
a high degree sheltered from foreign competition, resource exporters.
meanwhile, show clear signs of complacency, and The current situation can probably not be
are marked by low levels of collaboration in in- overcome merely through regulatory adjustment,
novation as well as less potent innovation output. no matter how pervasive. Substantive action to
Whereas we can refute the idea that there would exert radical and lasting mindset change, as re-
be a lack of political support for undertaking regards the merits of public sector and established
quired policy action, the lack of tangible evidence institutional brands and structures relative those
of enhanced innovation and actual economic of experimenting with and developing new enti-
294
ties and solutions, needs to be enacted. In order ups, and engineer an upgraded appreciation of
to enable a substantive impact, measures should entrepreneurship in education and labour market
be synchronized across several policy domains. institutions. There is also the task of furthering
Examples of what would most likely form the oil & gas sector itself, as well as its linkages
important components of such an agenda include to other sectors, including by spurning spin-offs,
those that would increase mobility between the not least as this is where a lot of the already ex-
public and the private sector, reinforce merit-based isting professional expertise and most dynamic
career paths in the labour market, enable income innovativeness no doubt resides. Universities and
transfers through other means than labour mar- research institutes belong to those that should be
ket distortions, support a long-term approach to incentivized to invest and partake more in com-
R&D, facilitate the establishment particularly of bined knowledge creation and knowledge use, by
potential high-growth knowledge intensive start- specializing and developing diverse approaches
Figure 21. Innovation along the value-chain (Source: CIS-IKED Pilot Data Innovation Survey, SCAD
(2009))
Figure 22. Innovative behaviour of firms with international versus domestic ownership (Source: CIS-
IKED Pilot Data Innovation Survey, SCAD (2009))
295
Figure 23. Proportion in the economy of large co-operating firms (Source: CIS-IKED Pilot Data In-
novation Survey, SCAD (2009), and Eurostat))
to science-industry interface and the kinds of ing, however, with the natural resource riches
knowledge brokering that can work out in their of these countries extracted and consumed for
specific context. fewer gains than could potentially be generated,
All this requires an approach to governance because insufficient effort is going into long-term
that allows for innovation to attain a high priority R&D and skills accumulation aimed to carve out
in public and private decision-making across the a sustainable edge, and also into developing the
board. An effective and consistent approach to competencies that are required for diversifying into
fostering innovation is greatly facilitated by con- those neighbouring and complementary activities
structive engagement of all the key stakeholders, in that could still last after the current resource basis
such a way as to enable a widely spread buy-in and is gone. The later in the day it gets, the stronger
room for bottom-up initiatives. Already enacted the drive will be for the GCC countries to do what
successful policy reforms, e.g., in ICT when it it takes to make their growth record sustainable.
comes to the UAE and Qatar, may be built upon In this sense, there will be a race between the
to solidify the momentum for such engagement. forces calling for reforms in support of long-term
The improved access to new tools and services in capacity building, and those that keep exploiting
ICT can also be used to help raise greater interest what can be relatively effortlessly consumed
in, and acceptance of, new solutions in other areas. today. While that is not unique to NRE, but ap-
Will the GCC countries succeed, and thus plies rather universally, more is at stake for these
ultimately demonstrate that the natural resource societies than for most.
curse is not cast in stone but can be turned around Finally, we argue that the empirical evidence
to realize a blessing? This we obviously do not and conclusions on innovation in the GCC coun-
know, and further observations and research tries presented in this chapter lend some insights
work are thus warranted. The clock keeps tick- into what is crucially important for breaking away
296
from the natural resource curse. At the same time, Andersson, T., & Formica, P. (2007). The
further studies are required on a number of issues. formation of international start-ups and mo-
This includes the actual state and nature of inno- bility as an international public good. Indus-
vation in natural resource based economies, the try and Higher Education, 2(21), 125127.
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Arzeki, R., & Bruckner, M. (2009). Oil rents, cor-
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ruption, and state stability: Evidence from panel
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data regressions, IMF Working Papers 09/267,
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Washington, International Monetary Fund.
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science-industry interface, how to generate suc- Aubert, J. E., & Reiffers, J.-L. (2002). Knowledge
cessful knowledge-intensive potential high-impact economies in the Middle East and North Africa:
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Auty, R. (1990). Resource-based industrializa-
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299
ascribed to capital or labor or any other particular diamond production and exports, conditions
production factor. Thus, TFP is in effect measured for extraction are set to become increasingly
as the unexplained residual, the source of which is demanding (Kojo, 2010).
associated with technical progress, organisational 5
The last-minute name change of the worlds
change, or new ways of doing things. tallest building, Burg Khalifa (named after
Vested Interest: Special privileged groups the ruler of Abu Dhabi), should be seen in
that carry own economic benefit from exerting a this light. The continuous negotiated influx
political influence on regulations or other policies. of resources from Abu Dhabi is set to gradu-
ally tie the regional economies, as well as
the governance, of the two prime Emirates,
ENDNOTES more closely together. The situation will
nevertheless hardly do away with the natural
1
Also sometimes referred to as multifactor competition between them, and the room for
productivity, TFP reflects the overall effi- diversified development, reflecting their dif-
ciency with which capital and labour is put ferent historical origins as well as economic
to use. It is boosted by generally improved structures.
ways of producing goods and services, and 6
In order to enable benchmarking that is rel-
tends to be driven by technical progress and evant to the GCC countries, as comparator
innovation. we use KAM data, and specifically Ag-
2
The GCC (Gulf Cooperation Council), gregate Western Europe, here relabelled
whose members are the Kingdom of Saudi EU12+3. This measure excludes the
Arabia, the Kingdom of Bahrain, Kuwait, the largest EU-economies and members of G7
State of Qatar, the Sultanate of Oman, and (France, Germany, Italy, UK) but includes
the United Arab Emirates (UAE), has as its high-income old EU countries, and also
objective to promote cooperation between the three advanced non-EU high-income
its members to achieve unity. European countries (Iceland, Norway, Swit-
3
At the aggregate level, the importance of such zerland). The measure is thus calculated as
linkages has been expounded in the notion of the average for: Austria, Belgium, Cyprus,
national innovation systems (Freeman, 1987; Denmark, Finland, Greece, Iceland, Ireland,
Lundvall, 1991). Impetus for innovation may Luxembourg, Netherlands, Norway, Portu-
also draw on linkages between individual gal, Spain, Sweden, and Switzerland.
firms, or between firms interacting within 7
Throughout this chapter, the GCC countries
or between specific industries or industrial are benchmarked against each other, the
clusters (Porter, 1990). defined high-end European comparator, and
4
The most impressive case in Africa is that the selected peers in the wider Middle East
of Botswana, which has demonstrated stable and North Africa (MENA) region.
high growth over the last decades, pulled 8
The level attained by Qatar, following politi-
by substantive revenue from mining, nota- cal decisions to put funding aside in founda-
bly of diamonds. Exceptionally high price tions and capacity-building programmes, is
stability for this commodity has helped fuel not yet recorded in official R&D statistics.
predictability in public revenue and underpin The investment is not matched by domestic
constant growth. Looking ahead, however, research activity, but rather stimulates inter-
conditions may well become less favourable. national linkages and provides incentives for
As Botswana remains highly dependent on future research.
300
9
CIS were first developed in European coun- CIS-IKED survey succeeded in obtaining a
tries but have gradually been carried out in 93% response rate (Andersson et al., 2010a).
an extensive number of other countries, both 11
The weight of oil & gas in the GDP of Abu
in the OECD and elsewhere. The main sta- Dhabi stands at about 60 percent. In Saudi
tistical unit for CIS is the enterprise, notably Arabia, for instance, the share is below 50
in the following market activities: mining per cent.
and quarrying (NACE 10-14), manufac- 12
http://epp.eurostat.ec.europa.eu/statistics_
turing (NACE 15-37), electricity, gas and explained/index.php/Glossary:Community_
water supply (NACE 40-41), wholesale innovation_survey_(CIS)
trade (NACE 51), transport, storage and 13
http://stats.oecd.org/glossary/detail.
communication (NACE 60-64), financial asp?ID=4719
intermediation (NACE 65-67), computer and 14
http://lexicon.ft.com/Term?term=dutch-
related activities (NACE 72), architectural disease
and engineering activities (NACE 74.2) and 15
http://unfccc.int/adaptation/nairobi_work_
technical testing and analysis (NACE 74.3). programme/programme_activities_and_
10
Run by the Statistics Center - Abu Dhabi work_areas/items/3994.php
(SCAD), under the guidance of the Interna- 16
http://www.eoearth.org/article/Resource_
tional Organisation for Knowledge Economy curse
and Enterprise Development (IKED), the
301
302
Chapter 17
Innovation in Scenario Building:
Methodological Advancements
and a Foresight Study of the
Automotive Industry in Brazil
Ariane Hina Schneider

Industry Federation of Parana, Brazil
Laila Del Bem Seleme

Industry Federation of Parana, Brazil
Felipe Fontes Rodrigues

Marilia de Souza
Industry Federation of Paran, Brazil
Helio Gomes de Carvalho

Federal Technological University of Parana, Brazil
ABSTRACT
Situated in Paran state in southern Brazil, the Metropolitan Region of Curitiba (MRC) is home to an
automotive sector which plays a major role in the local and national economy. In order to expand the
development of the automotive sector and to create new local and worldwide opportunities, the Federation
of Industries of Paran (FIEP) developed and employed an innovative scenario building methodology
to analyze the automotive industrys potential for innovation and attendance of new market demands for
2020; which is Sector Foresight. Therefore, results allow the players to have a clearer managerial view
of the industrys possible future. This chapter seeks to publicize the experience as well as the results of
this innovative project by focusing on the methodology and tools. Data sources included a review of the
literature, document analysis, direct observation, semi-structured interviews and two rounds of ques-
tionnaires. This experience contributed to innovate the organizational and methodological processes of
FIEP, and to improve the perspective of innovation in the automotive sector through a new approach to
scenario building. Results also shown this methodology can be applied to other industries in future studies.
DOI: 10.4018/978-1-61350-165-8.ch017
Innovation in Scenario Building
INTRODUCTION collaborative, coordinated and synergistic way.

When making decisions about the automotive
The automotive industry plays an important role industrys future as a whole, a systematic view
in the economies of over 40 countries, and is of this environment is employed, as it considers
a benchmark for innovation and application in the needs and wants of all participants.
management and production technologies. Brazil This scenario building activity, based on
is one of the worlds key automotive players and the foresight methodology developed by FIEP,
ranks fifth worldwide in vehicle assembly (OICA, differs from other methods as it enables the par-
2010). Paran state is home to one of Brazils lead- ticipation of different players within an industry,
ing auto industry clusters, with more than 6,000 thanks to FIEPs impartiality in overseeing the
related companies located in the Metropolitan entire process. It is regarded as an innovative
Region of Curitiba (MRC). methodology as it includes the perspectives and
Due to the industrys importance to Paran, opinions of multiple stakeholders, not to the or-
in 2008 and 2009 the Federation of Industries of ganizations individually, but to the industry as a
Paran (FIEP) oversaw a foresight study conducted whole, leading to the collection and analysis of
by its Industrial Development Observatory (ODI). strategic information regarding the views of all
It was designed to contribute to the MRC automo- participants. This new approach to scenario build-
tive industry by improving the sectors growth ing provides managers of different organizations
and development, and create new opportunities with a forward-looking, systematic look at the
worldwide. Scenario building was chosen as the need to innovate in technology, processes and
key tool to assess the industry, while the projects products to meet future conditions. It can also
timeframe was set for the year 2020. contribute strategically to organizational planning.
This chapter examines the innovative experi- It not only provides significant improvements for
ence and results of the project, specifically the scenario building, but is also an innovative new
methodology developed and the tools applied. service provided to industry by FIEP.
The regions automotive industry is relatively new
compared to other Brazilian clusters, and as such
it was somewhat unorganized, which hindered FORESIGHT AND
its view of the sectors future. Accordingly, this SCENARIO BUILDING
project was driven in part to promote interaction
among its key players and develop synergies Foresight is a methodology to collect and assess
within the sector. expert opinions about the future from the public
The innovation of this experience is seen in the and private sectors, universities and research
creation of a new organizational method (OECD, centers, through a structured, interactive, participa-
Oslo Manual, 2005): Sector Foresight. It was tive, coordinated and synergistic process (Godet,
developed by FIEP to significantly improve its 2001). It is used to build strategic views that can
industrial relations through an enhanced view of spur competitiveness and the development of a
the industries possible futures. This also contrib- country, territory, company or public institution
uted to the acquisition of non-transactional assets, and as shown below, an industrial sector or a
paramount to the automotive industry scenario productive chain.
building exercise. This methodology involves a The University of Manchester defines foresight
process of assessing and analyzing opinions from as a process of anticipation that assesses expert
the public and private sectors, universities and re- opinion to set priorities regarding certain assump-
search centers, and was conducted in a structured, tions about the future which are constrained by
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the external environment. These assumptions According to Godet (1987), scenarios are the
are limited to the development of interfaces with consistent description of a future situation and
customers, suppliers and regulatory bodies, al- leading events from the present onto that future.
lowing foresight to give meaning to the environ- From an industrial perspective, Porter (1989,
ment by defining strategic views and reducing p. 413) states that scenarios are:
uncertainties.
For Coates (1985), foresight is a process for an internally consistent view of the future
a deeper understanding of the factors that drive structure of an industry. They are based on a set
the design of the long-term future, and should be of plausible assumptions regarding important
taken into account in policy, planning and decision uncertainties that could influence the industrial
making. Hortons (1999) approach asserts that structure, taking into account their implications
foresight is a process of developing views on for the creation and support of competitive ad-
possible ways in which the future can be built: by vantage. A complete set of scenarios, and not
understanding that present actions will contribute the most probable one, is then used to design a
to the futures best scenario. competitive strategy.
On the other hand, Hamel and Prahalad (1995)
feel that foresight should reflect the idea that Scenario building involves a systematic pro-
predicting the future must be predicated on a cedure to detect trends and identify the social
detailed perception of trends in lifestyle, technol- forces that could alter them (Rattner, 1979). For
ogy, demography and geopolitics, but is equally this exercise one must define a timeframe, the
based on imagination and prognosis. Similarly, key structures and parameters for the analysis,
Martin et al (1998) define foresight as a process and the scenario building objectives.
for systematically analyzing the long-term future According to Simpson (1992) and Schoemaker
for science, technology, the economy and society. and Heijden (1992), the results from scenario
They add however, that the research should be building lead to a broader view of the external
able to identify fields of strategic study, develop- environment, thereby improving the decision-
ment and emerging technologies that would most making process, as it enhances managements
likely create the best economic and social benefits. perceptions and ensures faster decisions. Quinn
Cristo (2000) takes foresight further, seeing it and Mason (1994) complement this idea by stat-
as the process of anticipating and exploring the ing that the scenario building practice triggers
opinion of experts from social networks in order strategic thought, which prepares one to face
to build strategic views. important changes.
According to Schwartz (2000), scenario build- The techniques for prospective scenario
ing is one of the activities that comprise the fore- building date from the twentieth century and
sight methodology. Scenarios are tools for helping have subsequently been refined. The methods
long-range views in a world of great uncertainty. are many - (Godet, 1993, 2000a, 2000b; Porter,
Such tools can promote the recognition of change 1992; Schoemaker, 1995; Ringland, 1998; Wilson,
processes in the current environment. The author 1998; and Schwartz, 2000): Logical-Intuitive; the
also says they can be seen as alternative stories or GBN Model; Schoemaker; Michel Godet; Arthur
tales about the future. More than recognizing D. Little; the Mitchell Method, Tydeman and
changes, they allow preemptive responses in order Georgiades; Michel Porters Competitive Strate-
to fully adapt to them (Schwartz, 2000). gies; Impact and Trends Analysis; Comprehensive
Situation Mapping, Future Mapping, Crossed
Impacts and Grumbach.
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Of this sample of 12 methods only three are Building possible scenarios through the
described in this study, as they are basis to the evolution of the system under study by tak-
methods used by FIEPs ODI/PR for this case ing into account the most likely outcomes
study: Michel Godets Method (1993), Global of the key variables, and then assessing the
Business Network GBN (Schwartz, 2000) and variables hypotheses.
Grumbachs (1997) Methodology. All use fore-
sight as a theoretical basis. However, each has Scenario building, under Godets methodol-
distinctive features which can help meet specific ogy, begins with defining the scope of study, and
demands of varying situations. All three methods then listing the relevant variables and players. A
are also variable-based, taking into account the structural analysis is conducted to identify the
behavior of the players and the consistency of influence/dependence of each variable between
the multiple scenarios that can emerge. These them. Games are then used to identify the strength
results are used in strategy building in response of the relations among the players, as well as their
to the object of study. Nevertheless, the number objectives, strategies, behavior, uncertain elements
of variables and their possible outcomes can make and trends. All of these can cause ruptures in the
the process lengthy and time consuming, requiring scenarios environment. Thus, the analyses help
know-how and adaptability from the researchers. define the futures main drivers, allowing further
The three methods are briefly described below. hypotheses to be made that will be used later on,
in the morphological analysis.
Michel Godets Methodology Accordingly, Godets Methodology consists
of eight stages:
Godets (1993) scenario building methodology
begins with a diagnosis of the external environment 1. Definition of the scope and the environment
to further support strategic decision making. The 2. Retrospective analysis of the environment
author believes that every action in the present will and current situation
reflect on the future scenario, making it possible 3. Structural analysis of the system and
to predict possible scenarios and take actions to environment
achieve desirable results. This anticipation to 4. Selection of futures drivers
action helps deal with the growing effects of un- 5. Design of alternative scenarios
certainties and interdependency, plus changes in 6. Consistency tests
certain areas and inertia in others. The objectives 7. Establishment of polices and strategies
of the scenario building under this perspective are: 8. Strategic monitoring
Identifying key variables through a global Global Link Network Methodology

analysis that can establish relationships (GBN): Peter Schwartz (1988)
among the variables related to the object
of study; The Global Link Network Methodology, known
Identifying, from these key variables, as GBN, was created by Peter Schwartz, who sees
the main players, their strategies and the scenarios as an instrument of long-range strategic
means they have to reach their goals. The planning that considers macro-environmental
analysis of these elements, as well as the uncertainties. These qualitative or quantitative
evolution of the relationships among play- uncertainties require that multiple future scenarios
ers, can provide indicators towards pos- be generated during the planning process. This
sible scenarios; and method tries to identify those issues with the most
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effect on decision making, based on what he calls uses an open system approach, meaning that
the strategic urgency in a given system. the object of analysis can either influence or be
These issues can be accessed through inter- influenced by its environment. From this point of
views, panels or expert discussions that deepen view, it seeks to model the key strategic questions
the understanding of a subject. After defining and the players behavior, and only then build
the most relevant aspects of a given system, the prospective scenarios. For Grumbach, one
one should identify the driving forces with the should ideally build four alternative scenarios:
most influence on the macro-environment. From the more likely, the ideal, the optimistic
these driving forces one can identify the critical and the pessimistic.
uncertainties that will be the required inputs for Grumbachs method relies on various tools
scenario building. to complete its scenarios: brainstorming, Delphi
This scenario building methodology is unique rounds, cross-impact analysis, Bayes theorem,
as it begins with the micro-environment of the Monte Carlo Simulation and game theory. Its use
system and grows towards the outside, or the ex- is made simpler through the development of two
ternal macro-environment. The goal is to highlight software programs: Puma, a system for strategic
the most likely significant changes in the future planning and prospective scenarios; and Lince, a
of such a system. Therefore, the system should future management and simulation system. The
be analyzed from the inside-out, focusing on the method consists of three stages:
most significant differences that can occur in its
future scenarios. It can be considered a learning 1. Understanding the problem
process of a specific systems nature as it allows 2. Assessing the alternatives
the players involved to have a shared view of the 3. Evaluating and interpreting the alternatives
possible outcomes. It also enables managers to for decision making
learn how to cope with the unexpected.
The GBN methodology features eight steps:
THE AUTOMOTIVE INDUSTRY
1. Identification of the focal issue or decision
2. Identification of key factors The automotive industry is a global economic
(micro-environment) powerhouse. Vehicle assembly alone generates
3. Identification of driving forces over US$3 trillion in revenue worldwide. Auto
(macro-environment) manufacturing plants operate in more than 40
4. Ranking of pre-determined uncertainties countries, including six South American coun-
5. Selection of scenario logics tries, of which Brazil is the leader. The industry
6. Description of the scenarios consumes massive amounts of raw materials and
7. Selection of key indicators and signalers has invented production systems from Fords
8. Analysis of the implications and options traditional mass-volume assembly line to todays
advanced approaches such as the Toyota Produc-
Grumbachs Methodology tion System and Lean Manufacturing, to name a
few. The plants have become increasingly effec-
The initial version of Grumbachs (1997) meth- tive and are the de facto creators of todays global
odology was a tool for making and analyzing supply-chains.
prospective scenarios. However, it evolved into Over 70 million vehicles are produced globally
a future view-based strategic planning process each year, and this number has grown despite the
anchored in prospective scenarios. The method 2008 economic crisis (OICA, 2010). The tradi-
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tional industrial leaders have played little part in This recent growth cycle of the BRIC coun-
this growth, as new markets have emerged in the tries attracted new assembly plants which can
past decade, namely China, India and South Korea. supply domestic and neighboring markets. These
These countries already represent well over 20% countries are primarily seen as the answer to con-
of worldwide production, while South America tinued growth in the industry. After all, they not
represents about 5% (3.5 million vehicles). only boast growing demand, but also offer lower
Production on this scale requires a massive production costs, mostly favorable exchange rates
labor force: the automotive industry accounts for and heavy government incentives. Recent invest-
eight million direct jobs, which represent 5% of ments made by auto makers and parts suppliers
total world employment in manufacturing (ILO, back up this trend. To exploit these opportunities,
2008). It is also estimated that every direct job North American, European and Asian countries
accounts for five other indirect jobs worldwide. have invested in emerging economies, which are
Among manufacturers, the auto industry is the estimated to generate up to half the growth in
Research & Development leader, investing 4% worldwide production, and which are responsible
of its revenue into R&D. However, the nature of for around 80% of the industrys growth in sales.
R&D has changed. It has gradually been passed On the other hand, added pressure is being
down from the automakers to Tier 1 auto parts placed on the mature markets, as there has been
suppliers, mainly due to the latters thriving an increase in product life-cycle. This is the result
specialization in high technology parts and high of higher value-added technology and superior
value-added assembly sets (London School of production assembly. It also allows for longer
Economics, 2006). ownership and a higher average age of the fleet. A
The market became relatively saturated by lower repair frequency in the European Union has
the early 2000s, after a period of high growth in been reported, while at the same time the average
the industrys traditional markets: Japan and the maintenance value remains the same.
developed countries in Europe and North America. Even more pressure can be felt from the supply
This saturation is thought to be mostly due to the and demand side. High price sensitivity among
vehicle/population ratio as well as negative demo- consumers, rising production and raw material
graphic trends. The industrys current focus has costs and the emergence of new competitors are
shifted to a restructuring of production capacity, already a reality. China and India have started up
parts replacement and new markets, in the face exporting programs, mainly in light commercial
of sharp increases in prices of raw materials, and and low cost vehicles, and plan to export up to
a rapid rise of new players in Asia. one million vehicles per year (including the new
Among the markets that present the greatest ultra-low-cost segment). The auto parts segment
potential are the so-called BRICs: Brazil, Russia, has also become a key factor in emerging coun-
India and China. These emerging economies have tries, and will become even more so. Although it
a low vehicle/population ratio, vast territorial di- represents only 5% of the auto makers revenues,
mension and significant increases in purchasing it generates up to 50% of their profits.
power. These factors led to an increase in demand Apart from some regional manufacturers (Tata,
for personal and cargo mobility (PWC, 2006). An Mahindra & Mahindra in India, FAW and Chery
underdeveloped multimodal transport infrastruc- in China, and GAZ in Russia), the bulk of the
ture actually favored road transportation, which worlds domestic car and heavy vehicle markets is
is more flexible and adaptable to these countries distributed among the major American, European,
rapid economic growth. Japanese and most recently, Korean multination-
als. Nevertheless, a lower market concentration
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can be found in the auto parts business. The 30 for synergies among different companies along
largest companies in Europe are responsible for the supply chain and the many energy-intensive
providing almost all the parts and assemblies for technologies can offset such savings significantly.
the manufacturers which operate in the European The automotive industry has been faced with
Union (London School of Economics, 2006). numerous challenges, whether threats or oppor-
Despite its contribution to economic develop- tunities. Diverse strategies are well underway,
ment and mobility, the industry faces challenges taking into account the specific conditions of
that directly affect its sustainability. Internal com- each regional market. Likewise, comparative
bustion engines and tailpipe emissions are major advantages and disadvantages of each locale have
public opinion topics, despite being responsible preeminent importance regarding the role they
for only a small amount of total emissions from will play in the industrys future.
human activities (VDA, 2007). Heavy metals On this basis, following is a look at the au-
and other materials are also pollutants and a fun- tomotive industry in Brazil, showing its current
damental part of todays automotive technology. role in the domestic economy and the challenges
The automotive industry infrastructure also causes it faces, which underscored the efforts taken to
environmental impacts, while the use of cars has research possible futures for the industry in Brazil
a strong social impact. The industrys response to and the state of Paran.
these findings has been a crusade to produce safer,
quieter vehicles with embedded clean technologies The Automotive Industry in Brazil
and a comprehensive assessment of the products
life cycle. (WBCSD, 2004). This position demands Vehicle production in Brazil began in the late 1950s
that automakers in fact, the industry as a whole with the establishment of Volkswagen, Toyota and
to organize itself around a supply chain that is Ford plants (the latter also produced light trucks)
more sustainable and governed by best social, in the town of So Bernardo do Campo, in So
labor and environmental practices. Paulo state. Scania and Mercedes-Benz set up
In view of the global warming phenomenon, truck and bus plants in So Caetano do Sul in So
the industry has made it a top priority to signifi- Paulo, where General Motors later established a
cantly reduce its emissions (ACEA, 2007). This diversified plant. The city of So Paulo also re-
commitment has become a reality for automaker ceived a Ford truck plant shortly thereafter. Later
associations such as ACEA (European Automobile investments by Fiat in the state of Minas Gerais
Manufacturers Association), JAMA (Japanese Au- and others in the states of Rio de Janeiro, Paran
tomobile Manufacturers Association) and KAMA and Rio Grande do Sul comprised the basis of
(Korean Automobile Manufacturers Association). the automotive industry in Brazil until the 1990s.
These groups have all adopted greenhouse gas With the opening of the Brazilian economy
emissions caps. Automakers and suppliers seek to foreign markets and the concurrent economic
to help reduce CO2 emissions, mostly through stabilization that took place in the 1990s, the
better designs, lighter materials, alternative fuels industry received a push with the retooling of
and more fuel-efficient engines. They have also existing plants and the building of new plants by
invested heavily in emission control technologies. Renault, Peugeot-Citroen, Nissan and Mitsubishi,
According to the Well-to-wheel report, edit- to name a few (BNDES, 1999).
ed by the European Union Commission, switching In 2006 the automotive industry in Brazil
to alternative-fuel sources, either renewable or less turned 50 years old, with over 24 automakers,
polluting, could bring huge reductions in emis- over 500 parts suppliers and an endless number
sions. However, the high costs in R&D, the need of service providers (ANFAVEA 2007). Over the
308
previous ten years domestic production and sales One of the challenges of operating in Brazil
of vehicles had increased significantly. is the higherthan-expected production cost, seen
The Brazilian auto market is characterized mostly in its cumbersome and complex tax system.
by the production of small and medium-sized Even among other developing countries, Brazils
vehicles. In 2005, 55% of sales came from cars taxation is a heavy burden. The value-chain is
with engines no larger than 1000cc. Such vehicles strained by fiscal regulations, outdated laws and
have government incentives - such as tax waivers, union issues. In fact, tax and labor concerns might
first introduced in the 1990s - to encourage the jeopardize future foreign direct investments by
market for these so called popular cars. High automakers. On top of that, the fragile and under-
demand and competition push the need for cost- sized logistics infrastructure only helps increase
cutting, large-scale production and low margins. the cost of operating in Brazil.
A unique feature of the Brazilian market is the Although the country posts moderate growth
predominance of flex-fuel vehicles (which run on when compared to other developing economies,
gas, ethanol or any mix of both), whose technol- the automotive industry has a more positive out-
ogy has helped reduce the countrys dependence look for the short and medium-term. Downturns
on foreign oil. Successive hikes in the price of in the global economy have had limited effect on
oil worldwide have led several markets to further Brazils automotive industry, which has managed
research the Brazilian experience and assess the to retain an export base and meet domestic demand.
potential benefits of flex-fuel technology. In It is not widely known that Brazil and Argentina
fact, automakers and parts suppliers of flex-fuel combined represent 92% of Latin American pro-
technologies hope to exploit this interest through duction. Brazils automotive market alone (around
exports or technology licensing. two million vehicles) is at least four times that of
By the early 2000s the domestic market had Argentina and dwarfs those of Venezuela, Chile,
trouble meeting the industrys initial forecasts Colombia, Paraguay and Uruguay, which have a
of high-volume growth, and so shifted its focus combined market of less than 600,000 vehicles.
to exports to better utilize excess capacity. Ex- This brief background on the automotive
change rate policy changes and a strengthening industry in Brazil and around the world clearly
local currency, which occurred by mid-decade, shows that it plays a key role in the economies
showed up the weaknesses of this strategy. As in where it operates. There are many challenges to
other countries, Brazil couldnt sustain its role in be tackled, particularly related to uncertainties
the international market until its domestic market over factors such as competitiveness, alterna-
boosted demand. It wasnt until the late 2000s tive fuels, new production models, technologies,
that the market flexed its muscles and began its markets, governments and a qualified labor force.
long awaited growth path. Other automakers Through understanding and assessing these vari-
took notice and competitors have now arrived to ables, specific actions can be directed towards a
challenge the established players, through direct thorough development of the industry and the
investments in new plants and via favorable communities affected by it. Foresight studies
exchange-led imports. such as scenario building become essential for
The main foreign markets for Brazils automo- collective long-range thinking. The industry can
tive industry are Latin American countries with also undertake collective actions leading to the
similar features to Brazil (high concentration in desired outcomes it seeks.
small hatchbacks), and lower income countries
such as Mexico, China, India, Russia and South
Africa.
309
RESEARCH METHODOLOGY its many industrial sectors, defends the interests

of the industry and provides tools for the develop-
Based on its goals, this research is descriptive by ment of business associations, fosters international
nature (Vergara, 2005), as it describes the various partnerships, and eases the access to credit lines
stages and tools employed during the scenario and innovation (SISTEMA FIEP, 2010).
building exercise for the MRC automotive indus- The help meet these goals, the FIEP System
try. It is also a qualitative case study, and according started a project called Rede de Competncias
to Yin (2001), was designed to comprehensively (Competences Network), which sought to mobilize
and empirically approach a contemporary phe- the automotive industrys knowledge base to gen-
nomenon in its real-life environment. To achieve erate growth within the industry and consequently
this, multiple sources of empirical evidence were for Brazil. This project was carried out by the
required not only from a review of the literature, National Industry Confederation (CNI) which
but also through questionnaires, semi-structured coordinates all state Industry Federations and is
interviews, direct observation and analysis of the supported by the federal government through the
FIEP document database. Studies and Projects Funding Agency (FINEP).
The literature review was designed to identify One of the innovative mechanisms created by
the leading scholars and practitioners of scenario the Competences Network is the Industrial De-
building, such as Michel Godet (1987), Grumbach velopment Observatory think tanks (ODIs). Six
(1997) and Peter Schwartz (2000). Primary data Brazilian states have implemented local ODIs:
collection was conducted through semi-structured Bahia, Minas Gerais, Paran, Pernambuco, Rio
interviews applied to the FIEP scenario building Grande do Sul and Santa Catarina. The central
project personnel. The aim of the interviews was goal of the ODIs is to create strategic knowledge
to establish the scenario building practice at FIEP. regarding the economy, technology and societal
At the same time, direct observation was used changes and trends which occur globally, nation-
to obtain more detailed information regarding ally and locally. It anticipates the impacts of these
the respondents experience with the automotive changes and trends on numerous industries, and
industry. Secondary data was obtained through seeks to identify and support possible pathways
documentation assessment, which included meth- for innovation and sustainable industrial devel-
odology files, notes, videos, project reports and opment.
minutes of meetings. These documents demon- Each ODI selected an industry which was
strate the procedures and results of the project. The economically important and of local strategic
interviews were submitted for content analysis, interest. These were then the subject of a foresight
along with the secondary data. The goal was to pilot project. The FIEP System, through the ODI/
approximate Bardins (1977) regularity identifi- PR, chose Parans automotive industry because it
cation and develop a model that could be used in has national and regional importance, it employs
further practice and research. over 51 thousand workers in Paran (Brazil, 2006),
and is a regional benchmark in technology and
innovation.
SCENARIO BUILDING FOR THE Through its ODI think-tank, FIEP led the
MRC AUTOMOTIVE INDUSTRY prospective scenario project from 2008 to 2009,
with the goal of further developing the states
The Federation of Industries of Paran (FIEP) automotive industry and bringing in new oppor-
produces research and reports on economic is- tunities worldwide by the year 2020. To build the
sues, suggests and discusses strategies related to scenarios, certain steps had to be taken: defining
310
the scope of the project; establishing the Strategy Defining the Scope of the Project
Board and determining its responsibilities; diag-
nosis and trend analysis; and lastly, the scenarios According to Godets methodology (2000b), the
themselves. As this was a pilot project, these first and one of the most important steps is to define
stages were defined during the working process, the scope, as it provides the basis from which the
and were continuously tested and reassessed until theme/problem of the study can be determined, as
the final format was determined. well as the main goals. It also leads to decisions
As part of defining the scope, the key problem over using the industrial sector or its production
and main goals were also set. This stage also fine- chain, the geographical area and the time frame.
tuned the range of the project (industry sector vs. The choice for the automotive industry as
production chain), geographical area (the MRC) the object of research arose from the economic
and the project timeframe: the year 2020. Choos- findings of its importance to the state of Paran.
ing the automotive sector posed the challenge as Upon analyzing the states industrial base by
foresight studies mostly relate either to individual manufacturing value, the five main industrial sec-
organizations or territories. Adding to the chal- tors represented 53.5% of total industry in 1996,
lenge the main goal was defined as to contribute rising to 63.1% by 2005, namely: food processing,
to strengthening the automotive industry in the oil refining, and automotive assembly, equipment
MRC and fostering new opportunities worldwide manufacturing and chemical products. (Instituto
under the scope of 2020. Paranaense de Desenvolvimento Econmico e
The Strategy Board was made up of key play- Social [IPARDES], 2005).
ers that could benefit from the development of the Automotive assembly (division 34 of Brazils
project, namely senior managers and decision- national economic activity classification system
makers from leading companies and organiza- - CNAE) rose 320% in monetary terms from
tions linked to the industry. These individuals 1996 to 2005. This same growth is also seen in
are the ones that could contribute the most to the the number of businesses, which increased from
improvement of the industry if they chose to be 373 to 462 in the same period (Brazil, 2006). The
part of a foresight study. automotive industry was also a leader (together
Diagnosis and trend analysis began with gather- with the food industry) in job creation during
ing the main reports and market studies published those same years. However, only the automotive
by think-tanks, associations and consulting firms industry increased in each of manufacturing added
around the world. The diagnosis was divided into value, job creation and number of businesses.
global and local market structures, trends and Also, the states largest automakers and related
industry core competences. From the diagnosis firms (Volkswagen, Renault/Nissan, Volvo and
the main variables of the system were extracted Bosch) generate 20% of the states international
and cross-impacted into a structural analysis that trade (Brazil, 2008).
allowed for the key variables at stake to be iden- The auto industrys manufacturing chain covers
tified, which were used throughout the project. everything from raw materials to the most com-
For the scenario building, each at stake variable plex electronics components, as well as sales and
resulted in hypotheses or possible outcomes. Based maintenance-related services. Considering the size
on combinations of hypotheses, possible scenarios and complexity of the manufacturing chain, the
were built considering the pre-set time frame. study was limited to the sectors shown in Table 1.
Following is a description of the main steps An assessment of economic fundamentals
and sub-steps that will result in scenario building revealed that most of the automotive industries
for the MRC automotive industry.
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Table 1. Research profile for the study of the MRC automotive chain
Automakers 1st Level (TIER 1)1 2nd Level (TIER 2) 3rd Level (TIER 3)
Forged metal
Cast metal
Passenger cars and light Auto parts Die cast
System Suppliers
commercial vehicles Tires Plastic
Auto parts
Trucks and buses Auto bodies Rubber parts
Glass
Non-metallic parts
in Paran are located in the MRC, thus setting the CNPq, company sites, amongst others. Selection
studys geographical scope. criteria were selected from this survey in order to
Discussions among FIEP management resulted establish the Strategy Board.
in the year 2020 timeframe and the drafting of The search for strategic actors for the industry
the research problem. The former was due to was handled respecting the industrys delimita-
the lengthy maturation process of the automo- tions, by selecting 3 representatives from each
tive business, while the latter was defined by the segment selected, such as automakers, 1st level
Strategy Board as2: companies (system suppliers), 2nd level (auto parts,
pneumatics and auto bodies) and 3rd level (basic
To contribute to strengthening the automotive parts). The actors were first categorized according
industry in the MRC and fostering new opportuni- to their work category: associations and unions,
ties worldwide under the scope of 2020. governments, industries and research. They were
also classified according to their position in the
Establishment of the Strategy Board company: management positions, strategic deci-
sion making jobs, operational positions and sales.
The main actors interested in the development of a The search for products and services was both
foresight study for the MRCs automotive industry efficient and useful and was complemented with
were identified in the second stage, referred to customer, competitor and supplier research. Bits of
as the Establishment and Modus Operandi of the information such as ongoing or concluded projects
Strategy Board. The main activities the Strategy and scientific publications or opinions, related to
Board had to develop were to define the scope, the subjects of the industry, were added especially
direct activities, articulate resources, and monitor for the actors connected to research centers. In
the work and its results. short, the criteria used for choosing strategic actors
Following the methodology assumptions were: the companys size, number of employees,
(GODET, 2000a), the FIEP System considered an its capital source (national/multinational), and
approximation to the MRC automotive industries the companys position in the chain as well as its
very important; so that all decisions related to the field of operation.
project could be made together. After the strategic companies were selected,
A survey was first taken of both the companies their CEOs were invited to be a part of the Board.
and experts in the automotive industry located in This process was done through a formal docu-
the MRC. Sources used were: the FIEP industrial ment signed by the FIEP Systems president. The
database, news bulletins, newspapers, associa- companies were then contacted by telephone so
tions, unions and the Lattes research platform that each ones importance in the project was
of Brazils National Council of Research, the reaffirmed as well as making sure that the com-
312
pany was interested in taking part of the project. subject (environment, economics, energy, MRC,
Those who showed interest in taking part in the government, automotive industry, infrastructure,
project were visited by a technical team from FIEP market, automotive products, technology and so-
which was able to explain the project and talk ciety.) From a list of 250 variables, the research
about the expectations regarding each companys team consolidated them into 46, which are: global
participation. economic growth, automobiles life cycle, pro-
The first official Board meeting took place in ductive systems, mobility services, interest rates,
August 2008, at the International Innovation Cen- international commerce policies, tax legislations,
ter of the Federation of Industries of Paran. In this alternative fuels and public transport.
meeting the membersparticipation was confirmed The 46 variables chosen were organized in a
during the building of the Strategy Board and a matrix. The objective was to establish the influ-
bimonthly agenda of meetings was accepted, in ence and dependence relations of a certain variable
order to put into action the activities proposed. over another. From this variables confrontation,
In agreement with the chosen methodology, all a matrix was obtained: the Cross-Impact Matrix
the stages of the foresight scenario building were (Figure 1), in which the placement of the variables
directed and validated by the Strategy Board so of the system is determined. This procedure was
that the projects results had credibility. done with all 46 variables which are considered
The initial idea was to have the participation the most important for the automotive industry.
of approximately 10 companies. Currently the With this matrix established, a plan of influ-
Board companies are: Bosch, Brose, Denso, Fiat ences (Figure 2) was built which allowed for
Powertrain, Hubner, Igasa, Johnson & Controls, better visualization of the variables role in the
Perkins, Renault, Treves, Volvo and Volkswagen. system. The spatial character of the plan of influ-
There were a total of 12 important companies ences is fundamental for understanding the system
from the MRC automotive industry, as well as a under study and is of great value in defining future
development and innovation agency. scenarios.
The variables of this influence plan are clas-
Diagnosis and Trend Analysis sified into influence variables, variables at stake,
dependable variables, excluded variables and
An information survey regarding the automotive borderline variables, according to Table 2.
industry was conducted in this stage of Diagnosis
and Trend Analysis. The survey conducted this
diagnosis on a global and local level, running
trends analysis and sought out current compe- Figure 1. Example of a cross-impact matrix
tences identified as necessary for the industrys
development. Later came the structural analysis,
which allows for the identification of variables
considered relevant for the next stage of the project.
The structural analysis technique was used to do
a survey regarding the structuring variables for the
automotive industry. According to Godet (2004),
this is a tool used for diagnosing the influence and
dependence relations between the variables of a
system. The variables were classified according
to their dimension (global, regional and local) and
313
The 46 variables from the automotive industry have an ambiguous behavior and can interfere
were placed on this influence plan, as shown in in all the other system variables. They are at
Figure 3. The most relevant variables in this plan stake because their system structure positioning
were selected to define the scenarios. Thus this is uncertain, as well as, the position that they can
allowed a synthetic analysis and at the same time assume. Consequently, the scenarios can be built
allowed a deep systems analysis. This selection according to the different positions that these
was made in a Scenario Building Workshop where variables at stake can assume.
the variables were shown to a Technical Board The experts raised likely hypothesis for each
consisting of 32 participants, such as senior en- variable after the consensus was made of which
gineers, analyst researchers and other automotive variables at stake would be suitable for the prospec-
professionals. This Technical Board analyzed the tive scenarios in the industry. These hypotheses
variables shown and was able to incorporate, represent the likely states that the variables would
transfer or exclude the variables from quadrants, assume within the prospective scenario target. The
always focusing on the variables at stake. This results were that 24 variables and their hypotheses
process was conducted with the consensus of each were chosen. These variables and their respective
sub-group of participants. They elected a spokes- hypothesis were used as a basis for the scenario
person to communicate their decision to the building. An example of a chosen variable was
spokespersons that represented the other groups. alternative fuels and their hypotheses were: an
Consequently the spokespersons from all groups increase in regulations and a reduction of alterna-
were able to reach a general consensus among tive fuels available; and also a reduction in the
them and then share their common decision with regulations as well as an increase in the different
everyone. types of alternative fuels offered.
According to Godets prospective methodol-
ogy (GODET; 1993, 2001), the variables at Scenario Building
stake, that are the simultaneously very influential
and dependable variables, should be given Once the step of choosing variables and their
higher priority than the other ones. These variables respective probable hypothesis was concluded,
the specialists query process and the variables
probability were started. The hypotheses were
Figure 2. Types of variables of the plan of influ- presented as semi-structured questionnaires con-
ences ducted through interviews with members of the
Strategy Board of the MRCs Automotive Industry.
The hypotheses that best represented the opinions
of the strategic MRCs board members, regarding
the most propitious events, were consolidated in a
scenario referred to as a desirable scenario. The
hypotheses that represented the trend behavior,
that is, the most likely to occur, were consolidated
in the most likely scenario.
The hypothesis combinations, that seemed
the most likely/desirable for the foresight study,
triggered the scenario building - Probable and
Desirable that aimed at contributing to the
MRCs Automotive Industry consolidation for
314
Table 2. Classification of variables in the influence plan
VARIABLE
DESCRIPTION
TYPES
They are very influential and not very dependable variables.
Influence Variables
They are variables that explain the systems dynamics due to their high impact capacity over it.
They are simultaneously very influential and dependable variables.
Variables at stake They have an unstable nature and are capable of producing great changes in the systems dynamics
They are generally considered as challenges and must be constantly controlled.
They are not very influential but are very dependable variables.
Dependable Vari-
They have little impact or no impact at all on the system, but they are part of the results of its dynamics.
ables
Their development is explained by the variables performance in quadrants 1 and 2.
They are not very influential and not very dependable variables.
They are independent factors of the system having only a few connections with it.
Excluded Variables Their importance lies in the fact that they can constitute system trends, ie. Factors that have little or no influence
nowadays; however, they can represent elements that will have impact on the subject/problem dynamics in the
foresight study.
They are moderately influential and dependable variables
Borderline Vari- A priori, these variables may not indicate anything in a consistent way as its location is not well defined
ables Variables on this specific area deserve attention in the way of research efforts in order to better understand their
performance.
Source: SENAI (2010)
the development of new opportunities worldwide The experts survey was done in two rounds
around 2020. via the internet. The first round was open for 47
This stage had 17 experts participating from days. After analyzing the data from the first round,
the MRC industry, all of which were members of a reasonable 12 question consensus approach was
the Strategy Board. They were interviewed using reached. The remaining 11 questions that presented
a prospective questionnaire. 10 major themes were either irregular central tendencies or where there
touched on, as follows: (1) economics, (2) energy, was no consensus among the respondents were
(3) government, (4) automotive industry, (5) in- re-submitted to the 2nd round with the same 125
frastructure, (6) market, (7) automotive products, experts that had already answered the first round
(8) MRC (9) social and (10) technological. In the questions. The 2nd round was conducted a month
end, 24 variables and 83 possible hypotheses were after the consolidation of the first round results.
considered. The interviews contributed to variable This was available on the internet for 13 days,
filtering and this resulted in 23 variables that were resulting in 68 valid responses. In the second
considered to have the most impact on the MRCs round, relative consensus or central tendencies
industry, as can be observed on Table 3. were reached, allowing for a more robust analysis
The Strategy Board considered it paramount of the experts opinions regarding the automotive
to conduct a broader survey in order to obtain industry scenarios for the MRC.
more details about the hypotheses and even create A morphological analysis tool was used after
their probabilities. A Delphi survey was con- obtaining the hypothesis probability and was able
ducted online especially for this study. Structured to analyze and consolidate the most representative
questionnaires were sent to experts countrywide, prospective scenarios Probable and Desirable.
both upstream and downstream along the automo- According to Godet (2004), the morphological
tive supply chain; 125 questionnaires were filled analysis term comes from morphology which
out. means the study of forms. It is a tool that can be
315
Figure 3. Influence and Dependence Plan for the MRC Automotive Industry
used to build scenarios from the parts that com- Regarding achieved results, the study suggests
pose it. In a prospective study this tool aims at one likely scenario for the MRC automotive
providing a systematic scanning of possible futures industry that includes Brazils economic growth
within a given foresight timeframe, through a set through trade agreements and lower trade barri-
of combinations from different scenarios prepared ers in the external market. It also facilitates the
for each variable at stake. Brazilian companies access to supply chains and
The paths for the two main scenarios were: the distribution channels abroad, and includes at least
desirable scenario, or what was referred to as the some improvements in logistics infrastructure and
Sustainable Future, and the most likely scenario, the maintenance of the Brazilian automotive indus-
that was referred to as the Future Contingency. try as a key industry in Brazils trade balance. The
Those trajectories were a good exercise on how scenario shows the growth of renewable fuels in
changes and ruptures could happen in the near the energy matrix as well as new business models
future and therefore, be anticipated. Thus the such as rental services. It is believed that in this
industry or chain could be better prepared for study the industry would specialize in technology
challenges and opportunities from the competitive according to its core competences; MRC is known
environment in which they are located. as an important local production cluster.
316
Table 3. Themes and variables

colleges that are well integrated into the industry.
Themes Variables The scenario boils down to a new automotive
1. Positive trend in Exports
industry, based on a greater use of public trans-
2. Increase in GNP per capita
portation and alternative means of transportation
Economy
3. Economic importance of the automotive indus-
for vehicle owners and are directly linked to the
try in the RMC use of alternative fuels and fleet renewal.
Energy 4. Brazils transport matrix
Govern- 5. Brazils tax load

ment 6. Industrial policy RESULTS: STAGES AND TOOLS
7. Probability of reduction in barriers of entry
8. Trends in the supply chain Based on the previously stated experience of
Auto-
motive 9. Industry growth strategies
industrial scenario building and in rigorous ac-
industry
10. Vehicle Production share
cordance to the literature - highlighting Godet
11. Positioning of newcomers
(1993), Grumbach (1997) and Schwartz (2000)
- the research team at FIEPs Industrial Develop-
Infra- 12. Improvement of Brazils transport infrastruc-
structure ture ment Observatory (ODI/PR) was able to develop
13. Cost/benefit ratio of vehicle ownership in a stage-based framework comprising the neces-
Brazil sary steps for such an exercise, as well as the best
Market
14. Vehicle density in Brazil fit tools for its application in industrial scenario
15. New vehicle sales in Brazil building (Table 4). The main stages can be summa-
Product 16. Average fleet age in Brazil rized as follows: scope definition; establishment
MRC
17. Relative production costs of MRC compared of Strategy Board; diagnosis and trend analysis;
to other clusters in Brazil
and scenario building per se.
18. Qualified workforce in MRC Scope definition was considered the paramount
19. Probability of alternative transport use among stage since it defines the problem of research and
Social
vehicle owners
its goals. It also sets the geographic area, the ap-
20. Shift in employers/employees Union relations
proach (industry/sector vis--vis production
21. Productivity gains in the automotive industry
chain), and the projects timeframe.
22. New productive arrangements in the automo-
Technol-
tive industry The establishment of the Strategy Board is
ogy
23. Location and intensity of R&D activities in the stage in which the researchers identify the
the automotive industry key players that would be most interested in
the development of this type of foresight study.
Among its most important activities, one would
The desirable scenario or the Sustainable highlight assisting in scope definition, guidance
future includes the MRC as an important world- for the activities according to its relevance to the
class production center as it becomes an agent industry and the validation of the researchs work
of technology transformation, not only for the and results.
industry but also the State. The scenario suggests The project, as it was developed by the ODI/
a lower logistics cost in Brazil due to better use of PR, included a great amount of work on diagnosis
the multi-modal system as well as a more impor- and trend analysis. It enables researchers to fully
tant role in Brazils exports. Higher investments understand the object of study as well as gather the
in education would reflect in a better qualified upmost critical information regarding the industry
workforce, trained in universities and technical in reference. From this stand point, both global and
local diagnosis and trend analysis take place as
317
Table 4. Stages and tools for scenario building
stages SUB-STAGES TOOLS

Definition of topic or problem for foresight study
Assignment of chain or industry
Perceived ideas workshop
SCOPE Geographic delineation
Change, rupture and inertia workshop
DEFINITION Definition of foresight timeframe
Retrospective and prospective questionnaires
Definition of objectives
Assessment of Stakeholders
Assignment of Strategy Board members Perceived ideas workshop
STRATEGY
Appointment of attributions of the Strategy Board Change, rupture and inertia workshop Retro-
BOARD
Operation and procedures of the Strategy Board spective and prospective questionnaires
Global and Industry-specific diagnosis Retrospective and prospective questionnaires
Trend analysis Perceived ideas workshop
diagnosis/ trend
Assessment and analysis of key players in the industry Change, rupture and inertia workshop
analysis
Structural analysis and Stakeholders game SWOT analysis
Research and Assessment of industrys indicators Structural analysis
Identification of uncertainties Retrospective and prospective questionnaires
Formulation of hypotheses DELPHI
scenario building
Hypotheses presumption Hypotheses probability presumption
Scenario assembly Morphologic analysis
well as identifying the core competences necessary Change, rupture and inertia workshops:
for the industrys development. Moreover, this is Group dynamics aimed at the acknowledg-
when the key variables are first gathered that will ing perceptions, behavior and mental rep-
be applied throughout the research. resentations that experts have in regards to
Finally, the scenario-building stage consists the theme and research problem. Through
of the identification of possible hypotheses for this exercise, one can identify the changes
each variable at stake within the system. The foreseen, desired or feared by the players
likely combinations of hypotheses are, thus, the during a given timeframe. It can trigger the
basis for the possible scenarios considering the formulation of alternative responses to the
given timeframe. changes previously identified.
The applicable tools for the foresight studies Perceived ideas workshops: It aims at
should be those that contribute the most to gather- identifying the experts conceived ideas or
ing and analyzing strategic information during the behavior that has an impact on the dynam-
multiple stages of prospective scenario building. ics of the theme or given research problem.
They should also assure relevant results not only As such ideas are taken for granted; they
for the industry but also for the organizations have a powerful impact on the players be-
individually. These tools are: havior in a given system.
Structural analysis: Technique which
Retrospective and prospective question- structures the collective thinking about the
naires: They help the research team obtain variables of a foresight study, thus reduc-
information from the players about changing its complexity. It offers one the possi-
es, ruptures, inertia related to past, pres- bility of describing any given system with
ent and future that are related to a given the help of a matrix and a chart that estab-
research topic. lishes the relationships of all its constituent
elements.
318
Stakeholders game: As is the case with It is important to note that the stages and their
the structural analysis, the stakeholders tools are non exclusives as in some cases; they
game aims to reduce the complexity of can be re-arranged or even excluded from the
the competitive movements of a given foresight research. The combination of stages, sub-
systems players. Through systematically stages and their tools will depend on the theme,
gathering information on the strategies of time available and resources, personnel, level of
stakeholders, one can position the players understanding of the tools, budgeting and other
according to their interests in the system. factors peculiar to the effort of foresight research.
SWOT analysis: This well known tech-
nique helps the industry to take advantage
of the opportunities and avoid external INNOVATION PROCESS IN
threats. It also explores the strengths and SCENARIO BUILDING: A NEW
weaknesses of the players helping them SERVICE FOR THE INDUSTRY
to make the best of both. Its application
makes it possible to obtain and process Scenario building based on prospective helps
relevant information for scenario building players in acquiring relevant knowledge, compe-
as well as to plan strategies for the players tences and tools that allow them to raise the players
involved. foresight skills, which in turn fosters short-term
Morphologic analysis: This tool provides innovation capability as well as increases com-
a systematic exploration of possible fu- petitive performance while adding value to the
tures within a given timeframe, through processes, products and services in the long run.
the likely combinations between hypoth- Attesting to the innovation in the modus-
eses variables. operandi of scenario-building at FIEP, Table 5
Hypotheses probability presumption: gives one a comparison of methods anchored
Aims to identify the set of hypotheses most in the prospective for scenario-building. The
likely to occur in order to put together the last column is focuses on outlining the elements
possible prospective scenarios. It comple- exclusive to FIEPs model.
ments morphological analysis as it quan- FIEPs model is the result of the significant
tifies the probability of the occurrence of improvement of other methods and is currently
each set of hypothesis. offered as a new service for the Paran State In-
Delphi: Based on the elaboration, submis- dustrial base.
sion and resubmission of a given question- Some testimonies of key stakeholders explic-
naire to a group of experts, thus allowing itly state innovations that were triggered in the
them to acknowledge the groups collec- industry. According to Mr. Yoshio Kawakami,
tive opinion about a research problem. The President of Volvo Construction Equipment Brazil:
consecutive rounds of responses also pro-
mote reflection on the individual respon- The research FIEP conducted via ODI/PR was
dents as they have access to the groups surprising due to its ability to mobilize and coor-
general trends. As such, this technique dinate strategic actions. The exercise significantly
verifies the degree of convergence/diver- added value to the entire local automotive industry
gence of knowledge about a given set of as it led to the establishment of the automotive
hypotheses so they can be applied in the engineering graduate program in Curitiba. This
scenario building. opportunity is beneficial to Volvo Brazil not only
because it is increasing the professional growth of
319
Table 5. Stages and tools for scenario building
Methods
Feature
Godet Schwartz Grumbach FIEP
Problem definition Yes Yes Yes Yes
Historical analysis Yes Yes Yes Yes
Description of present situation Yes Yes Yes Yes
Variable Identification Yes Yes Yes Yes
Stakeholders Identification Yes Yes Yes Yes
Consistency check Yes Yes Yes Yes
Multiple-variable hardship Yes Yes Yes Yes
Expert consultancy Yes Yes Yes Yes
Competitor behavior monitoring No No No Yes
Qualitative and quantitative variables Yes Qualitative Qualitative Yes
Detailed technical presentation Yes No Yes Yes
Cross-impact analysis Yes No Yes Yes
Delphi method No No Yes Yes
Probabilistic hierarchy Yes No Yes Yes
Managers mental map No Yes Yes Yes
Multiple exploratory scenarios Yes Yes No Yes
Strategy Boards involvement with
No No No Yes
multiple chain competitors
Source: adapted from Marcial (1999) and the authors
its engineers, but also because it provides the same was able to deliver through its scenarios. A good
opportunity for many of its suppliers in special- example is the variable that proxies hybrid-electric
ized product development engineering services. vehicle production for the year 2020 which will
total 5% of the vehicle production. This is the
Mr. Alain Tissier of Renault Brazils executive sort of information that I cannot find nor buy in
management adds: the market and was only possible through FIEPs
work [] it is an important parameter for defining
Such collective work could have never been new products by Renault.
done by my companys strategic planning team,
mostly due to the heavy workload needed and for As shown above, the stakeholder involved in
not being able to mobilize that many key players the exercise is able to take advantage of the op-
[] there is no such service in the market. Sce- portunities and benefits of the structural tendency
nario building is important for defining courses analysis, better understand the industry and the
of action, and FIEP proved it has the know-how individual organizations and assess the markets
to pull it off. The result is that we now have input future needs. Furthermore, the collective is able
for our strategic planning. to anticipate the industrys possible opportunities
and threats, thus enabling faster and more robust
We dominate the market, but need more informa- responses to environmental changes. Another
tion from the external environment, which FIEP benefit would also be in the development of
320
raising and managing key information for the FIEPs methodology consisted of 4 stages, 18
development of new products, services, concepts sub-stages in total and 9 different tools that could
and business models. be replicated in studies for different industries.
This methodological advancement works
not only as means of raising the awareness of a
CONCLUSION given industrys competitive global, regional and
local environment, but also spurs the individual
This foresight study can be seen as a methodol- and group innovative responses towards critical
ogy for building the future, which contributes uncertainties. Scenario building under the stra-
to the conception and implementation of new tegic prospective school developed by Michel
economic development and innovation strategies Godets seminal papers (1993) was traditionally
for a country, region, organization, or as shown in used by either enterprises or territories. By add-
this chapter, an industry or supply chain. Based ing stakeholders governance as a neutral partner
on articulated and cooperative efforts, this kind of to legitimate scenario building for stakeholders
research encourages entrepreneurs to think about and multiple research techniques, the foresight
the relevance of future studies, prospective views, methodology was greatly inhanced allowing an
of medium and long-term planning as well as col- entire industry to conduct its common strategic
lective action, with the aim of achieving innovation thinking in an innovative and collaborative way.
and sustainable competitive advantage for firms, This research contributed by proposing a
industries, local and national economic sectors. methodological framework for sector foresight,
With the goal of strengthening the MRCs which can hereafter be applied to other local indus-
automotive industry, the Federation of Industries tries as well as to other auto industries located in
of Paran (FIEP), through ODI/PR, led a sector other regions and nations. The exercise promoted
foresight project, a truly innovative service, aimed communication between the MRCs automotive
at adding to the industrys development and creat- industry players, enabling collective thinking
ing new opportunities in the worldwide arena. The about the industrys future as well as the building
project took over two years of research with over of the most likely and desired scenarios. The
200 experts directly involved, including scholars, delivery of those consolidated scenarios is the
researchers, businessmen, managers and govern- main product offered to the industry, allowing
ment agents. This initiative was a pioneer effort the players to have a global view of the industrys
to bring together an industry known for its indi- impacting variables and critical uncertainties. In
viduality and independence, focusing on collective turn, they can follow their own paths which best
thinking as a means for joint competitive gains. suit their desired future.
This exercise allowed for the comprehensive Furthermore, the appropriation of this con-
consolidation of the necessary methodological tent allows for a clearer managerial view of the
stages and sub-stages for a sector foresight study. industrys possible future. This overview allows
In fact, it resulted in an innovative methodology technologies, products, processes and enterprises
for scenario building, as it requires an industry to be anticipated in a way that meets the neces-
view as well as cooperative involvement of the sary responses to future demands shown in the
industrys players both in the process and re- scenarios. Thus, the scenarios become the local
sults. Aside from that, tools that were suggested managers decision making support platform as
throughout literature were tested in the different it offers premiere strategic information for all
study phases and were confirmed according to players in the industry.
the particular industrial focus analysis. In short,
321
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Bardin, L. (1977). Anlise de Contedo. Lisboa:
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ENDNOTES
well as its sales and maintenance-related services.
Foresight: Methodology to collect and assess 1
TIER: term used by the automotive industry
expert opinions about the future from the public
to determine the place in the chain occupied
and private sectors, universities and research
by a certain industry.
centers, through a structured, interactive, participa- 2
The projects goal was presented and vali-
tive, coordinated and synergistic process (Godet,
dated by the MRC automotive industry Strat-
2001). It is used to build strategic views that can
egy Board, which was formed afterwards.
spur competitiveness and the development of a
325
Section 4
Knowledge Management and
Innovation
327
Chapter 18
Toward a More Pragmatic
Knowledge Management:
Toyotas Experiences in
Advancing Innovation
Steven Cavaleri
Central Connecticut State University, USA
ABSTRACT
Managers often conceive knowledge management processes in ways that unduly limit its potential.
Toyota has avoided falling into this narrow paradigm trap by creating its own version of knowledge
management that is well suited to its culture. They have woven their knowledge management strategy
together with process improvement and innovation methods. Toyotas knowledge management system
is a theoretically sound, yet practical, business approach built on a set of scientific principles based on
a philosophy known as Pragmatism. This chapter examines how Pragmatic principles used by Toyota
can achieve superior innovation results. The chapter concludes by explaining why the Pragmatic ap-
proach delivers superior performance at lower cost than conventional knowledge management methods.
INTRODUCTION as many management theorists, regard innovation

as being the organizational outcome of a properly
Some researchers see organizational innovation designed business strategy. In their eyes, strategy
as a product of individual skills, such as creativity becomes the activator of predictable organizational
and imagination. Conventional wisdom regards processes where B follows A - as if a clockwork.
it as being an art, not a science. Still others, such They envision a tightly controlled system capable
of driving innovative ideas through a pipeline
DOI: 10.4018/978-1-61350-165-8.ch018
Toward a More Pragmatic Knowledge Management
flowing through various phases of development rigorous fashion so improvement efforts both make
toward an outcome - releasing a product or ser- processes better and deepen process knowledge.
vice to market. For example, Bacon and Butler
(1998:11) define innovation as a commercially To Peirce, the key to creating high quality
successful use of invention, and invention as being knowledge is through rigorous experimentation
a solution to a problem (unmet needs). Similarly, and the integrated application of three types
Davila et al (2006), propose that innovation IS of inferential reasoning, namely deduction,
a management process one requiring specific induction, and abduction. Abduction produces
tools, rules, and discipline. radical insights of the sort that companies seek
This chapters purpose is to explore an alternate for gaining competitive advantage. The chapter
paradigm for innovation. It suggests a strategy proposes an innovation strategy based on prag-
based in the logic of scientific reasoning and ex- matic principles designed to leverage the power
perimentation. Specifically, this alternative spurs of abductive reasoning (Wiener, 1958). Toyota
innovation by radically improving the quality of is one of the leading companies in both applying
knowledge held by an organizations members. pragmatic principles for increasing knowledge
Its theoretical basis is a system designed to im- quality, experimentation, and innovation. This
prove the quality of scientific discoveries known chapter examines Toyotas methods for increas-
as Pragmatism. Pragmatisms founder, scientist ing knowledge quality and innovation and their
Charles Sanders Peirce, set forth a number of origins in pragmatic philosophy.
principles for being pragmatic in improving the
effectiveness of ones action. Many management
theories, such as Total Quality Management, incor- WHAT IS INNOVATION?
porate pragmatic principles. Peirces (1958:293)
approach to scientific discovery begins with the What is innovation? Research by Baregheh
pragmatic maxim that holds we should always, (2009:1334) found the term innovation describes,
the multi-stage process whereby organizations
Consider what effects, that might conceivably transform ideas into new/ improved products,
have practical bearings, we conceive the object service or processes, in order to advance, compete
of our conception to have. Then, our conception and differentiate themselves successfully in their
of these effects is the whole of our conception of marketplace. By contrast, such flow-oriented
the object. definitions oppose those that focus on identifying
the sources of knowledge necessary to produce
This maxim is the basis for an innovation innovations. For example, scholars, such as
strategy that focuses on conducting frequent Peirce and noted economist Joseph Schumpeter
mini-experiments throughout an organization. (1950), view knowledge as being the primary
For example, Spear (2009:215) cites an example force behind innovation. Peirces main interest
of how plant-floor workers at Aisina first-tier in studying knowledge was in discovering how it
supplier for Toyota routinely use such an ex- drives processes of scientific discovery, whereas
perimental approach to improving the quality of Schumpeters primary interest was in how knowl-
their common knowledge. edge influences the entrepreneurial economic
potential of a firm. Peirce studied how scientists
Problem solving is done in a disciplined fashion. conduct research and how their methods lead to
Assumptions about cause and effect are made breakthrough innovations. He concluded that
explicit and stated clearly, then they are tested in scientific innovations often happen suddenly, but
328
usually occur after prolonged periods of analysis synthesis that rearranges previously diverse ideas
and many experiences. A surprising find was that now joined together. While Pragmatic analysis
these scientists often employed a special type alone does not stimulate radical innovation, it
of reasoning called abduction to achieve these sets the stage for the abductive process where
radical innovations. The process of abductive breakthrough discoveries are often the result.
inferential reasoning builds on conclusions gained Today, many organizational processes such as
from extensive analysis followed by a period of Total Quality Management, strategic management,
rearranging perceived facts in the minds of the KM and innovation, include pragmatic principles
scientist. Burks (1946) interprets Peirces claims in their designs. Peirce wrote over forty volumes
about abductions power to drive innovation as dedicated to presenting his core principle that in-
depending on two key elements. First, abduction novation was mainly a scientific process resulting
relies on inferences taken from a body of data used from integrating three different types of scientific
to explain prior hypotheses, and second, in contrast reasoning that conclude in abduction. These three
to inductive methods of testing hypotheses, abduc- types of logic include (1) Deduction; (2) Induc-
tion provides a way of discovering new, broader, tion; and (3) Abduction. Each of these types of
hypotheses. Martin (2009) interprets abduction as logic enable decision-makers to draw inferences
being a synthetic way of thinking that integrates from evidence gained observation and experience.
many of the lessons of experimentation into new Management processes employ one of more of
ideas of what might be possible. He concludes that these types of reasoning. Ideally, these forms of
synthetic thinking can fuel innovations in firms, reasoning become part of an integrated whole
such as new products like Research in Motions system and used together. (Table 1) Each of the
Blackberry communications device. first three methods listed focus on one type of
Peirces approach to innovation is very sys- inferential reasoning, whereas 5-Point Dynamic
tematic. It views innovations as resulting from Mapping (Cavaleri & Seivert, 2005) is an inte-
a combination of extensive analysis and expe- grative strategic management process designed
rience, followed by abduction, synthesis and to improve the quality of shared knowledge in
breakthrough. He proposes, abductive suggestion an organization.
comes to us like a flash. It is an act of insight, By using scientific reasoning in an integrative
although extremely fallible insight. It is true that manner, it progressively reveals the mechanisms
the different elements of the hypothesis were in our by which actions produce expected effects under
minds before; but it is the idea of putting together specific conditions. This is not only a scientific
what we had never before dreamed of putting way of achieving expected outcomes it is also
together which flashes the new suggestion before sets the stage for enabling knowledge to be cre-
our contemplation. (Peirce, 1988:227) In other ated and improved.
words, innovation is the result of a kind of mental
Table 1. Approaches and forms of scientific reasoning
APPROACH TYPE OF LOGIC PROCESS THEORIST(S)

Total Quality Mgmt. Deduction Control Deming
Quality Improvement Induction Policy Making Firestone & McElroy
Research & Develop. Abduction Innovation Martin
Strategic Management Integrative Planning Cavaleri & Seivert
329
THEORETICAL BACKGROUND edge in organizations. Knowledge processes are

the task-focused social interactions among team
Pragmatism relies on the scientific method to members designed to formulate, evaluate, and
drive the process of experimentation necessary to validate knowledge claims. (Firestone & McElroy,
improve the quality of knowledge. The founder 2003) Knowledge claims are conjectures, asser-
of the discipline of knowledge management, Karl tions, arguments, or theories proposing which
Wiig (2004:213) sets forth four basic premises as action are most likely to lead to expected states of
the foundations of modern knowledge manage- affairs. Here, knowledge is, reiteratively, improved
ment. (1) Knowledge is the primary driver of and refined, over time, through many cycles of
enterprise performance; (2) Knowledge affects experimentation. Experimentation means not only
performance through people; (3) Effective Knowl- taking new actions, but also looking at the same
edge Management must be people-focused; and (4) situation through new eyes, and interpreting per-
Personal knowledge effectiveness. He concludes formance feedback differently. To the pragmatic
that in doing knowledge management we must manager, knowledge is a storehouse of rules for
facilitate and strengthen the knowledge-related actions under various specific situations to achieve
processes, activities, and practices that make it an expected outcome. Simply, knowledge is a
possible for people and organizational entities type of contingency plan for action that is based
to make effective actions. Some knowledge upon on a set of situational cues and lessons learnt
management advocates claim that information from experiences. Due the apparent fallibility of
technologies should be the focus of KM initia- knowledge, it requires continuous improvement
tives. Yet, there is little evidence to support the and validation to increase its value in generating
effectiveness of such technologies in the types of effective action. Over time, knowledges main
business environments where knowledge manage- use is to solve problems and its effects become
ment is most important complex, dynamic ones. the basis for conclusions about the value of that
(Malhotra, 2005) Stewart (2002) also questions knowledge. It becomes iteratively refined through
the effectiveness of technology-enabled KM the lessons learnt during these problem-solving
approaches, noting they neglect to ask what episodes. This is a hallmark of Toyotas approach
knowledge should be managed and toward what to KM. Knowledge is continuously improved
end? Firestone and McElroy (2005) argue that based on lessons learned from its application in
it is moot to seek a precise meaning of the term various problem solving initiatives throughout
knowledge management and more important the company.
seek the answer to question - Has KM has ever Firestone and McElroy (2003) propose that
actually been done? They argue that unless KM is knowledge matures over the course of a knowl-
formulated using clear, non-contradictory ideas, it edge life cycle when organizations take systematic
is impossible to lay any claims to its effectiveness steps to improve knowledge quality. Improve-
or value. They see KM more simply as being a ments in knowledge quality also owe to the con-
set of processes designed to enhance an organiza- tinuous problem solving processes used to drive
tions present pattern of knowledge processing knowledge processes. Unlike conventional KM
to improve organizational outcomes. Fahey and approaches used to supply knowledge to workers
Prusak (1998) have voiced a similar skepticism based on its availability, pragmatic KM employs
about the way KM has been defined expressed as what McElroy (2003: xxiv) terms supply-side
what they term the eleven deadly sins of KM. knowledge management. This stands in contrast to
Pragmatic KMs focus is on managing knowl- demand-side KM which instead of focusing on the
edge processes to improve the quality of knowl- supply of existing knowledge to a workforce, seeks
330
instead to enhance their capacity to produce it. Toyota is one of the most highly effective
Firestone and McElroy designed their Knowledge knowledge management and innovation-based
Life Cycle model of knowledge management in a companies in the world. Even though Toyota has
manner that owes much to Karl Poppers ideas often received the MAKE Award as one of the best
on problem solving (1972, 1994) and the role of KM companies in the world, it rarely ever uses
problems: detecting them (while engaged in busi- the term knowledge management in its literature.
ness processing), arriving at tentative solutions One of the features of Toyotas strategy is the
(knowledge claim formulation), and performing pragmatic methods it uses for driving knowledge
error elimination (knowledge claim evaluation) to and innovation. This formula for innovation did
produce knowledge. (2003: 197) The Life Cycle not occur merely as the result of happenstance.
KM approach is significant for many reasons, but Nearly half a century ago, Toyotas leaders learned
most importantly, it improves both the quality of about a scientific approach to operating a company
knowledge and rate of innovation in organizations. based on pragmatic principles from quality guru
Such developmental knowledge strategies have W. Edwards Deming. Demings system not only
significant advantages over conventional static emphasized continuous improvement in quality,
KM strategies due to their impetus to continuous it also taught the value of knowledge and learning
improvement in the quality of knowledge that for innovation. Toyota has seamlessly interwoven
results from its use. The essence of the Life Cycle knowledge processes directly into its business
KM approach is the formulation, evaluation, and processes and systemic problem-solving initia-
validation of knowledge claims by subjecting them tives. Designing work this way not only amplifies
to the scrutiny of subject matter experts within the value of existing improvement processes,
the team or organization. Each time a problem such as TQM, but it also improves the quality of
emerges, it becomes viewed as being an experi- shared knowledge within the company. Why do
ment to select the potentially most effective course such knowledge-based processes work so well at
of action and study its effects for future codifica- Toyota? The core of the Toyotas high-performing
tion. At Toyota, this becomes a self-organizing knowledge-based system is a highly interactive
process where potentially interested workers, from collective form of scientific experimentation based
around the company, receive invitations to view upon the tenets of Pragmatism. The implications
how a problem is being addressed -- so they may of adopting such a comprehensive organization-
participate in problem solving and learn. In the wide strategy in business and commerce are
true spirit of pragmatic knowledge processing, it indeed profound.
is not sufficient to solve the problem, the qual-
ity of knowledge needs improvement too. Spear
(2009:217) cites an example at the Toyota Supplier CASE: TOYOTAS
Support Center where a problem-solving team had PRAGMATIC KNOWLEDGE
solved a problem by getting better-than-expected MANAGEMENT SYSTEM
results, yet failed in terms of learning outcomes. It
was true they had succeeded, but not completely. Management scholars, such as Liker (2004) have
Yes, they had made the changeover process much closely studied Toyota, yet despite this extensive
better than it had been. Their shortcoming was analysis, the theoretical sources of many of the
not that they had failed to reduce the changeover improvement principles were relatively unknown.
further. It was that they had failed to learn from The founder of the famed Toyota Production
reducing it further. System, Taiichi Ohno (1978) attributes many of
the core ideas used in the framework to Henry
331
Ford. On the other hand, various members of attention to understanding the mechanisms that
the founding Toyoda family have credited the enable their actions to produce effects. Over time,
influence of the founder of the Total Quality such analysis not only improves the quality of
Management (TQM) approach, W. Edwards Dem- knowledge available for use in the organization,
ing, with having a major impact in shaping the but it also prompts innovation.
company. Today, there is little doubt that many The Global MAKE (Most Admired Knowledge
of the pragmatic principles, first advocated by Enterprises) Award Hall of Fame has honored
Deming, now play an important role in innova- Toyota as one of the top twenty-six Knowledge
tion processes at Toyota. However, less obvious is Management firms in the world. Yet, Toyota
the influence of Demings teachings on the firms executives rarely have used the term knowledge
structured approach to scientific experimentation management. Toyotas leaders have avoided using
and leveraging knowledge gained for improving the types of KM techniques that are so popular in
business performance. MIT researcher, Steven the Western countries, in favor of building their
Spear, describes Toyotas approach to scientific own custom knowledge-centric processes. Doing
experimentation in these terms, consider what the so enables them to interface seamlessly with its
Toyota people are attempting to accomplish. They internal business and improvement processes.
are saying before you (or you all) do work, make Toyotas most well known knowledge-based ap-
clear what you expect to happen (by specifying proach is its yokoten system. Yokoten is Toyotas
the design), each time you do work, see that what way of propagating new ideas and promoting
you expected has actually occurred (by testing improvement in other past of the company in
with each use), and when there is a difference conjunction with its quality, Lean, and problem
between what had actually happened and what solving approach.
was predicted, solve problems while the informa- Toyotas approach to KM is essentially a
tion is still fresh. (Johnston, 2001) pragmatic one. What makes it pragmatic? At
Near the end of his life, Deming wrote about it simplest, yokoten follows many of the same
the importance to companies of developing principles of kaizen, such as a mindset based on
profound knowledge of how their improvement experimentalism, and the focus on causal analysis
systems operate. What is far less well known is found in TQM. Pragmatism employs the scien-
that Demings views were derivatives of Peirces tific method to the question: How do we make
Pragmatism. Some scholars, such as Towns, actions more effective? Is it coincidental that
(1997) have argued that Deming himself was a Toyotas approach to KM originates in the same
Pragmatist who employed the pragmatic frame- philosophical doctrine as its quality improvement
work as a practical tool for effecting change in process? MIT professor Steven Spear (2004:7)
organizations. Similarly, Barton (1999) notes a spent many years observing Toyotas workers and
set of touchstones exist which allow us to interpret production systems in operation at various plants
systems and systems thinking in terms of Peirces in Japan and the United States. He discovered at
pragmatism. (p. 7). Pragmatism, at its very core, the core of Toyotas vaunted Production System
is an approach that employs the scientific method is a single-minded drive to engage in continuous
to determine the possible future effects of ac- rigorous scientific experimentation. At Toyota,
tions to taken by understanding how past actions the focus is on many quick simple experiments
have produced particular outcomes. Pragmatism rather than on a few complex lengthy ones. This
embraces the scientific method of inquiry toward is precisely that Toyota workers practice process
improving the quality of knowledge-in-use in improvement. They cannot practice making
firms. Its methods ask managers to pay careful change, because a change can only be made once.
332
But, they can practice the process of observing in this chapter. The intellectual roots of this ap-
and testing many times. These are essential ingre- proach originated in Charles Peirces notion of a
dients in Toyotas yokoten system that integrates community of committed inquirers first conceived
problem solving with knowledge management. over a century ago.
Toyotas yokoten system focuses on creating At Toyota, identifying problems is more of-
and sharing knowledge that arises during problem ten the result of continuous reiterative problems
solving initiatives. This focus on creating knowl- solving and learning cycles. Research on Toyotas
edge applied in problem solving initiatives is an ex- problem solving approach by Spear & Bowen
ample of what McElroy (2003) calls demand-side (1999:103) finds all managers are expected to
KM in action. Liker (2008:164) explains yokoten be able to all jobs of everyone they supervise and
as being not merely a way of communicating or also teach their workers how to solve problems
sharing best practices. Rather, it is a way to engage according to the scientific method. This is a
in collective problem solving and use the resulting systematic approach to concurrently both produce
innovations to propagate even more innovations products and find problems. This process may
in other parts of the company. He distinguishes seem inefficient to some, but it promises many
yokoten from conventional ways of sharing best benefits including reducing costs, and spurring
practices by tracing the origins of yokoten. Toyota innovation. Toyotas approach stands in bold
takes an organic, non-mechanical, view of it busi- contrast to conventional Western manufacturing
ness. It is not just go, see and then copy. For strategies. Critics wrongly assume its collaborative
Toyota, it is go, see, and improve upon. Inside organic nature is inefficient because the focus on
Toyota, the backbone of the improvement process cost-reduction is indirect. In conventional me-
is a self-organizing collective problem solving chanical production systems there is little actual
process. Their justification for investing heavily learning, knowledge, or innovation that results
in problem solving initiatives is that there are sig- among operators from running the system. By
nificant cost savings from eliminating the effects contrast, Toyota designs all of its training, problem
of problems before they become deeper and more solving, and improvement initiatives to interface
widespread in their influence on performance. A seamlessly with yokoten processes. This is feasible
key tenet of the Toyota system is that everyone has due to using the same conceptual framework of
two jobs, first to perform a specific set of tasks, pragmatic principles. (Fearon and Cavaleri: 2006)
and secondly, to improve the job. The reason The yokoten process is simple. After identify-
for employing this approach is deeply rooted in ing a problem, other employees throughout the
Toyotas culture. The companys focus on kaizen plant receive a signal that a particular issue holding
and continuous improvement is well known, but potential interest for them has surfaced. Then, the
a more fundamental philosophy embedded in problem solvers send a brief description of the
the fabric of Toyotas culture is the belief people problem to all interested parties throughout the
can never know in detail what will happen in the company. They are then invited to come, look, and
future. (Liker 2008:154) Consequently, the chief see the problem and to participate in the ongoing
priority of managers is the training of operational efforts to solve it. The visiting co-workers can
employees in the techniques of problem solving contribute their own insights to the problems-
to address unexpected problems that result from solving process as well as they may take away
unforeseen changes in the organization before what lessons may be learned from the dialogues
they become serious issues. This approach ex- with their fellow problem solvers. This type of
emplifies Firestone and McElroys Life Cycle swarming activity attracts those other organiza-
knowledge-processing methods discussed earlier tion members who feel they may have something
333
to learn and gain from participating in the prob- solvers in isolating causes of problems. The logic
lem solving effort because it may benefit them is simple the fewer unknown variables, the sim-
eventually. In accord with pragmatic principles, pler to isolate the causes of variation. While such
knowledge exists in a problem-focused context a way of doing business may seem impractical,
where the chief questions that arise focus on the its pragmatic knowledge improvement value is
design of the experiment to take place before the subtle, yet critical. Let us revisit Spears example
eyes of the workers and how they will measure taken from the Toyota Supplier Support Center.
the quality of their knowledge. This is a quite The problem-solving team forgot its dual mission
different approach from standard forms of KM to improve both performance and the quality of
in which various information technology systems knowledge. In Spears (2009:218) words, Thus in
send information to employees whether they falling short, they not only missed their target but
perceive it may hold any value for them in solving missed the chance to push further to understand
problems they face. factors they had assumed to be true but that their
At Toyota, the shared culture supports simul- experience had proved to be false. The process
taneous efforts to improve people, processes, and had gotten better, but their understanding of it had
competitiveness as part of a complex system. In a not improved as much as much as it might have
long-term study of numerous Toyota plants, Spear had they made clear their expectations at the start
& Bowen (1999: 103) found All of the organi- and the assumptions underpinning them, thereby
zations we studied are managed according to the having something tangible to investigate when
Toyota Production System and share an overarch- those assumptions were proven false. Toyota
ing belief that are people are the most significant provides the most visible instantiation of what a
asset and that investments in knowledge and skills company looks like when it follows Pragmatic
are necessary to build competitiveness. Further, knowledge-based principles, and is deserving of
leading, learning, and problem solving at Toyota further evaluation by scholars and practitioners
are all what Spear (2009) calls high velocity alike.
skills. He notes that Toyota is one of a number
of high velocity organizations able to differentiate
and gain sustainable performance advantages by KNOWLEDGE MANAGEMENT
nurturing superior improvement, innovation, and AND INNOVATION
invention processes. At Toyota, work is an ongoing
experiment that, over time, yields accumulations of It is ironic that business leaders tend to perceive
knowledge capable of driving innovation. Toyota their ways of managing to be pragmatic when
goes to extreme lengths to design its experiments. in fact they are far from it. This owes to the
It starts by establishing its control variables. They common misconception of being pragmatic as
do this by specifying the exact processes with little being goal-oriented rather than being scientific
room for variation in performing tasks. They set and experimental. Pragmatic business strategies
up rigid standards at the outset introducing a high include fundamental elements, such as abduc-
level of standardization. This standardization often tive reasoning, inquiry, knowledge processing,
takes the form of following what is termed The experimentalism, and formal systems to improve
Toyota Way (Liker, 2004) of doing things. The the quality of learning and knowledge. At mini-
purpose of making such extreme prescriptions mum, transforming business strategies toward
for work is not as a means to create a lock-step being more pragmatic provides companies with
production system. Rather, it is to facilitate the a relatively simple way to boost innovation by
process of experimentation by aiding problem improving the quality of shared knowledge within
334
the firm. Haner (2002) proposes that innovation tinuous, incremental, knowledge-based approach
initiatives can produce varying levels of quality where innovation breakthroughs result from the
in innovation within a firm depending on the accumulation of scientific knowledge acquired
expertise exercised in managing the effort. All over time. While this approach is compatible
innovations are not equal quality. Similarly, the with the general economic theories laid out by
conventional wisdom holds knowledge as being notable economists, such as Schumpeter (1950)
all of the same quality. It is axiomatic that break- and Nelson and Winter (2002), it runs contrary to
through innovations can reliably flow from low many of the popular management-oriented theo-
quality knowledge. While leading economists, ries of innovation proposed by thought leaders,
such as Nelson and Winter (2002), acknowledge such as Burgelman (1983), Christensen, (2003),
the relevance and importance of organizational Von Hippel (1998), and Utterback (1996). These
knowledge to the innovation process, they fail to management-driven theories of innovation often
define the specific mechanisms by which knowl- ignore the critical role played by knowledge and
edge converts to innovation. Without recognizing knowledge processing in achieving breakthrough
the relevance of knowledge quality to the innova- innovations. By contrast, Pragmatic theories of
tion process, many companies enthusiastically al- performance improvement advocate for ongoing
locate significant resources to sharing low-quality experimentation and learning from experience as
knowledge. Low-quality knowledge imposes a means to heighten the organizations capacity
unnecessary limits on firms. Yet, such oversights for adaptation. How do Pragmatic knowledge
are probable when firms do not have systems in management and innovation approaches actually
place to evaluate the quality of knowledge-in-use. work? Martin (2009) argues against overreliance
These oversights are traceable to the operational on traditional measures of business success, and for
definition of the terms knowledge or knowledge the value of using abductive logic in developing
management in use today. If managers assume new products and companies. He notes,
knowledge and information are equal, then there
is no need to be concerned about the issue of While Motorola was projecting future sales
knowledge quality. This is because information volumes of feature phones, Mike Lazaridis,
is of singular quality in their minds. founder of Research in Motion, was imagining
On the other hand, philosophers, such as Plato, what executive life would be like if you could
Socrates, Dewey, Peirce, Popper, and Quine argue receive your emails on a handheld device. How
that all knowledge is fallible. If the knowledge compelling would an ordinary phone be if you
were infallible then it could is considered a be- could have a BlackBerry attached to your belt?
ing truth rather than knowledge. Poppers (1945) He couldnt prove that this would be a good
theory of fallibilism outlines an epistemology idea. There was no data on the demand patterns
proposing that all knowledge is capable of con- for smartphones, because smartphones existed
taining errors. One means of identifying errors only in his imagination. But a mere 11 years after
and improving knowledge quality is by using the launch of the product of his imagination, RIM
the Life Cycle Model of Firestone and McElroy, leads Motorola by an ever-accelerating margin in
2005. Here, innovation is the natural outcome of sales, market share and profitability. Long ago,
ongoing efforts to improve the quality of knowl- Peirce coined a term for the thinking that Lazaridis
edge where it is both a cause of performance used to create the BlackBerry: abductive logic.
improvement efforts, and its effect. This is a con- Martin (2010)
335
COMPLEXITY AND PRAGMATIC comingle to create a dangerous soup of misper-

KNOWLEDGE MANAGEMENT ceptions with great potential to cause managers to
misfire in making decisions -- even in less complex
Research by Sterman (1994) suggests that peoples dynamic systems. When the limits of bounded
capabilities of learning through experience dimin- rationality on decision making by managers are
ish as the result of a variety of cognitive and percep- well understood it becomes clear that even the
tual limitations that exist within complex systems. smartest of managers struggle to discern optimal
These factors often render human problem solving strategies in a dynamically complex environment.
capabilities ineffective. In a world defined by high Given the ubiquitous effects of bounded rational-
levels of dynamic complexity, even the smartest ity and dynamic complexity, the importance of
leaders are incapable of accurately predicting creating high quality knowledge, learning rich
the effects on performance of the strategies and lessons from experience, and experimenting in
policies they formulate. The forces of bounded systematic way is greater than ever.
rationality are often too strong to simply permit Designing knowledge management systems
effective management by relying on conventional around the use of pragmatic principles promotes
methods of managing (Simon, 1991).Yet, despite reflection, inquiry, and ways to improve the quality
the limits on the cognitive processing abilities of knowledge in an organization. Alternately, an
imposed on all executives by these forces, there organizational culture rooted in a shared under-
is a general reluctance to even consider the pos- standing of the value of experimentation driven
sibility that limits exist. Executives often become by continuous learning, discovery, and innovation
skillfully unaware of their own inability to simulate is likely to pay dividends for many organizations.
solutions to complex problems in their minds. Pragmatism provides managers with a scientific
They prefer to try solving the wicked problems conceptual framework to guide their efforts to cre-
they face by simplifying them into ever-smaller ate and improve knowledge for innovation. One
components through a process of rational analy- of the core tenets of Pragmatism is that the quality
sis. This strategy of reducing complex problems of knowledge improves directly in proportion to
to their elements to find causes tends to produce the level of insight gained from understanding
more unintended consequences than the number the cause-effect mechanisms produce outcomes
of problems it resolves. Sterman (1989) studied from actions. Pragmatic analysis studies how
the effects on managers and MBA students asked gaps between expectations and results trigger
to play a computerized business simulation that the inquiry process. Inquiry is a search for new
incorporated delayed feedback of the effects pro- solutions to improve performance and seeks to
duced by decisions the players made. The lengths settle doubt over how future actions can generate
of the feedback delays were comparable to those desired results. Inquiry also opens the possibility
found in a low-moderate complexity business of reconsidering the validity of gained through
environment. The length of the feedback delay prior experiences. This sort of analytical process
significantly reduced the game players perfor- uses unexpected performance to evaluate the
mance in the simulation. In real life situations, reliability and trustworthiness of the knowledge-
unexpected ambiguities amplifying the complexi- in-use at any point in time. This is one element
ties of learning from experience. Interpreting the of the double-loop learning process described by
exact meaning of feedback and in predicting its Pragmatic theorists, such as Argyris (1990) and
implications of for future performance becomes Schon (1983). Double-loop learning is a process
confounding for workers. In sum, the effects of designed to reevaluate the validity of operative
delayed, confounding, and ambiguous feedback knowledge by contrasting past performance with
336
expected results. This type of action learning is the belief that organizations are machines and
ultimately depends on replacing or improving cur- innovation is a predictable, deterministic process.
rent knowledge. Ideally, the goal is to align such The belief that organizations are machines leads
knowledge more closely with ones expectations. to the presumption that innovation is a mechani-
In complex situations, where cause and effect cal process that flows through a company via
are difficult to discern, the capacity to improve controlled, simple, and sequential channels.
knowledge, beliefs, and assumptions becomes the The validity of such assumptions diametrically
fuel that drives adaptation, innovation, and other opposes much of the relevant academic literature
forms of intelligent action. Schon (1983:50) views that describes the basic nature organizations as
simple technical rationality as being insufficient being complex adaptive systems (Stacey, 1996).
for solving the sort of complex problems faced Forrester (1991:15) has an even harsher view of
today by professionals. Once we put aside the reductionist strategies designed to deal with the
model of Technical Rationality, which leads us problems posed by complexity. Complex systems
to think of intelligent practice as an application defy intuitive solutions. Even a third order, linear
of knowledge to instrumental decisions, there differential equation is unsolvable by inspection.
is nothing strange about the idea that a kind of Important situations in management, economics,
knowing is inherent in intelligent action. Above medicine, and social behavior usually lose real-
all, Pragmatism is a science for driving innovation ity if simplified to less than fifth-order nonlinear
by increasing the level of intelligence embedded dynamic systems. Often the model representation
in actions thus increasing effectiveness. There must be twentieth order or higher. Management
is no intelligent action without reflection. At strategies rarely are sufficiently sophisticated to
Toyota, the process of reflection receives much adequately deal with the problems posed by com-
more attention than in most companies. Toyotas plexity. Rothwell (2005) has taken a historical view
14th and final principle is to become a learn- of the innovation process and identified a series of
ing organization through relentless reflection progressively more complex theories to explain
(hansei) and continuous improvement (kaizen). the innovation process that have evolved. He has
Liker, (2004:251) studied Toyota extensively and identified five generations of innovation models
notes that at Toyota reflection and learning drive ranging from linear models using technology-push
innovation. I believe Toyota is the best learning systems to more flexible, customized, continu-
organization. The reason is that it sees standard- ous innovation models. Similarly, Tidd (2006)
ization and innovation as two sides of the same claims that one of the most important challenges
coin, melding them in a way that creates great in managing innovation is to make clear sense of
continuity. Ultimately, the Pragmatic perspective complex, uncertain and highly risky sets of phe-
defines knowledge as being the product of action, nomena. Yet, such dynamically complex domains
experimentation, prediction and reflection. When tend to render traditional management strategies
the polar forces of action and reflection comes ineffective. All knowledge encompasses theories
into correct balance it opens the door to learn- that predict some future state or expected outcome.
ing deeper lessons from experience. Technical Over time, accrued experiences can provide evi-
rationality is incapable of adequately addressing dence to verify that theories-in-use and practices
the challenges posed by complexity or driving match well with reality. The next section of this
the innovation process forward in ways that may chapter will explore this type of action-based view
confer sustainable competitive advantages. One of knowledge and the tools that can help to raise
of the most fundamental assumptions that tend to the level of quality of this knowledge including,
derail knowledge management-driven innovation inquiry, semiotics, and Pragmatic logic.
337
ELEMENTS OF PRAGMATIC an imagined outcome or pattern of behavior. The

KNOWLEDGE MANAGEMENT expected result is that hiring new technical sup-
port personnel will offset the turnover problem
From the Pragmatic perspective, knowledge is and return the quality of customer to an accept-
always contingent on situations. In particular, its able range.
basis is a triad of interconnected elements that Here, a pragmatic manager envisions each
define every problem situation. Collectively, these possible problem-solving scenario as being an
triads are known knowledge acts. Knowledge acts experiment. Experimentation fulfills dual pur-
consist of the following three elements: poses. It operates in the same way that managers
at Toyota seek both to improve performance as
1. Case A perceived problematic situation or well as the quality of knowledge about a situa-
ideal future state tion. When a problem is recognized, then actions
2. Rule Algorithms that serve as guides to are taken in accord with specific rules -- based in
action in various situations knowledge to attain a hoped for outcome. Such
3. Result Expected outcomes follow conse- experiments seek to determine whether particular
quent to prior actions. problem diagnoses and specific rules-for-action
will produce expected outcomes. If results meet
Case expectations -- then, the knowledge used to guide
that action was valid for that particular case. Simi-
A typical case defines a problem situation or an larly, through a process of logical induction we
unmet purpose. For example, it might be one where may reinforce the rules for action used as being
sales of a computer software product are increas- appropriate for use in this situation. Over time, as
ing fast, calls to the companys toll-free technical rules are repeatedly used, in becomes possible to
support hotline are increasing dramatically, and ascertain their trustworthiness. In this scientific
the rate of employee turnover among technical experiment, if expected results fail, then we may
is increasing at steep rate causing the quality of want to question the following:
customer to support to decline markedly.
1. How we interpreted a problem and what
Rule meaning we give to it.
2. Whether the rule for action we followed is
A rule for action is a prescription of a series of steps appropriate to the situation.
or processes to follow in a given situation. Rules 3. The extent to which an expected future state
may range from being particular sets of algorithms is consistent with knowledge acts.
to more general heuristics. For the manager of the
technical support center is to follow the habit or In Pragmatism, the science of semiotics gov-
routine for handling such situations in the past, erns the formation of meaning given to a perceived
such as to invest more money in recruiting new symbol in a problem situation. For example, a de-
technical support personnel. cline in market share may symbolize many things
ranging from dissatisfaction among customers to
Results aggressive action taken by competitors. The prob-
lem we ultimately defined and the desired result
An expected result is a predicted outcome or ideal will largely govern the type of rules for action we
state of affairs. Whenever actions aim toward are likely to invoke to achieve that desired state.
achieving a specific purpose, their design targets Over time, as we go through multiple iterations
338
Figure 1. The Performance-Doubt-Inquiry Triad

of following rules-for-action to achieve desired
end states so as to resolve a perceived case -- we
accrue knowledge of which actions work and
which fail. Unlike simple theories of learning
that address the importance of lessons learned,
the Pragmatist uses the knowledge gained as
feedback to measure the degree to which ones
beliefs mirror reality. Knowledge acts, not only
become a basis for taking future actions, it also
provides input for revising ones belief systems.
When expected performance fails, it triggers the
irritation of doubt about the validity of our beliefs
about how things work.
for new answers that typically might involve
redefining the case or selecting new/different
THE PERFORMANCE- knowledge acts to follow or both. Once perfor-
DOUBT-INQUIRY TRIAD mance improves to expected levels then doubt
will decline as will the amount of effort devoted
Inquiry plays a critical function within the Prag- to inquiry. Figure 2 depicts the three basic ele-
matic knowledge processes. It leads not only to ments that compose knowledge as envisioned in
improving the quality of existing knowledge, but the Pragmatic tradition.
to creating new knowledge as well. Inquiry often According to the Pragmatists, most explica-
takes the form of exploring new ways of thinking tions of truth are defined, not only by how things
about past knowledge and experience to settle work in reality, e.g. it is true that when a lead ball
ones mind about why actions taken may not have is dropped in the air it falls predictably toward
produced the expected results in the past. The the ground due to the effects of gravity, but there
inquiry process is set in motion when actual per- is also social component to defining what is true.
formance fails to align with goals (expectations). Outside of the undeniable physical laws of the
When performance fails to meet expectations it universe, in fields such as medical science, there
causes doubts to arise about the validity of the are many interpretations as to the causes of disease
hypothesized causal relationship between case, based on the shared common beliefs of communi-
rule, and result. In other words, there might be
doubts about whether the right rules-for- action are
used or whether the way the diagnosis of the case Figure 2. Situational Knowledge Act
provided a meaningful description of the situation
or both. Figure 1 illustrates the dynamic relation-
ship between performance, doubt, and inquiry.
Whenever results fail to match expectations
this precipitates what Peirce terms the irritation
of doubt to emerge. Figure 2 depicts how the
unexpected declines in performance cause great-
er doubt in inverse proportion to the unmet ex-
pectations, which cause inquiry to increase. So
here, the process of inquiry commences a search
339
ties of committed practitioners and inquirers. and revise rules for action thereby increasing
Figure 3 demonstrates the reciprocal relationship their effectiveness. Finally, abduction synthesizes
between performance and inquiry as mediated by conclusions developed from prior deductions and
doubt. inductions to create new hypotheses about how
When performance declines and doubt grows, key governing relationships might exert their in-
it causes our efforts to seek alternative explana- fluence on some new initiative, such as releasing
tions to expand through a process of inquiry. a new product or predicting changes in consumer
Inquiry is the driving force behind the science of buying habits. This logical process of recursively
discovery. Discovery can take many forms in moving through continuous cycles of prediction
organizations including invention and innovation and action is also the substrata of many process
improvement systems. Most importantly, lessons
learnt from revising rules-for-action, set the stage
A SCIENCE OF DISCOVERY for creating improved knowledge for innovation.
Knowledge gained from experience becomes the
Historically, Charles Sanders Peirce developed basis for enriching models of practice. Senge
the principles of Pragmatism to provide a gen- (1990: 176) argues, The problems with mental
eral roadmap to increasing the capabilities of models arise when the models are tacit when
scientists to make important discoveries. Peirces they exist below the level of awareness. Models
approach to promoting discovery was to employ based on false premises cannot produce highly
the synergistic use of all three forms of reason- effective outcomes reliably and in a sustainable
ing deduction, induction, and abduction to build manner. Quality experts, Box & Draper (1987:424)
knowledge and use it to inform effective action. For observed, Essentially, all models are wrong, but
example, the logical process of deduction enables some are useful. Pragmatism enables managers
practitioners to use the knowledge extracted from to create causal models that will enable them
prior experiences and now embedded in rules-for- to improve their knowledge, innovation, and
action to guide future conduct. The effectiveness performance.
of these actions in meeting expectations provides
feedback on the validity of the knowledge in
use. Similarly, induction draws upon the lessons
learned from prior experience to further innovate
Figure 3. The balance of the Performance-Doubt-Inquiry Triad
340
Managing Knowledge by The PDCA cycle does not explicitly acknowl-

Improving Its Quality edge how the quality of knowledge-in-use
changes over time as a product of learning and
Quality guru, W. Edwards Deming created what experimentation. Incorporating the aforemen-
has become became the centerpiece of virtually tioned pragmatic principles into the PDCA cycle
every TQM initiative -- the Plan-Do-Check-Act there is a greater potential seeing more clearly
cycle. (Figure 4) Among the greatest influences how learning, reasoning, reflection, and experi-
on Demings thinking were ideas he learned mentation, when integrated together, all contrib-
from his mentor, Walter Shewhart. Shewhart ute to improvements in the quality of knowledge.
was an avid reader of the writings of Harvard The four Pragmatic tools described earlier in this
professor of pragmatic philosophy C.I. Lewis chapter directly govern the extent to which em-
(Towns, 1997, Barton, 1999) and began to envi- ployees can fully realize the potential of the PDCA
sion the implications of applying their principles model to increase levels of organizational perfor-
to performance improvement and statistical mance, adaptation, and innovation. Knowledge
process control. Deming proceeded to marry is the product of using these tools and is the sec-
together quality, performance improvement, and ond most important determinant of effective action
knowledge into the rubric known as Total Quality behind holding valid beliefs about how things
Management. He also wrote of the importance work in practice. Figure 5 provides an integrative
profound knowledge in quality improvement framework that unites knowledge, learning, and
initiatives. Deming (1993:102) identified four reasoning into a single perspective.
components of profound knowledge including a The PDCA cycle often acts as a balancing
theory of knowledge. He argued management is feedback loop to determine the extent to which
a form of prediction and requires having a theory actual results match expected performance. If they
of knowledge about how things work causally so do not match, then it sets off inquiry-driven search
we can anticipate the future consequences of our processes designed to reduce doubt by closing
actions. Demings theory of knowledge teaches the performance gap by improving performance.
that any statement, if it conveys knowledge, then The cycle achieves its learning purpose by enact-
predicts future outcomes. Here, Deming was ing specific forms of inferential reasoning to drive
speaking of the abductive qualities of knowledge. each of the four elements in the loop. For ex-
As the quality of knowledge improves -- through ample:
reiterative problem solving initiatives -- it provides
opportunities for workers to find errors in their
collective thinking, reach deeper insights into Figure 4. Demings PDCA Cycle
how cause produces effect, and enriches mental
models with new possibilities. By rearranging
facts and impressions to form new knowledge
acts, it also enables abductive hypotheses to form.
Such new speculations are the seed of innovation
because they produce a type of design synthesis
that heretofore failed to exist. In effect, a rational
series of conclusions and inferences indirectly
leads to creative insights that would be otherwise
unlikely to form.
341
Figure 5. Integrated Pragmatic Knowledge System
The PLAN function seeks to determine the ously improved. It is more likely that knowledge
exact parameters of the case; built upon valid premises and using the logic of
The DO function seeks to select the Rule abduction will be capable of effectively driving
(rules for action) that will drive action to the innovation process.
achieve a desired state;
The CHECK function looks at both the ex-
pected result of anticipated action as well DISCUSSION
as the effects of prior action.
Despite Toyotas outstanding business perfor-
In Pragmatic logic terms, the various steps mance in terms of quality and innovation, competi-
in the PDCA correspond to the specific types of tors tend to emulate its pragmatic methods far less
reasoning necessary for creating new knowledge often than one might expect. Arguably, Toyotas
or improving existing knowledge. The process organizational system is unique and difficult to
of deduction drives planning, while checking is imitate. It is a complex system composed of a mix
primarily a process of induction. Finally, the Act of deeply held values, precise standards, relentless
function is largely a matter of abduction. (Reed, learning, scientific experimentation, and personal
2010) Each type of inferential reasoning builds on reflection by its employees. This sophisticated
the conclusions that result from a logical sequence system has evolved over a half-century driven
of considerations among the case-rule-result by adherence to the companys fourteen basic
triad. The Pragmatic system of knowledge quality principles. The difficulty other companies experi-
improvement operates as a rigorously scientific ence in imitating Toyotas knowledge processes
experimental framework designed to ensure that provide a competitive advantage to the firm. After
the quality of the knowledge-in-use is continu- all, typically the greatest sources of sustainable
342
competitive advantage are unique applications of such types of KM are not readily apparent to them.
a firms intellectual capital reflecting their subtle The failure of such conventional KM approaches
ways of thinking and perceiving that remain less to spur innovation over the past decade has been
then apparent to outside observers. However, it unsurprising. First-generation KM approaches
is equally arguable that the barriers to imitation do not address the sort of knowledge-creation
of Toyotas strategy stems even more the extent processes that innovation requires. Pragmatic KM
to which its process are designed on the basis of innovates by seamlessly integrating knowledge
pragmatic logic that often is nonsensical in the with processes, such as problem-solving and
eyes of outsiders. For example, the notion of re- quality improvement. However, today TQM has
ducing costs, indirectly, through knowledge and run out of steam in many companies as managers
innovation rather than by employing discrete cost- focus more on its cost-reducing benefits than on its
cutting initiatives is purely confounding to many innovation promise. To more effectively leverage
competitors. Further, the pragmatic principles that the promise of knowledge-based innovation pro-
uphold their yokoten system has little resemblance grams individual employees must become capable
to the sorts of information technology-based KM of changing their beliefs about how things work as
approaches that proliferate around the world. the result of ongoing scientific experimentation.
Toyotas KM system is a direct mirror of its They must be taught to be open to evidence that
own pragmatic principles that subscribe to idea may go contrary to habitual ways of thinking.
that knowledge, action, feedback, and belief are Typically, such insights are the product of not
inseparable. In the original pragmatic writings only experimentation, but also reflection. While
of Peirce there was a perspective expressed that the notion of engaging in wide spread reflection
all of these factors are parts of a larger dynamic among workers in companies has largely been
system driven by inferential reasoning, inquiry, rejected in North America as being inefficient,
and reflection. In sum, Toyotas quality, knowl- the need for it remains compelling. In the race
edge, and innovation processes are synergistic among companies to achieve more sustainable
and operate seamlessly together. In other words, forms of competitive advantage, a type of orga-
there is no Toyota innovation system or qual- nization known as a high-velocity organization is
ity improvement system per se rather there is winning the race (Spear, 2009). They achieve this
the Toyota pragmatic way of doing business that by consistently investing heavily in developing
embraces all of the processes that deliver superior employee capabilities in four areas: (1) systems
performance for the company. design and operation; (2) problem solving and
improvement, (3) knowledge sharing; and (4)
developing high-velocity skills, such as leader-
FUTURE DIRECTIONS ship, in others.
Pragmatic knowledge-based systems stand in

stark contrast to conventional knowledge man- CONCLUSION
agement approaches in several important ways.
Conventional KM approaches demand either a Amidst the hype of promises made about KM,
high investment in technology and/or employee among those many companies that claim to have
time. Ironically, many of todays employees al- used it, few of these promises have realized
ready carry high responsibilities and resent the its potential benefits. Yet, there are significant
add-on nature of typical KM processes. This is advances by other companies, such as Toyota.
especially so when the direct benefits of doing Over the past twenty years, Toyota has been
343
developing its own type of knowledge-based Box, G. E., & Draper, N. (1987). Empirical
system to improve problem solving, quality, and model-building and response surfaces. New York,
innovation. This system relies on the Pragmatic NY: Wiley.
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by Deming. The main advantages of adopting a
and strategic management: Insights from a process
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study. Management Science, 29(12), 13491364.
improvement at relatively low cost. Organiza-
doi:10.1287/mnsc.29.12.1349
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Christensen, C. (2003). The innovators dilemma.
journey. Yet, there is no escaping the principles
New York, NY: Harper.
laid out by Schumpeter (1950). He pointed out
the importance of knowledge for innovation, and Davila, T., Epstein, M., & Shelton, R. (2006).
identified the principle that successful innovation Making innovation work: How to manage it,
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346
347
Chapter 19
Knowledge and the
Politics of Innovation:
Insights from a R&D Company
Theodora Asimakou
London Metropolitan University, UK
ABSTRACT
The chapter discusses the relationship between knowledge management and innovation; specifically, it
examines how knowledge in organizations affects the creation of new knowledge and what the implica-
tions are for innovation management. The core argument is that in a knowledge-based company, where
competition is assessed at the edge of rare expertise and the development of innovations (Boisot, 1998;
Drucker, 1993; Sveiby 1997), knowledge, which is always interwoven with power, becomes a precious
resource, on the grounds of which struggles are inevitably enacted over its control (Foucault, 1980;
Clegg, 1989). To argue this, the chapter brings together two related fields, knowledge management and
innovation, which even though in principle they examine similar phenomena, i.e. the creation and sharing
of new knowledge, in practice they appear disconnected (Asimakou, 2009b). To support the arguments,
two innovation mechanisms in two business groups of a major oil company are discussed. The study
used a set of qualitative techniques for data collection (in-depth interview, participant observation,
documentary analysis) and a sample of 41 employees, which represented the groups participating in
the innovation game (manager, scientists, assistant scientists, administration staff and students). I argue
that two mainstream innovation management approaches (the rational planning and the cultural ap-
proach) have shaped the understanding and actions of the Business Groups in setting up the innovation
mechanisms; however, power struggles at the individual, group and organizational level impacted upon
the innovation processes to the extent that the latter became passive technical solutions.
DOI: 10.4018/978-1-61350-165-8.ch019
Knowledge and the Politics of Innovation
INTRODUCTION I suggest then, that these co-existing ap-

proaches form discourses and actions, of which
The chapter starts by critically looking at the the analysis may reveal issues of power and order.
literature of innovation the assumptions and the The two dominant discourses on innovation man-
limitations of the dominant approaches. One ob- agement are viewed as one language game, where
serves that popular managerial press constructs the various players compete to determine adequate
debate around certain core-themes, and presents actions. The question then becomes, how current
innovation either as an administrative question knowledge (i.e. regime of truth) impact on the
or a technical problem, a social or a political possibilities for innovation and change, and how
matter (Carr, 2003; McFarlan & Nolan, 2003; knowledge workers embark on a power game in
Rogers, 2003; Brown, Durchslag & Hagel, 2002). their effort to influence organizational transforma-
Mainstream theories split innovation in various tions. The chapter does not construct one more
stages and attempt to control each of them with approach to add to the analysis of innovation, but
administrative or technical devices. I distinguish rather examines what the already existing ones
here two main approaches (Fonseca, 2002; Asi- actually do to the organizational life. The analysis
makou, 2009b): innovation as rational planning appeals to the theoretical concepts of discourses
and innovation as culture, which, nonetheless, as regimes of truth and the political dimension of
are grounded on the same assumptions, i.e. the knowledge (Foucault, 1971; 1980; Lyotard, 1984;
controllability of ideas and innovation processes. Howarth & Stavrakakis, 2000). By adopting a
Both approaches set out to manage innovation discursive approach to the analysis of innovation,
by controlling either directly the process or the the chapter throws light into the political dimen-
environment/culture where innovation is sup- sion of knowledge in a knowledge-organization,
posed to grow. and into why organizations and individuals resist
In order to construct a counter-argument and or support innovation practices.
identify the limitations of these approaches, I sug- To illustrate the arguments the chapter brings
gest that the theoretical progress of the knowledge evidence from a R&D dept, while in the process
management field should be contemplated, and of changing, i.e. conferring a new order by chang-
in particular the literature on the nature of knowl- ing the hegemonic discourse, which aspired to
edge in organizations (Collins, 1993; Blackler, stimulate new ideas and support innovation. Two
2003). Studies that encapsulate these theoretical innovation mechanisms in two Business Groups
insights, have demonstrated the complexity so of a major oil company are presented and the
much of the structure of knowledge, as much enacted politics are discussed, as manifested at
as of the processes that produce it. It becomes the organizational, group, and individual level. As
evident that positivistic and functionalistic said above, the methodology adopts a discursive
methodologies cannot fully explain knowledge approach, in other words, it conceptualises inno-
related phenomena at the workplace. Hence, our vation as a new discursive formation, which con-
understanding of innovation would only be en- tested the existing one; it uses a set of qualitative
riched if alternative approaches are also applied. techniques for data collection (in-depth interview,
Furthermore, responding to the call for giving up participant observation, documentary analysis)
the either structural or voluntaristic approaches and a sample of 41 employees, which represented
to understanding innovation, the chapter brings the groups participating in the innovation game
evidence that both approaches may co-exist in the (managers, scientists, assistant scientists, ad-
organization -hence which one is the right one ministration staff and students). I argue that two
does not form part of the current analysis. mainstream innovation management approaches
348
(innovation as rational planning and innova- Broadly speaking, there are two main streams
tion as culture) have shaped the understanding that form the debate: the first conceives innova-
and actions of the Business Groups in setting up tion as a rational planning process, whereas the
the innovation mechanisms; however, the negli- second as a culture management issue; these two
gence of the power struggles that were enacted have formed respectively two powerful discourses.
sentenced the innovation processes to become The first discourse is descriptive; it developed
passive technical solutions, without achieving from neoclassic economics and suggests that in-
to spread, and to engage the experts population. novation is an entrepreneurship function, essential
The evidence unfolds over three main sections: for the survival of small and bigger organizations
first, I present Hydro-Carbon Solutions the (Betz, 2003; Bessant & Tidd, 2007; Trott, 2008).
context of research, main question and research The rational planning of innovation suggests the
methods. Then, I present the findings; on one splitting of the process in controllable and mea-
side I present the rhetoric of the two innovation surable stages, from the evaluation of ideas to the
mechanisms, and the practices they suggest, and final stage of launching the product in the market.
on the other side, the power games enacted at the At the end of each stage, the idea is evaluated
organizational, group and individual level, the against the market, the expected profits, and the
arguments which derive from various language compatibility of the idea with the strategic route
games depending on what is pursued each time-, of the firm. All these matters should be designed
and which sometimes facilitated and sometimes in advance, and incorporated in a business plan.
constrained the innovation process. Finally, I The second discourse is prescriptive; it de-
discuss the evidence in the light of the highlighted veloped from the human relations school and
power games, arguing for the necessity to engage emphasizes the significance of values and culture
the work population into the governance of knowl- in making innovation blossom (Kanter, 1988;
edge and innovation process. Lengnick-Hall & Wolff, 1999; Rogers, 2003;
Smith, 2007). The analysis of innovation from
this perspective takes into account how cultural
DISCOURSES ON INNOVATION variables, biased decision-making strategies and
MANAGEMENT managerial procedures mediate the processes of
creating and sharing knowledge within and across
It is widely acknowledged that the literature institutions. This approach attributes a central
on innovation management, formed by various role to the management of an innovative culture,
disciplines (economics, finance, organizational and hence to charismatic leaders -the innovation
behaviour, etc) has led the field to high inconsis- hero- who design, manage or support it. Due to
tency in terms of assumptions and findings. There its emphasis on soft issues and communication,
are various suggestions for ordering the debate it suggests the use of communication techniques
that shapes theory and practices (Wolfe, 1994; to spark, share and develop further ideas, together
Slappendel, 1996; Fonseca, 2002) e.g. diffusion with the technological devices to support the
of innovation, organizational innovativeness and processes.
process theory, or deterministic, voluntaristic and Interestingly, Klein (2001) argues that in
interactive perspectives, etc. Here I suggest that principle one discourse confers its legitimacy
dominant approaches could be conceived as pow- from the other, in trying to link the organizational
erful discourses that form organizational actions. strategic goals with the economic growth, acting
as one powerful discourse. The interest in over-
349
coming the eitheror dilemma has recently & Luckmann, 1966); often tacit (Polanyi, 1967);
led to the formation of the concept of organiza- a function of the play of other meanings (Der-
tional ambidexterity, which attempts to support rida, 1978); enacted (Weick, 1979); distributed
structurally commercial and scientific interests (Hutchins, 1983); situated (Suchman, 1987); mate-
in a single organization (Benner & Tuschman, rial, as well as mental and social (Latour, 1987);
2003; Gupta, Smith & Shalley, 2006; Simsek, resilient, but provisional and developing (Unger,
2009). However in practice the two discourses 1987); public and rhetorical (Vattimo, 1988); and
remain separated, and often conflict over research acquired through participation within communi-
priorities, allocation of resources etc, for their ties of practice (Lave & Wenger, 1991). The con-
innovation assumptions and suggested practices tribution of all this admittedly controversial and
are not compatible; hence confusion increases polyphonic work is that it triggers the expansion
and creates multiple interpretations and actions. of the dominant rational-cognitive understand-
Most importantly, such mechanistic approaches, ing of knowledge, by emphasizing so much the
appropriate to measure and calculate closed sys- complexity of tacit skills and practice, as much
tems, have proved insufficient to study complex as the significance of social processes, cultural
relationships, human experiences and cultural categories and language in creating knowledge
issues, which constitute the substance of knowl- (Orr, 1990; Lave & Wanger, 1991; Brown & Du-
edge. Research within these paradigms aim to guid, 1991; 2001). The narrow understanding of
control and manage the unpredictable character scientificabstract knowledge expands and breaks
of innovation, whereas it is precisely the assumed the conventional distinction between people and
rationality and power of management that should technologies (Blackler, 2003); hence, the narra-
be questioned and investigated (Hassard & Pym, tive and tacit dimension of knowledge, together
1990; Alvesson & Willmott, 1992). Furthermore, with the contextual factors (structures, culture)
both discourses assume and intentionally aim to that support knowledge processes, gain attention.
create consensus and trust among people in organi- The innovation literature and practice has been
zations (Adler, 2001; Park, 2006; Usoro, Sharratt, late to embracing the theoretical progress of the
Tsui, & Shekhar, 2007). The question of power knowledge management field, even though the
is addressed as variable that can be manipulated, insights of the latter would compliment the limita-
i.e. it is seen merely as means of negotiation, not tions innovation studies have met (Plessis, 2007;
as the force of creating a new order and a new set Chatzkel, 2007). Some alternative research has
of rules (Foucault, 1980; Clegg, 1989), leaving indeed engaged with these theoretical advances,
this way many aspects of power relations outside (Frost & Egri, 1991; Markham, 2000; Fonseca,
of the analysis. 2002; Smith, 2007; Asimakou, 2009a) and doubted
On the other hand, the knowledge manage- the adequacy of both the starting assumptions
ment field has made substantial progress in and the applied methodologies to study complex
understanding the nature of knowledge and relationships and cultural issues. In this body of
knowledge processes at the workplace, depicting literature, I distinguish two main approaches:
the social character and the political dimension innovation as social construction of meanings,
of knowledge, and most importantly its power and innovation as a political process. The for-
to confer orders of truth, which allow or stop mer focuses on the creation of new meanings
actions. Blackler (1993: 864) summarizes the and interpretations, which enrich organizational
output of this theoretical work: knowledge has knowledge and understanding, and finds its roots
been described as: socially constructed (Berger in an interpretative epistemology. Undoubtedly the
350
most influential model here is the one of Nonaka to manipulate and control others behaviour and
(1994) has triggered a volume of research (Di- actions, but it is a wider notion, which forms
erkes, Antal, Child, & Nonaka, 2003; Takeuchi, structures, practices and subjectivities in the
& Nonaka, 2004; Ichijo, & Nonaka, 2006) and organizational life. Frost and Egri (1991) claim
a variety of organizational and technological that at the surface level, power and politics shape
practices. The model essentially conceptualizes the everyday life, the contestations and struggles
knowledge as an on-going process, which relies for collaborations; here, power manifests itself in
on communication. Knowledge creation is a dia- the attempts of individuals and groups to exploit
logue among individuals and organizations, and the rules, and take control of the current order for
organizational knowledge increases as individu- their own benefit, and at the expense of another
als span across and beyond the organizational group (Markham, 2000). At the deep structure
boundaries. Despite the shift of focus towards level, power operates in subtle and hard to de-
knowing and communication, the model employed tect ways; it springs from an already contested
a linear interpretation of the related processes; and agreed order, which is currently accepted as
consequently the practices that have been formed natural and neutral.
on its grounds did not achieve to break away from Hence, I suggest that innovation should be
an instrumentalist, object-view of knowledge. viewed as one rich language game, involving
The latter, i.e. innovation as a political process, many and sometimes conflicting elements, where
deals with issues of power and conflict, while new various stakeholders conflict over its control and
knowledge replaces the old one, and is rooted in a articulation of rules, using arguments from domi-
critical theory or a post-structural paradigm. The nant theories of innovation. The arguments may
chapter joins the latter approach, and challenges not always be consistent, since the actors try to
current models of analyzing innovation, for they achieve different things each time. The articula-
neglect or downplay the force of politics and the tion of concepts that prevails, shall ultimately
power games enacted when setting up and manag- shape understandings and actions, and serve the
ing innovation processes, in best cases reducing interests of the group that has suggested it (this
politics to networking. The chapter addresses articulation may be technical or commercial etc).
the political aspects of organizational life, when The political analysis of knowledge creation ad-
a new discourse (in this case knowledge and in- dresses the question of what is accepted as good
novation) and practices (i.e. innovation systems) and what is rejected as bad, who decides and
emerge, and the power games that are triggered. who benefits from these decisions (Lyotard, 1984),
Following Foucault (1980), discourses construct what supports and what stops change, and what
regimes of truth, which have a normalizing effect the implications are for innovation and its man-
upon phenomena and practices, making some of agement. In other words the analysis addresses
them appear good, truthful, respectful, whereas the social and political dimensions of individual,
others are considered harmful, wrong, shame- group, and organizational action. Combined with
ful, etc. Truth is always interwoven in a circular a discursive approach, the analytical framework
relation with systems of power that produce it conceptualizes power relations through the lenses
and sustain it, and with effects of power, which of discursive formations (Foucault, 1971; 1980;
it induces, and which extend it (Foucault, 1980). Fairclough, 1989; Howarth & Stavrakakis, 2000),
Hence, discourses embody meaning and social which implies that discursive orders are shaped
relationships, they constitute both subjectivity by and shape dominant truth-regimes and social
and power relations (Ball, 1990, p.2). From this practices.
respect, power is not simply someones ability
351
THE STUDY: HYDRO- Innovation Systems: Eureka

CARBON SOLUTIONS and the Ideas Machine
The data gathering of the study lasted one year The project materialized while Hydro-Carbon
and was part of a broader research, which inves- Solutions was experiencing structural and cultural
tigated knowledge discourses and innovation changes. In order to make the business more
mechanisms in an R&D firm, Hydro-Carbon profitable and commercially flexible, the parent
Solutions, during its commercialization turn. company Oil Co gave its research laboratories a
In this context, two newly adopted innovation considerable degree of freedom. These labora-
mechanisms were studied, i.e. Eureka and the tories started operating as independent technical
Ideas Machine, while being used by two Busi- consultancies with commercial objectives, for Oil
ness Groups. The methodology involved in-depth Co and other customers. The new commercial
interviews (41 interviews with managers, scien- environment meant that each group was thereaf-
tists and administration staff, min. 1 hour each), ter responsible for its financial performance and
examination of documentary data (newsletters, survival. The new commercial reality affected
websites, e-mails, previous research projects) and so much the jobs and the required skills, giving
participant observation (meetings, presentations, the scientists a great range of administrative and
informal conversations). managerial tasks to perform, as much as the cul-
The interpretation of findings was conducted by ture of the site, which so far reminded more of a
means of critical discourse analysis (Fairclough, university, rather than a commercial organization.
1989; Wodak & Meyer, 2001), which supported As expected, commercialization redefined the
the study of both the formal innovation discourse research needs. The focus and funds moved pre-
as suggested by the company, and its interaction dominantly to short-term, core research, whereas
with local understandings of commercialization, longer-term and high-risk projects, which had
research, and innovation. The analysis focused signalized the research strategy, stopped for being
on the way the formal innovation discourse financially unstable.
conferred the necessity for supporting research Meanwhile, knowledge acquired a new status
and innovation, while structures and cultures in the knowledge-based society. New techno-
were transforming. It examined how concepts logical knowledge became important not only
and arguments developed in this unsettled arena, for Oil Co and its competitors, but also for their
allowing for multiple meanings to develop, and customers, i.e. it became a commercial object.
for conflicts between competing groups (business The corporation embraced the innovation dis-
people, managers, scientists, etc) to emerge over course, and this fuelled some Business Groups
defining the real meanings and hence actions. to design innovation systems, in order to capture
Responding to the criticism that the approach and develop further the desired innovative ideas.
treats meaning as fixed, the study deviated from In this unsettled arena many different groups (the
the standard CDA by bracketing off the quest for Business, the market sector, the scientists, etc) saw
one true meaning and other reference to cognitive the opportunity to enter the new knowledge game,
elements (Potter & Wetherell, 1987), in favour of and define what research and innovation are, in
capturing multiple equally valued and co-existent order to meet their own interests. Especially for
realities. the scientists it was an opportunity to claim back
some of the benefits they used to enjoy before the
commercialization turn.
352
Findings and Analysis Solutions and the Business. If the panel was con-
vinced for the commercial value of the idea, then
Eureka: Rhetoric and Practice an initial amount of money was granted to start
the scouting stage of the project. The progress
The most important innovation mechanism for the would be assessed at the end of each stage and,
scientists was Eureka. This was an initiative of the if it could still demonstrate financial returns, then
corporation, intended to support long-term, non- more funding was granted to the next stage. The
core ideas that did not fit in any other innovation assumptions of the rational planning approach
channel. The system provided the scientists the are evident here; the process tries to control the
strategic business framework, from within they uncertainty of the environment by maximizing the
would develop viable technological innovations. financial control over the process of developing
innovations, from the early stage of ideas genera-
the role of Eureka is to find and nurture and tion until their launch in the market.
support in their early stages ideas, which dont A consequence of the all-inviting rhetoric
comfortably fit into the existing Businesses; so deployed around Eureka was that many scientists
what you could say is that there are two types of read in this the opportunity to do some inter-
innovation: its in the box and out of the box, its esting, non-core research, of the kind that had
core and non-core; so we are looking for those stopped during commercialization. However,
non-core ideas, which would otherwise be dif- this led to the generation of ideas that were more
ficult to support, thats essentially our role, but non-core and high-risk than what Eureka was
because its sometimes difficult to distinguish core ready to support, e.g. screen-washing devices and
from non-core, it might be almost non-core, there pieces of hardware. Not surprisingly, scientists
is actually a grey shading between the black of that saw their non-core and high-risk ideas be-
the core and the white of the non-core, so people ing rejected over and over, became frustrated by
come to us with ideas which are clearly core, and the undefined and unrefined expectations of the
we might even support them at early stages, but process, which was seen as a bit of a lottery: you
they wouldnt come through our mechanism for put in a proposal, keep your fingers crossed, and
significant funding, we are likely to support them hope you will have the OK to go ahead.
at an early stage [Eureka team member]
The Ideas Machine:
In effect, the process tried to change the scien- Rhetoric and Practice
tists understanding of innovation as technology
into innovation as exploiting opportunities for [] but you have to be very clear about what
change. This intention was reflected in its vague innovation is, to me innovation covers the whole
definition and the all-inviting rhetoric, which spectrum of things, it is business processes, it is
reflected the strategic turn of Oil Co to re-invent working processes and it is also ideas genera-
itself from oil to energy company, and hence to tion for revenues, so I think you have a really big
expand in new markets. spectrum and I think what you need to be quite
Eureka was a website, where scientists could careful in your project, is to make sure that thats
log on, browse ideas, and submit their own. The covered, because just because you dont have lots
Eureka team reviewed the idea, and if worth of big ideas that generate lots of revenue, it doesnt
exploring, then the inventor had to present a busi- mean that you dont have innovation, you know,
ness case in front of the innovation panel, which if you can start off by finding ways to make the
consisted of senior managers of Hydro-Carbon life easier you are still being innovative, to me it
353
is a big spectrum, to me thats essential, a quite their ideas materializing, and felt that their voices
big spectrum; so yes, to ideas and big projects were heard at the Technology Group; however,
that work really well, but also the underground their ideas were not exactly the kind that could
should work well as well [Ideas Machine team be technically and commercially exploited. The
member, emphasis added] scientists, whose ideas were primarily sought,
remained reluctant or at least indifferent to use
The Ideas Machine was a local (i.e. technol- the local innovation system: an all-embracing
ogy group level) innovation system devised by innovation system, where all suggestions were
Technology Group A, which first among other welcome, was not perceived as the appropriate
groups realized the importance of supporting funnel to host complex scientific ideas. Even
systematically the innovation processes. Essen- though the rhetoric implied the democratization
tially, it aimed both to change the new commercial of the workplace, the Technology Group actually
culture that made people think only of the short- needed technical ideas, which means that the
term objectives of their work, and to crack the experts were still a powerful elite.
previous elitist culture, where innovation was a
scientists prerogative. From this respect, the Organizational Level
question of innovation was constructed as an issue
of democratizing the workplace; nobody should Conflict of Worldviews
be excluded from the innovation game, because
everybody was equally competent to come up Committed to the idea of the continuum between
with small ideas, which could eventually grow long and short-term ideas, a Eureka team-member
bigger. Beyond the rhetoric of democratization, discussed the problem of the gap between the
this open and all-encompassing view of innova- edges:
tion had also another more practical objective: as
a manager pointed out, the more ideas you have yeah, and then weve got you know, down here
in the beginning of the funnel the more chances [points onto a piece of paper] weve got next
you have to come up with a marketable idea at years new programmes or whatever; and the gap
the end. is here, its in the middle, because these projects
The system exhibited the assumptions of the that are in the long-term never ever become short-
cultural approach to innovation management. It term for some reason {laughs} because they are
acknowledged that innovation can only be man- done by long-term researchers, the guys whose
aged by creating the right environment, and to drivers are social or scientific or whatever and
this end it devised a combination of techniques havent really got much incentives to get the idea,
for ideas generation together with a funnel. From and these people dont even look off their desks,
there the innovation team progressed the ideas so the gap is sitting here in some sort of 3+ year
on the appropriate route, whether this involved horizon, and again what we are trying to do, in
immediate action internally by the Technology order to change this, is to actively manage this
Group, or forwarding them to an external innova- chunk, so that it later drags ideas from year to
tion funnel -mainly Eureka. year, and drags experience from here
The all-embracing rhetoric was successful
in engaging the groups that had been excluded The lack of communication between the Busi-
during the university days of the site, in the ness and scientists had always been the common
innovation game. Lab-technicians, assistant sci- excuse to justify the low number of marketable
entists, pre-students and administrative staff saw ideas; however here, the problem was constructed
354
as a fundamental incompatibility of drivers, in- be how to create a shared concept of innovation

terests and objectives between the two parties. that would engage both Business and scientists.
Eureka, even though designed to bridge this
gap, did not address this cultural and essentially Conflict over Innovation
political issue, but treated ideas and experiences
as distinct entities that could be managed inde- [] I think the danger is that were being con-
pendently from the individuals who generated ditioned to think of innovation just as a business
and would work on them. thing, but there are a lot of kinds; SAFE innova-
Eureka was meant to be the solutionto concili- tion that you are allowed to be creative, to think
ate the Business interests with the research staff about ways where they can have a big impact on
capabilities and skills, in a clear business context; the bottom-line, and those are, if you like, good
this combination had been impossible before the ideas that have a low risk capacity; coming up
commercialization turn, when scientists were free with technical ideas I dont know if thats hap-
to pursue their own research projects without tight pening here thats where the guilty pleasure of
control. However, the rise of knowledge discourse innovation is [emphasis added]
gave various groups the opportunity to assert their
interests via the innovation game. The scientists,
who were not asked their views on designing The excerpt demonstrates the scientists resistance
the innovation system, seized the opportunity to to accept the business articulation of innovation,
challenge the rules of the new innovation game. which essentially expects low risk and safe in-
Yet, a Eureka key-member insisted on ignoring novation with applied results. In the risk-averted
the deep structure politics behind the failure of commercial culture, blue-sky and uncertain re-
the process to engage the scientists, and preferred garding results innovation is being excluded. The
to explain the problem as an issue of different approach tries to control uncertainty, which is a
objectives and mentalities: key-characteristic of technological innovation,
by means of a business case and stage-by-stage
ehm, people dont like people that do long estimation of profits. Technical innovation is
term R&D dont like working with the Business, described as guilty pleasure, which emphasizes
and people in the Business dont like working with that it is a forbidden activity in the commercial
people who do long-term R&D, because they have order an activity that many scientists looked
other objectives; now, our role is to force them back to with nostalgia.
to do that, some like that, some people dont, but The Technology Groups concentrated on put-
those people like OUR System, our System goes ting proposals in the Eureka funnel, which they
down well, ehm, but the overall process is not al- considered the main system to support innovative
ways perceived as positively as it should, because projects, since its rhetoric borrowed elements
it requires people to work with the Business and from the scientific understanding of innovation;
requires the Business to work with the originators i.e. Eureka set out to support long-term and high-
risk research. However, the rhetoric did not meet
This excerpt depicts the politics of innovation, the practice, and the actual process of selection of
as different groups having different objectives to projects frustrated many scientists, who realized
serve. Hydro-Carbon Solutions tried to bridge the that what the Eureka team meant by high-risk
objectives by mechanistic means. Still it did not projects was not exactly what the scientists felt
touch the actual question, which would rather real innovation would be:
355
I thought Eureka would be for that, but a lot the Group. Hence, a battle between Technology
of the Eureka ideas are fairly normal, they dont Groups and Eureka over getting the funding or in
seem particularly radical at all, so I have the some cases, as the following excerpt suggests, a
impression now, within this group anyway, within battle over getting control of the money emerged.
the company, Eureka is really a way of getting The Eureka-member introduced this concern:
funding for the more long-term ideas, which Oil
Co dont want particularly to fund themselves, the [] now, the reason why we [Eureka team] are
Oil Business I mean, the sales related business, so here, is because if you allow all the R&D funding
I have to alter my impression of Eureka [laughs] to go through the Businesses, through the Global
[emphasis added] Fuels Business or Lubes or whoever, then there is
a tendency for it to get driven to the short-term, so
Scientists attributed the perceived inconsisten- we are here to provide an alternative to short-term
cies to the lack of a shared conceptual framework, time zone; now, short-term does not necessarily
and found the opportunity to assert their role in means, it means core, everything is driven to the
shaping the research strategic framework. core, because of the short-term objectives, so we
are here to provide an alternative to that
weve never discussed it between different teams,
so I think because we have never discussed it, each The commercialization turn pushed the
one tends to bring their own, its never discussed as Technology Groups to constantly improve their
a Technology Group B what is Innovation, what financial performance, and consequently core-
are we going to do about it, how much time we projects became their main priority. The Business
are going to spend on it, what is the procedure, in principle liked to fund radical innovative ideas,
I mean Eureka as such has been mentioned and but it is difficult to see how this individualistic,
promoted etc. but I dont think that within the survival-directed approach to management would
Technology Group there is a shared vision let innovation become the Technology Groups
everyday life. Furthermore, this struggle addresses
It is true that most of the interviewees suggested clearly the issue of governance of the innova-
their own definitions of innovation and best ways tive process which is related to the question of
to support it. Ultimately, what they were trying to governance of knowledge: who decides what is
do was to gain back some of the research structures a good or a bad idea, and who knows what is to
that existed before the commercialization of the be decided. The Technology Groups doubted the
research site. Furthermore, what they pursued was adequacy of the innovation panel and some as-
to have their saying about the criteria for assessing serted the control of the resources.
innovation projects.
Group Level
Conflict over Funds
New Innovation vs. Old
Despite the scientists frustration, Eureka was not Scientific Work
abandoned, but acquired a secondary use: it was
increasingly treated as a pot of funds that could The new and still vaguely construed innovation
sustain some jobs for a while. Eureka money discourse has offered many career opportunities
was very attractive for the Technology Groups, to those, who realized early that the new innova-
which under the commercial identity, had to find tion game needed someone to set the rules i.e.
the resources to survive and prove their value to to say what is innovation, what is a good and a
356
bad idea, etc. As the relevant literature prescribes, se, which was actually a political way to state his
innovation needs a hero, i.e. someone who is objections, but how he used his scientific authority
ready to fight against the tides to make things to boycott the system which was devised by an
happen. Hence, innovation stars, emerge: these innovation star. In other words, by refusing to
were individuals who saw in the new unsettled review and submit further ideas, he exposed the
innovation game the opportunity to add some hits weaknesses of the system.
in their curriculum, and hence become visible to
the business. Their increasing status and power I think I have a slight worry about how
frustrated some senior research colleagues, who those ideas are assessed, because whats hap-
in their turn refused to participate in these local pened with some ideas, some of the ideas the
innovation systems, and reached directly for higher person assessing them thought that oh, they are
innovation mechanisms. in myin Bobs area, and so he sent these 6
titles from the web and said Bob, you should be
Iperhaps had a concern with some things go- looking at these and I said, I just sent back an
ing into the ideas machine didnt have any depth, e-mail saying no, so from that point of view, if
and we all we all on our jobs in some way or all those 300 hundred ideas are just not being
another innovate, but we dont actually recognize pushed forward the right way, perhaps I would
this as innovation, and you know, some guy might have a worry about it, well of course some of the
be working very hard on a research project and be ideas have been pushed forward from the Ideas
really doing a lot of very impressive innovation, Machine., but., I certainly, Ive probably
but he doesnt sell himself to the management team submitted 12 ideas into it in the first quarter
or I dont know and says this is innovation, he of this year, and I havent submitted any for the
just says well, this is part of my job and he just past 6 months [emphasis added]
does it, and another guy might not be working so
hard, he might be coming up with a very simple, The exposed justification for not participating
not very clever idea, and he might say this is in the local innovation games was common in all
innovation and then just sell it discursive attacks against the existing innova-
tion systems -higher or local-, and appeared as a
The scientist explicitly referred to the momen- legitimate behaviour: where the scientists did no
tum innovation discourse was gaining within Oil participate, where the conceptual framework or
Co, and the way people exploited it to promote criteria were not clear, where the evaluation took
themselves. The account shows how innovation place behind closed doors, then people would not
has turned into a buzzword, a vaguely defined trust the process.
and all-inclusive concept that allowed those who
controlled it to manipulate it according to their Individual Level
interests.
Conflict of Career Opportunities
Mistrust and Surface Politics
Nevertheless, not all scientists engaged in battles
In addition to politics enacted at the structure, the in the innovation arena; some were not concerned
same scientist referred to politics at the surface with the new game, and chose to focus on learning
level, by expressing his concerns regarding the the rules of commercialization, which, no doubt
(lack of) evaluation criteria in the way ideas were was the new hegemony of the site-life. Especially
assessed. What is interesting is not his concerns per young recruits and scientists in managerial posi-
357
tions, even though content with the revival of DISCUSSION AND

innovation, preferred to see it as someone elses FUTURE RESEARCH
job, while they were going on with their everyday
work. Commercialization had certainly affected The study examined two innovation systems
scientists roles, and most importantly the work- implemented in two Technology Groups of Hydro-
life on site: on one hand, it imposed a regime Carbon Solutions. The two mechanisms were
of tight resource-control, on the other hand, it formed by two different discourses on innovation,
prepared the new recruits for promising careers the rational planning and the culture manage-
in commercial positions. Consequently, many ment, and set out to achieve different objectives.
young scientists preferred to develop the necessary However, I showed how they both encountered
managerial skills for a career away from the labs. similar difficulties in getting the scientists involved
in the new innovation game. I argue that a clash
the big problem I think we have is time and pres- of worldviews and interests, personal and group
sures on our resources, as I say everything has antagonisms, mistrust and feelings of exclusion
changed the past 2 years and we have become from decisions, in other words a range of conflicts
more commercial, people now have less time ehm, at the organizational, group and individual level,
I find myself occupied 8 hours or even 10 hours turned the innovation systems into databases where
per day, therefore I guess there are things that low quality or irrelevant ideas were deposed. Table
are more critical to my learning and personal 1 presents different elements of the discourses on
development [] [emphasis added] innovation management, which were encountered
during the fieldwork. These discourses provided
The young scientist here comfortably used the members of the organizations legitimate argu-
concepts that acquired legitimacy from the comments, which they used in order to achieve their
mercial discourse. I should stress here, that the own objectives, while there was no hegemonic
question is not whether people had actually less view on innovation management.
time or they felt like that being stressed by the Beyond the rationalistic understanding of
intense pace of changes. What matters for the innovation management at the Technology
present analysis is that no time was a valid argu- Groups, which assessed how many ideas have
ment in the new commercial culture, and widely been produced and how much money secured,
accepted as a shared reality; hence it provided the innovation move had a political aspect as well,
a legitimate excuse for not engaging this extra which is evident in the transformation of power
time that innovation required. This prioritization relations; while the knowledge discourse is gain-
of commercial targets over innovation time ing momentum, the innovation game opens up
was supported by the Oil Co commercial culture, opportunities for differentiation for groups and
which was described largely as conservative individuals. The findings showed how some cre-
and risk-averted. In other words, especially ative scientists got empowered by the revival of
young scientists did not want to invest their time innovation, whereas others got marginalized.
on experimenting with uncertain ideas, because Some individuals saw their career prospects
possible failures would impede their career widen by endorsing the new innovation discourse,
development. Here, it becomes evident how co- and rushed in to take on active roles. Being at the
existing discourses collide and create options interface regarding innovation with Hydro-Carbon
for individual action, i.e. individuals can choose Solutions and the parent Oil Co, they had the
their actions from a repertoire of equally valid, legitimated authority to judge what innovation is
but competing, discourses. according to the needs of their sponsors. The
358
Table 1. Competing discourses of innovation (adapted from Asimakou, 2009a: p.177)
Innovation as Rational Long-term Innovation as Culture Scientific Technological

Planning Commercial Innovation
Innovation
Type Marketable ideas Small technological Small, technological, Radical technological ideas
ideas administrative, opera-
tional, etc. ideas
Objectives Improved and/or new New products Improved business Contribution to knowledge;
products performance groundbreaking innovations
Assumptions Innovation process as Innovation as measur- Innovativeness as a Innovation as a scientific
a thing to use when able economic element; personality trait; in- community trait; innovation
needed; innovation as innovation as a cost novation as an asset as an asset
a cost
Key-concepts Safe risk Collaboration between Cultural change Uncertainty; knowledge shar-
business and scientists ing between scientists
Rhetoric Commercial innovation Innovation strategic All-embracing; big and Curiosity oriented; Problem-
as competitive advantage framework; problem small ideas (instead of solving for knowledge
solving for customers good and bad)
Practices and tools Funds, Innovation Man- Funds, Funnel, Panel, Funds, Conferences, Funds, conferences, collabo-
agement Groups, innova- Business Case, Data- Database, Innovation rations, publications
tion in scorecards and in base, Networks and Hero and Team, In-
Personal Performance Alliances novation Chats
Contract
Responsibility Scientists Business, market sector All staff Scientists
and scientists
Unanticipated Eradication of manage- Collision of mindsets; A sense of democratiza- A secluded culture Ivory
consequences rial responsibility; lack lack of shared under- tion of workplace Tower
of strategic framework standing
prestigious innovation language game, espe- production and the benefits of participant groups.
cially at the local level, once established as the The findings showed instances of Technology
only right way to innovate, becomes a controlled Groups that tried to take control over financial
area from where those who did not support the resources and ultimately over innovation, either
related processes were excluded, i.e. called indif- directly e.g. by restructuring like Technology
ferent and non-innovative. Group B, or indirectly by debating over what
At a higher level, Eureka attempted to merge innovation is and over the value of the proposals.
the commercial rationality of the Business with The scientific population, feeling marginalized
the scientists creativity in one discourse and one or pressurized by commercialization, appealed to
process by forcing both sides to collaborate for arguments deriving from the dominant commer-
the sustainability of the organization. However, cial discourse or the reviving scientific to claim
the findings indicated that the difficulties Eureka time, resources and career opportunities whether
encountered were not merely due to different this meant activities in the innovation arena or in
mindsets, but rather a power struggle between commercial posts. The scientists who wanted to
different groups over articulating innovation and do research on their own terms used arguments
controlling the available resources. Essentially, the from the scientific language game to justify their
scientists did not trust the Business people, who reluctance to collaborate, whereas the youngsters
controlled the financial resources, that they could used arguments from the commercial discourse
drive innovation for the interests of knowledge to justify their innovation inertia. Clearly, the
359
two discourses (i.e. commercialism and scientific CONCLUSION

innovation), and the orders they subsequently cre-
ated, not only could they not fully support each The models for managing innovation attribute
other, since they reflected opposing rationalities managers a great degree of control over the
and practices, but furthermore, their collision process, assuming that employees would em-
created possibilities for a variety of actions. brace a well-designed innovation mechanism;
The widely admitted problem that Business and the discussion above highlighted the limitations
scientists traditionally cannot work with each of such a manager-centred approach. Evidence
other is the best example of this opposition of from Hydro-Carbon Solutions suggests that the
rationalities and this could not be resolved by population, whose valuable ideas were sought to
forcing tighter control. exploit, needed be involved in the governance of
This presents us with a key-question, which the the process: the scientists, while feeling empow-
two innovation mechanisms did not address, i.e. ered by the momentum of knowledge discourse,
how to create an innovation concept, and hence a claimed their right to have a voice over deciding
practice, that would achieve the consensus of the the what and how of the research strategy. This
involved parties. The question that sharply arises point is crucial, since most innovation systems
is the political question of who decides what exclude the users from their management whether
is a good idea, who sets the criteria and who or this may be the articulation of innovation, the
what legitimizes this decision; in other words, practices to follow, the setting of criteria or the
whose interests (e.g. Business, Science, Society?) evaluation of projects. This act that essentially
innovation would ultimately serve. The account means a redistribution of powers in organization
so far emphasized the significance of governance would benefit so much the organization as much
of the knowledge processes which seems that as society at large, since decisions for the value
it is not only a philosophical and sociological of technical ideas would not be taken by a single-
concern, but also Oil Cos reality. From here on, minded decision-center.
more research is needed in the area of governance In sum, the study briefly reviewed the main
of the knowledge production process, both at approaches to innovation management, and their
macro (across organizations) and micro level impact on R&D firms. It suggested that these
(within an organization), in order to understand approaches have contributed to the construc-
how the process affects various stakeholders, and tion of a powerful dominant discourse, which
the actual role of each stakeholder in this process, shapes thinking and actions in organizations.
and ultimately the quality and social relevance of However, the models of analysis neglect the
innovations. Furthermore, adopting the view that power-dimension, which is critical to understand
the essence of innovation is knowledge creation, innovation management. The contribution of
and knowledge is a contested praxis, then more this chapter is that it brings together the insights
research is needed on how to stimulate this process and developments of knowledge management
given the conflicts and antagonisms that this would field into the innovation management literature.
create. Most critically we need to understand how Contemporary managerial discourse has attrib-
new knowledge replaces the already existing one uted knowledge and innovation a central role in
at the organizational level; in other words, how achieving business sustainable growth, especially
a regime of truth is challenged and altered in an in R&D firms, where knowledge is the capital,
organization. the input, and the output of their operations. Ap-
proaches to innovation management tend to take
a structural or a voluntaristic take in understand-
360
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Durchslag & Hagel, 2002); it has been defined as always co-exist in a single phenomenon. From
groundbreaking new knowledge, or as the outcome this respect, knowledge/truth is always interwoven
of small incremental changes. It can be either new with systems of power, which it sustains, and with
theory or product. Here, a discursive approach is effects of power which induce it.
adopted, which embraces all previous definitions; Knowledge Production: The system of rules,
it conceptualizes innovation as a discourse which process and practices that frames and supports
re-articulates its web of relations among signifiers, the systematic pursuit of knowledge; within this
depending on the politics and the context, where system the dominant group each time prescribes
these signifiers acquire meaning from. rules, roles, directions and actions, and decides
Innovation Management: A set of technolo- what is valued as knowledge. It is worth noting
gies, which largely aim to manage, i.e. control that the process is highly political and always
the process of generating new knowledge in a contested by other interest groups (Lyotard, 1984).
knowledge-based organization. Here I distinguish Politics of Knowledge: The subtle or direct
two approaches: those who attempt to rationalize conflict between groups, while they try to impose
the process by splitting into small measurable and their articulation of a dominant discourse. The
controllable stages (Bessant & Tidd, 2007; Trott, assumption here is that, since discourses gener-
2008), and those who assume that the process ate a regime of truth, groups have an interest in
per se is incontrollable, and aim to influence it influencing what this truth should be.
by controlling its context/environment (Kanter, Power: It is not simply the ability of some-
1988; Smith, 2007). Alternative takes to innova- one to manipulate and control the behaviour and
tion management suspend the idea of controlling, actions of others, but it is a wider notion, which
and conceptualize it either as a process of creating forms structures, practices and subjectivities in
new meanings (Fonseca, 2002), or as a political the organizational life (Clegg, 1989). Power is
process, whereby groups constantly negotiate or always present where knowledge phenomena and
collide over the articulation of the rules of the effects emerge.
innovation language game (Frost & Egri, 1991). Technological Innovation: The outcome of
The latter is the working definition adopted by a long-term scientific research project, which
this chapter. is based on a change of the knowledge in the
Knowledge: Following Foucault (1980), field. Most often it is contrasted to new product
knowledge is a regime of truth, which have a development, which is the outcome short-term
normalizing effect upon phenomena and prac- projects that aim to small changes, and may not
tices, making some of them appear good, truth- be scientifically significant.
ful, respectful, whereas others are considered
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365
Chapter 20
Innovation and Knowledge
Management for Sustainability:
Theoretical Perspectives
Ren J. Jorna
Frisian Academy (KNAW), The Netherlands & University of Groningen, The Netherlands
Niels R. Faber
Frisian Academy (KNAW), The Netherlands & University of Groningen, The Netherlands
ABSTRACT
This chapter supports the argument that innovation is a special case of knowledge management; it is
about knowledge creation. With economic profit as its driving force, innovation is mostly short term
and commercial, feeding the question whether innovation really can be applied to ecological and social
systems. The problem concerns the goal of innovation: what does it suppose to realize? In this chapter,
we combine knowledge management (KM) and innovation concepts with sustainability and we argue that
as long as the emphasis in innovation is on profit and not on people and planet (the three Ps
of sustainability) we have no guiding mechanism for innovation, namely the existence of a sustainable
future. In a sustainable perspective, innovation becomes an instrument that benefits society at large.
In this chapter, we explore concepts behind issues of KM and innovation through literature review and
we argue along three lines of thinking. First, we demonstrate that innovation is knowledge creation at
an individual and collective level. Second, we argue that innovation should be a means and not a goal.
Third, we offer a perspective to operationalize the relationship between knowledge, innovation and sus-
tainability. Sustainability as an issue requires adaptation of human and social systems to ever-changing
environments. This continuous need for change demands people to constantly develop and obtain new
knowledge to realize the balance between system and environment. We conclude this chapter by in-
troducing concepts on Knowledge of Sustainability (KoS) and Sustainability of Knowledge (SoK) that
form the synthesis of our discussion, and we set the outline of a framework for sustainable innovation.
DOI: 10.4018/978-1-61350-165-8.ch020
Innovation and Knowledge Management for Sustainability
INTRODUCTION economists argue - favorable for us all. On the

other hand, innovation is initially nearly always
The debate about the value of innovation is not a continuation of the (successful) past. It does not
new. Beginning in the 80s and getting stronger come out of the blue and very often innovation
in the 90s, the EU has continuously stimulated destroys existing products and services and in
innovation. One might say, metaphorically, that this way seems to decrease economic strength
innovation looks like a medicine that can cure (creative destruction). It seems that everyone
almost all social, technical and economic ailments. knows what innovation is and that it simply has
(Kleinknecht, 1990; Nooteboom, 2003; 2008). to be realized. We believe that this perception
Of course, continuous innovation is an illusion. is at least incomplete, especially if one looks at
Improvement is often possible, but realizing some- innovation from a knowledge management and
thing new often also brings along destruction as sustainability angle.
we know from Schumpeter (1934). We therefore In this chapter, innovation will be considered
make a distinction in innovation as improvement as a special phase of knowledge management, or
and innovation as an ideology. When one argues to be more precise, innovation is about knowledge
that conservatism is the general mentality, or creation and knowledge acceptance. Although we
that our economic climate is too weak or that the need a general definition of innovation, we will
entrepreneurial spirit has to be stimulated and not dig into the many definitions of innovation.
then concludes that we have to put more effort Many adhere to an interpretation of innovation
in innovation, innovation is used as an ideology. as an instrument that leads to more (economic)
Innovation as improvement is different, but has the growth. That is not our focus. As far as innovation
assumption that one has goals in mind or knows is concerned, we want to show that the realiza-
the present shortcomings. We then have to answer tion of something new can or perhaps should
questions like which goals? or why changes be related to an increasingly important issue that
and therefore destruction? or is innovation a is relevant for humankind in general. We are
common remedy? talking about sustainability, the dynamic balance
It should be obvious that an answer to the of a system - of whatever kind - and its environ-
abovementioned questions cannot be given by ment. This complicated dynamic balance is not
one slogan. Innovation lends itself to a multitude beyond innovation, it is the kernel of innovation
of meanings. Often innovation is realized with and in realizing this balance we have to create
the sole purpose of propelling economic growth. knowledge. We have to innovate in order to make
A broader orientation that looks at long term our social and natural system sustainable, not to
changes, for example with respect to ecological make it endlessly grow. To our knowledge, no
and social sustainability is missing if one focuses existing physical or biological system can grow
on this short term economic growth. This opens endlessly. Utterly important for any discussion
the debate to (1) mindlessness in innovation re- about innovation are two things: the presence of
garding its consequences, and (2) sustainability knowledge (of sustainability) and the creation
as an answer to address these consequences. of (new and sustainable) knowledge. One has to
The present basic attitude is primarily a profit know facts, rules, practice and theories on the
orientation in which innovation leads to the one hand. On the other hand, one must have the
development of new products, processes and conviction that risks and uncertainties, which are
services, and if they are available (supply), there implicit in any innovative activity, will be such
will be a demand. Therefore, economic activity that something better is realized. We will argue
will increase and so will growth, which is - as that the issue of sustainability requires a perspec-
366
tive on innovation that shifts the attention from be approached as a belief on which one has very
profit and planet to people (Elkington, strong grounds for thinking it is true and that it
1997; 1999). The only way in realizing this is by has to be justified, eventually, whether it is of the
using knowledge management. propositional or inferential kind. It is interesting
The structure of this chapter is as follows. In to see that this EoP reference to knowledge is
the section Knowledge and KM, we will discuss missing in most present-days discussions in KM.
various aspects of knowledge management (KM): One characteristic determination of knowledge,
the functions, the phases, the levels of aggrega- is that - whether it is inter-individual (inter-
tion and the various generations of KM. In the subjective) or supra-individual (Platos World of
section Innovation as Knowledge Creation, we Forms) - it is always connected to cognition of
will especially focus on 2nd generation KM in the individuals. This implies that human beings are
sense of knowledge creation (innovation). In the always involved as interpretation mechanisms.
section Sustainability (the Knowledge of) and From a human information-processing point of
in the section From KoS tot SoK, we will make view (Newell & Simon, 1972), knowledge is
the step towards sustainability by introducing interpreted information. We explain this position
the notion of knowledge of sustainability and later after we have given a short history of KM.
we will explain what we mean by this concept. Until recently, knowledge management was not
Furthermore, knowledge of sustainability has to an issue in management science. Management is
be operational and that is why we also introduce supposed to be about the control, the regulation and
another term: sustainability of knowledge. The the command of things. However, knowledge
relation between the various concepts will be only became fashionable some twenty years ago.
depicted in Figure 2 section. In the last section, There is a lot of debate about the meaning of KM.
we will give conclusions. We believe that knowledge (management) can
have three meanings (Dalkir, 2005; Jorna, 2007).
First, knowledge is a fashionable, somewhat more
KNOWLEDGE AND KNOWLEDGE mysterious word for information, implying that
MANAGEMENT (KM) knowledge management is the same as information
management. Second, knowledge management is
Background about the assessment of all kinds of competencies
of staff in organizations, in which case it is almost
The first question in discussing KM is to answer similar to (sophisticated) Human Resource Man-
what is knowledge? Then confusion starts. Do agement (HRM). Third, knowledge management
we still have to define what is already known in is about managing the form and content of ideas,
philosophy and epistemology for more than two thoughts and actions of human individuals. In
thousand years? The answer to this question is the remainder of this chapter we are not favoring
affirmative; because how can we otherwise man- the information equals knowledge or the HRM
age (control, coordinate or direct) this something interpretation. Our interpretation of KM is the
called knowledge. focus on ideas, thoughts and actions of humans,
We will not address the age-old discus- individually and collectively. We will start with
sions about knowledge. However, an excellent discussing various aspects of knowledge and KM.
entrance can be found in The Encyclopedia of First, we argue that data, information and
Philosophy (EoP; Edwards, 1967). According to knowledge are parts of a three-stage rocket (Jorna
the EoP: knowledge is justified true belief. In & Simons, 1992; Schreiber, et al., 2000; Jorna,
a more elaborated formulation, knowledge can 2007). Knowledge is based on information, and
367
in turn information on data. Data are the noises, section Innovation as Knowledge Creation, we
scratches, images and other unstructured elements will argue that most discussions about innovation
from reality. If data are interpreted explicitly, we neglect or ignore the essential knowledge creation
speak of information. If information is used in process by humans (Boden, 1994a).
reasoning or in performing actions by people - i.e.,
if it is interpreted - the result is knowledge. This Functions of Knowledge
line of thought, namely that knowledge involves Management
reasoning and therefore making adaptations or
interpretations on data and information, also means KM started as a discipline with regard to orga-
that in the chain from data to knowledge the de- nizational issues of knowledge. An organization
grees of freedom vary. Data can be interpreted in or company has to deal with storage, sharing,
many different ways to serve as information. In distribution or use of knowledge. Although every
a similar way, information can be interpreted in researcher in KM knows, that staff is the ultimate
many different ways to serve as knowledge. The quality or gold in the performance of an organi-
crucial distinction in information and knowledge zation, this individual perspective remains mostly
is interpretation. This activity is carried out by implicit in standard innovation models (Nonaka
humans as information processing systems. Hu- & Takeuchi, 1995; van der Ven et al., 1999).
mans are the ultimate carriers of knowledge and Another issue in KM is that the development,
therefore also of innovation (Jorna, 2006). fluctuation or dynamics of knowledge, and there-
Second, when knowledge management is fore implicitly of learning, often is not accounted
conceived of as information management, the for. Knowledge seems to be a static, stable and
assumption is that knowledge more or less equals defined entity, which can be manipulated and
information. Information is available, accessible controlled as if it were something material. Noth-
and can be shared and utilized. For that reason, the ing is less true and it seems that common sense
relationship with information and communication in KM takes the volatile or dynamic character of
technology (ICT) is almost a natural one. With knowledge for granted. This is unsatisfactory. The
the help of databases, decision support systems only theoretical research that at least deals with
and other ICT-tools, sharing, storing and using the dynamics of knowledge has been formulated
information is evident. The assumption with regard by Boisot (1995). He offers a model in which
to knowledge is that it is a kind of information. change and dynamics of knowledge are accounted
However, problems arise when issues of innova- for. We come back to the dynamics issue in the
tion and creation appear. Then the equivalence third section. We first want to explain the func-
between information and knowledge stops. It is tions in organizations that KM is suitable for. In
quite natural to talk about knowledge creation and spite of all the attention for innovation, it should
knowledge acquisition, but it is strange to refer to be kept in mind that innovation in the sense of
information creation or information acquisition. To deep exploration (March, 1991) - or second order
formulate it stronger, ICT cannot in itself create learning (Argyris & Schn, 1978) - is not the usual
or acquire knowledge. These processes have to practice in many organizations. One could argue
be performed by humans. Therefore, the orienta- it better be so, because being only innovative
tion towards knowledge creation and acquisition, all the time is non-human or at least unrealistic.
as very important activities and processes in Functions of knowledge management activi-
organizations, shifted the attention away from ties are use, sharing, distribution, development
the ICT-orientation of KM in which knowledge and integration of knowledge elements within an
management is information management. In the organizational context. These different activities
368
operate on different levels (Dalkir, 2005). Knowl- phases are knowledge creation, encoding, storage,
edge use points to the usual business processes sharing, maintenance and use.
of staff, focusing on the actual application of a Although in Figure 1 the subsequent phases are
persons knowledge during normal task execu- depicted linearly, they in fact take place iteratively.
tions and processes. A persons existing set of Knowledge creation itself already starts with
knowledge elements enables him to make certain something. An actual creatio ex nihilo (creation
decisions and to perform his task. from nothing) does not occur, not even in radical
Both the activities of knowledge sharing and innovations. Within this sequence, the content of
knowledge distribution take place at the level of knowledge can be looked at phase by phase, with
a group of co-workers, expressing the transport regard to the people involved, the form or type
of knowledge between them. The distinction of knowledge expressed and the importance of
between these two functions concerns the mode the individual or team, respectively. The phases
of communication. Knowledge sharing refers to of creation and encoding are essential in any
peer-to-peer knowledge transfer where knowledge discussion about innovation. In the remainder of
elements of one person are transmitted to another this chapter, we will discuss knowledge content
who integrates it into his own set of knowledge only when it regards the issue of sustainability.
elements. In knowledge distribution, knowledge Knowledge content is too specific and domain
elements of one person are transported to multiple dependent to be discussed in general. However,
colleagues. we will discuss details of the types of knowledge
Knowledge integration refers to the acquisi- for two reasons. In the first place because in the
tion of knowledge elements from sources that various phases of innovation the same type can
are external to the individual, focusing on the not be dominant and in the second place because
input-side of employees. From external sources, a the dynamics of knowledge types is as relevant
member of an organization is presented with new as the dynamics of knowledge content and is the
knowledge elements. Subsequently, he integrates motor of knowledge creation.
the knowledge elements into his own set.
Knowledge development concerns the genera- Knowledge Processes and
tion of new knowledge elements. The generation Knowledge Types
of new knowledge elements is mainly for most an
internal (mental) activity of a person. Based on The relation between knowledge and innovation
an existing set of knowledge elements, a person is simple. Knowledge is both the primary source
creates new knowledge elements. Knowledge and the outcome of an innovation. It is the input,
development and creation primarily are individual throughput and output of innovations. Apart from
human-information processing activities. creating knowledge, the key activity in innova-
tion is making and sharing knowledge. No matter
Phases in Knowledge Management how brilliant a new product or service is, if it is
not transferred or exchanged, the innovation will
As indicated earlier, innovations are based on not be successful.
knowledge; they have knowledge as input, as To complete our picture of innovation from
throughput and as output (see section Innovation the knowledge perspective, a distinction can
as Knowledge Creation for details). In KM lit- be made in content of knowledge and how this
erature (Dalkir, 2005; Jorna, 2006) various phases knowledge content is expressed: its form or type.
in dealing with knowledge are distinguished. The Content of knowledge refers to domains, e.g., the
construction of houses, physics, the working of
369
computers or health care. Knowledge according appearance of that thing. Sensory knowledge is
to type is the denomination of how this knowl- bodily knowledge: when we make a thing func-
edge content is presented. The various aspects of tion as the proximal term of tacit knowing, we
knowledge make it almost impossible to define incorporate it in our body - or extend our body to
types of knowledge unambiguously. Based on the include it - so that we come to dwell in it (16).
work of Boisot (1995), we developed three types Boisot identifies this knowledge as the domain
of (semiotically inspired) knowledge: (a) sensory of the ineffable (Boisot, 1995, p. 62). It cannot
or tacit, (b) (en)coded, and (c) theoretical (or tacit) be coded, it is about concrete experiences, and it
knowledge (Jorna, 2006). can be shared only with those who are physically
The first type concerns sensory (or tacit) knowl- co-present.
edge or just behavior. It starts from a perception Quantification of sensory knowledge is pos-
of difference, interpreted in terms of an analogy. sible through looking at details. The more detailed
The situation is well known: when you eat a fruit a sensory experience is, the richer it is. Knowledge
you never ate before, your reaction to the new taste of details is relative to domains. A professional
will be something like: Well, it reminds me of will be able to perceive more when looking at
and you name a fruit you know. Essential is to a certain activity than an amateur will. Sensory
always recognize the situation in terms of a situa- knowledge can therefore mostly be measured
tion you already know. It should be clear that the through the analysis of behavior.
bigger the sensory problem is, the more difficult The second type, (en)coded knowledge, mate-
to find an analogue. We believe that sensitiveness rializes when signs become codes. Certain aspects
in sensory knowledge is often underestimated of remembered situations (visual, acoustic and
but of the utmost importance, especially in the tactile forms) evoke these situations. For example,
first phases of an innovation. We hypothesize concrete cows are replaced (represented) by the
that creative people also are the ones with a big sound cow and the category of cow emerges.
talent for expressing sensory knowledge. As we With the sign, codes emerge - a code being noth-
will argue later, this type of knowledge requires ing else than a convention establishing a relation
the physical co-presence of individuals and the of substitution. The sign enables communication
use of drawings or pictures. The emphasis is not and makes communication easier. The diffusion of
on documents and formulas. knowledge becomes easier where signs (codes) are
The sensory - or as some would call it the available (Boisot, 1995). Externalization requires
tacit - perspective underlies what Michael Polanyi coding. In terms of Boisot (1995): the diffusion
has coined personal knowledge (Polanyi, 1967, of the sign now takes place along the lines of a
p. 11). He describes the process involved in this social community. Co-workers or partners do not
knowledge type as being aware of that from have to be co-present. It is therefore extremely
which we are attending to another thing, in the
Figure 1. Phases in knowledge management
370
unlikely that coded knowledge is dominant in the all three knowledge types, of course depending
early phases of innovations. on content. As we will argue later, knowledge
Codes can be quantified by taking into account creation requires a mixture of knowledge types.
the number of elements and the combination rules
a code consists of. Musical notation systems are Generations of Knowledge
more strongly coded (allow less ambiguity) than Management
natural languages. Therefore, in the use of images
and metaphors, coded knowledge comes closest to The early propagators of KM were not much
the non-coded sensory knowledge. Further details interested in innovation or knowledge creation.
on the weakness or strength of codes can be found That has changed over the last 10 years. To make
in Goodman (1968), who uses five syntactic and this shifting position clear, McElroy (2003; 2008)
semantic requirements to distinguish weaker from made a distinction in 1st and 2nd generation KM.
stronger sets of signs (see Jorna, 1990; 2006). First generation KM focuses on capturing, encod-
A third kind of knowledge type emerges when ing, storing, sharing and distributing knowledge.
a third aspect is added to the aspects of sensory These knowledge processes provide knowledge
difference and codification (substitution), that of workers with valuable knowledge and are called
structure or pattern. It arises when coded signs supply-side knowledge processes. This way of
relate to the events represented, not based on a practicing KM emerged when researchers and
convention, but based on patterned or structural practitioners assigned the success of flourishing
qualities. We then have theoretical knowledge. companies to their knowledge processing capabili-
Scientific, ideological and religious knowledge ties. The rise of computers boosted this form of
are of this type. Can one be creative in this phase? knowledge management even more. It is therefore
Certainly one can learn. However, no longer is quite understandable that ICT and KM are often
knowledge acquired through searching for per- named in the same breath. The purpose of 1st
ceptual analogies or categorizing. Knowledge is generation KM is to enhance the deployment of
now the result of (scientific) inquiry - empirical knowledge (McElroy, 2003), the exploitation of
as well as theoretical. This means that innova- knowledge (Jorna, 2006) or the utility of knowl-
tion, here, is much more difficult, because an edge (Boisot & MacMillan, 2004). KM in this
enormous accumulation of past knowledge has form is far from processes like knowledge creation.
to be re-interpreted. This observation raises some interesting ques-
An attempt to quantify theoretical knowledge tions. Where can the origin of knowledge that one
is to describe this type in terms of why or be- wants to exploit be found? How is this knowledge
cause chains. The longer the chain, the more created? Who is responsible for validating, judg-
abstract the theoretical knowledge. Therefore, ing and criticizing the created knowledge? First
we believe that knowledge creation and therefore generation KM cannot provide answers to these
innovation at the start is more sensory than theo- questions (Firestone and McElroy, 2003). More-
retical. One should note that not only scientific over, it just assumes that valuable knowledge
knowledge is theoretical. Ideologies or religions has already been created in an organization. First
also provide complex why chains and therefore generation KM neglects the fact that valuable
are theoretical too. knowledge has to be created.
The various types of knowledge are relevant in In line with this observation, Boisot and Mac-
various phases or functions of KM. Distribution Millan (2004) argue that a practical foundation of
and sharing are not possible without codes and knowledge management in the 80s and 90s, rather
neither is storage. The use of knowledge regards than a theoretical/scientific one, had the conse-
371
quence that until now practitioners of knowledge learning, knowledge acquisition, knowledge claim
management have not been much troubled by formulation, and knowledge claim evaluation
epistemological or foundational issues (Boisot (McElroy, 2003; Peters et al., 2010). The various
& MacMillan, 2004, p. 22). In other words, the knowledge content and the various knowledge
primary concern of organizations and knowledge types have a different emphasis within the innova-
management has been with the economic utility of tion stages (creation versus implementation), the
knowledge. To make an outing to sustainability, innovation types (from radical via incremental to
the focus is on the P from profit and not on the imitative) and the kinds of innovation (product,
Ps from planet and people. process or organization). We expect sensory
Second generation KM acknowledges the knowledge to be more important in radical inno-
fact that knowledge is created, interpreted and vation types and in creation. At the front of new
evaluated (Firestone and McElroy, 2003). This knowledge (innovation or knowledge creation),
kind of KM is little ICT oriented and requires a the emphasis is more on showing and demonstrat-
deeper understanding of the sources of knowledge ing and therefore on physical co-presence. The
and knowledge processing. The two generations (en)coded and theoretical knowledge could be
of knowledge management differ on two major more important in incremental innovations and
aspects: (1) assumptions about knowledge, and implementation. Knowledge management in this
(2) appropriate solutions. First generation knowl- sense ensures that processes of knowledge pro-
edge management holds a logistics perspective duction and knowledge integration are ongoing.
on knowledge. Knowledge exists and can be The outcomes of knowledge production are to be
transported and stored. Knowledge needs to be evaluated knowledge claims (Peters, 2011). We
delivered at the right time, at the right place, in the therefore argue in the next section that innovation
right form, and in the right quality (Schreiber et is knowledge creation and a part of KM.
al., 2000). McElroy labels the logistics view, sup-
ply oriented knowledge management. When the
presence of knowledge is the focus, solutions are INNOVATION AS
oriented towards delivery. The strong focus of 1st KNOWLEDGE CREATION
generation KM on ICT is therefore not surprising.
Second-generation knowledge management In this section, we focus on innovation as a special
challenges 1st generation knowledge management case of knowledge management (see also Tidd,
on both aspects. First, knowledge is not assumed 2006). The stages of innovation are related to the
to exist already. Second-generation knowledge processes of knowledge creation (production) and
management starts from the notion that knowledge knowledge integration (Dalkir, 2005; McElroy,
needs to be produced. Knowledge production is 2003). In the process of knowledge production,
explicitly identified as an important knowledge new knowledge is produced by one or more
process in addition to knowledge integration. individuals. During the process of knowledge
The production orientation strongly builds on integration, newly created knowledge is com-
a human originating social perspective, which municated to others and integrated into existing
counteracts the strong ICT orientation of 1st genera- knowledge. When observing innovation processes
tion knowledge management. Second-generation from the perspective of knowledge management,
KM perceives knowledge production as a pure the two (main) phases are: a phase of invention or
human oriented and social activity, which may creation or invention and a phase of implementa-
be supported by technology. Central processes in tion (Boden, 1994a; Nonaka & Tackeuchi, 1995).
knowledge production are individual and group During the phase of invention or creation an indi-
372
vidual - and in some cases a group of individuals (1994a, 1994b). Boden uses a computational
- conceives something new: a new product, a new view on creativity, which also implies the issue
process or a new service. The actual process of whether and how creativity can be implemented
creation is often considered as taking place at the in artificial systems. Boden gives four phases of
individual level, but what exactly creation is, is creativity, earlier proposed by Poincar: prepara-
difficult to define. Boden (1994b), for example, tion, incubation, inspiration and verification. In
uses the definition of creativity as bringing Bodens cognitive perspective, this is translated
something into existence or making something into the framework of symbols, representations
out of nothing. Csikszentmihaly (1996) states and the manipulations on symbols within the hu-
that creativity is a process whereby a symbolic man mind. Because creativity implies thinking and
domain within a culture is changed. problem solving, it means that problem spaces or
Creativity, or invention as it is often called conceptual spaces are the starting point for every
in organizational environments, can be studied systematic and scientific discussion about creativ-
from the perspective of its behavioral manifesta- ity. It is, however, difficult to look at and collect
tions and of its underlying mental processes and empirical data, because the start and ongoing of
mechanisms (Michon, Jackson & Jorna, 2003). creative mental processes and creative products
Examples of the former are a comparison of the are unpredictable and surprising and therefore
paintings of Magritte and Rembrandt or a com- difficult to observe. One cannot just sit and wait
parison of the Operating Systems MS-Dos (now until a creative idea materializes.
Windows 7) developed by Bill Gates and Mac- With respect to creation, two kinds of novelty
OS by Steve Jobs. Results of these analyses may are discerned, the first consisting of novel com-
consist of lists of characteristics explaining that binations of familiar ideas, the second consisting
for the software case Mac-OS is more creative of the transformation of initial conceptual spaces
than MS-Dos. Very often lists of characteristics themselves. The former implies that combinations
in the software case are interpreted in terms of are found that are improbable, the latter that com-
styles of working, interfaces, functionality or even binations are formed that are impossible. The last
related to personality typologies suggesting that, kind of novelty is often understood as creativity.
for instance, Steve Jobs as a person is more open, It is a bisociation of matrices (Koestler, 1964).
innovative or inspiring than Bill Gates. Similar These matrices are in fact the mental representa-
lists, but different in content, can be developed tions in a human cognitive system. They may
for the comparison of all kinds of new products, consist of stories, icons, texts, images or schemas,
services and processes. Practice shows that the but they form the basis upon which changes take
decision as to what product or service is more place. Bisociation means that common structures
creative cannot be reached easily. or common combinations are dissolved and that
More interesting with respect to creation new combinations in the human mind arise by
from an individual, cognitive point of view are processes such as analogy, metaphor and so on.
descriptions of individual cognitive processes In this sense, being familiar with and bypassing
and mechanisms. This concerns individuals in constraints lie at the heart of creativity. Removing
the creativity phase, but very often also the in- constraints then may result in new ideas and new
teraction of groups in the implementation phase. thoughts. It should be acknowledged that Bodens
Concerning individual acts of creation, the most theory says nothing about the content of a creative
elaborate attempt to deal with creativity within product or idea, it is only about unraveling the
an overall cognitive, human information process- mental processes and mechanisms in, especially,
ing, framework has been undertaken by Boden the creative or invention phase.
373
During the implementation phase, the idea perspective. The MD goals are about ecological,
that was conceived in the invention phase is human and social issues, but they have various
transformed into the final innovation outcome. shortcomings. They are not about innovation and
For instance, products are developed and imple- knowledge creation, they only marginally integrate
mented, services are formalized and people are private firms and organizations, they work very
trained. In the implementation phase important much top-down (from nations to people), and not
others have to be convinced and be made part as we prefer bottom-up (from people to nations),
of the novel product or service. This is a process and they are very difficult to quantify, except for
of one individual interacting with many others. basic economic needs (UNMD, 2000, p. 5). Fol-
Here, the sociological aspect will dominate the lowing this direction we are back at the profit
psychological perspective. In Table 1 we depict issue.
the individual and group level for the various The before mentioned focus in innovation on
phases of KM in combination with innovation. profit is like a snake biting into its own tail. This
Depending on the characteristics and the stages of is another way of formulating the innovation
innovation and whether an innovation is product, paradox. If an innovation is not commercial, it is
process or organization oriented, knowledge will not successful and if it is not successful or com-
play a different role, individually or collectively. mercial, it is not an innovation. The question is
In the very early phases, the individual is of ut- whether there is a way out. We argue that dealing
most importance, whereas the acceptance of an with sustainability is required, because in contrast
innovation and its use in practice can only be done to what many neo-liberal economists know, but
by groups in companies or in society. However, if do not believe: without people or planet there
it concerns organizational innovations, the group is no profit.
relevance is present from the very beginning. One could argue that social innovation fulfils
There is a big problem in determining the the needs of the people part in the sustainability
relevance of innovation. Often innovation is only discussion (Taylor, 1970; Mulgan, 2006). We
positioned in terms of its neo-liberal economic have two reasons to note differences. In the first
valuation. As a consequence of this dominance, place social innovation is about the content of
it is not only difficult to reject this orientation, it innovation, comparable to product or service in-
also requires a change of mindset, for example, novation. This is not our primary concern. In the
if one looks at sustainability that regards the whole second place the sustainability issue with regard
world population. Now, the dominant view on to people always requires or implicitly assumes
innovation is the profit perspective. An innova- a criterion or threshold. This is not in general the
tion is successful if it has technological and com- case with social innovation.
mercial success. If an innovation contributes to In the next two sections, we will therefore
(economic or financial) growth, it is relevant. focus on sustainability. Can the issue of sustain-
Even if it contributes to planet and people, it ability be attacked from an innovation point of
is very difficult to determine or measure this view? We believe it can, but only if one uses a
valuation and therefore one often returns to the knowledge management perspective and not a
financial measure of profit. Even the Millen- profit perspective only. Sustainability depends
nium Development (MD) Goals of the United on knowledge, but social sustainability also re-
Nations are difficult to incorporate in the people quires joint knowledge actions.
374
Table 1. The hypothesized presence or absence of group and individual in knowledge phases
Knowledge Knowledge Knowledge Knowledge Knowledge Knowledge use

creation encoding storage sharing maintenance
Individual Yes Yes Yes Little Little Yes
Group No Little Yes Yes Yes Yes
SUSTAINABILITY (THE tions to meet their own needs (WCED, 1987, p.

KNOWLEDGE OF) 43). Although commonly used, this definition does
not provide any footholds or further elaborations
The previous sections addressed the topic of KM, of what incorporates the knowledge domain of
and the position innovation holds within. Central sustainability. Aiming to provide more footholds
to our discussion has been knowledge as basic for businesses, Elkington (1997; 1999) uses the
ingredient of both KM and innovation. Various Triple Bottom Line to capture the domain of sus-
aspects of knowledge have been discussed, such tainability and provide footholds for organizations
as the types of knowledge that are identified. to deal with it. He describes sustainability in terms
What lacked from our discussion so far however, of people, planet, and profit. In each action
is substance; until now, knowledge has been de- of an organization, all these elements should be
scribed without reference to a particular instance considered; more importantly, there should be a
or domain. What we mean, is that knowledge was balance between these three elements. Elkington
discussed without discussing its content. Knowl- argues that only when inclusiveness and balance
edge always has some content that is linked to a are addressed, an organization will be sustain-
specific domain. Schreiber et al. (2000) refer to able. However, how these criteria should be met
knowledge elements as the elementary building remains to be seen.
blocks and a knowledge domain as a coherent set In search of an answer to the question what
of such knowledge elements that together comprise sustainability is about, Faber et al. (2005) found
a specific domain of interest. In this way, one can about 30 definitions of sustainability and over 300
speak of quantum physics or gardening to indicator lists and practical initiatives including
refer to a specific body of knowledge. reports, guidelines, and policies. Although com-
Similar to the examples provided, the topic monalities exist, each definition and initiative
of sustainability denotes such a knowledge provides a specific perspective on sustainability,
domain consisting of numerous knowledge ele- either having a broad and shallow, or a small
ments. Sustainability, in contrast to for instance and detailed scope on issues of sustainability. In
gardening, is not an easily described knowledge their analysis, Faber et al. (2005) use a systematic
domain. Various interpretations of sustainability framework to position found definitions and op-
have been provided since the term was first used erationalizations. Here, we discuss the framework
in the 1960s in the context of dealing with envi- briefly to illustrate the complexity that is involved
ronmental problems. A commonly used definition in dealing with the domain of sustainability.
of sustainability stems from the World Commis- The framework is constructed using a system
sion of Environment and Development (WCED), perspective on sustainability. The argument is
which describes a sustainable development as a that sustainability is a property that is ascribed
development that meets the needs of the present to artificial systems. We discuss the implication
without compromising the ability of future genera- of applying an artificial system perspective in the
375
next section; for now we use the term system. tainability concerns only concrete systems. For
When attributing sustainability to a system, this these systems clear sustainability criteria can be
expresses the existence of a balance between the formulated. Finally, as these systems operate in
system and its environment, such that the system stable environments, their sustainability will not
can exist forever. be affected by unforeseen changes. The complex
Faber et al.s framework for analyzing the corner of the sustainability space is occupied by an
various interpretations of sustainability consisted entire different species of systems. There, abstract
of three dimensions that form a so-called sustain- systems reside, for which no absolute measures of
ability space. The first dimension indicates the sustainability are available. Even stronger, each
tangibility of the system that is dealt with, stretch- measure that exists is susceptible to change due
ing from concrete (e.g., a car) to abstract (e.g., an to continuous changes in the systems environ-
organization). The second dimension deals with ment, constantly affecting system-environment
the goal that is considered in ascribing the sus- interactions.
tainability property to the system, stretching from These two sides of sustainability put entirely
absolute to relative. An absolute goal orientation different demands on anyone dealing with sustain-
builds on the belief that a specific configuration ability, particularly in relation to the knowledge
of the system exists that is sustainable under all s/he needs in order to grasp the domain, and all
conditions. The relative goal orientation rejects the the more in starting or considering innovations
absolute stance, expressing the need to constantly of whatever kind. In the simple corner of the
monitor changes in the systems environment and sustainability space, problems once encountered
adapt the system to these changes to restore the and solved, provide the knowledge to deal with
balance. The third dimension expresses the inter- all future problems. As indicated, these systems
actions between the system and its environment. are concrete as well as their composing parts.
This dimension relates to the question whether The environment of these systems is stable, and
changes in composing parts and internal struc- a finite state of sustainability is assumed to exist.
tures of the system and its environment are taken Therefore, the objective is to control the systems
into consideration in the sustainability property. behavior such that this state is maintained. Once
Interactions are either static or dynamic. At the one knows what this state of sustainability is
static end, the environment is considered to be and how it can be achieved, no new knowledge
static. Interactions between system and environ- is needed to realize and maintain the systems
ment therefore do not change over time. At the sustainability. However, in the complex corner
dynamic end, changes in composition and structure of the sustainability space, systems are abstract,
of environment are considered. At the static end residing in a dynamically changing environment,
of this dimension only the magnitude of interac- which constantly demands new arrangements of
tions is relevant. At the dynamic end not only the the system, and a finite state of sustainability is not
magnitude of interactions, but also the quality and assumed to exist. In this corner, new knowledge
the dynamic changes of interactions need to be is constantly required in order to understand the
considered (Faber et al., 2005). configuration of the system and the interactions
In relation to the present discussion, Faber et with its environment. Also, the demand for new
al.s (2005) framework shows that in the knowl- knowledge regarding the balance between system
edge domain of sustainability multiple layers of and environment is continuous. In other words,
complexity are detectable. When observing the the knowledge domain in the simple corner of the
extreme corners of the sustainability space we sustainability space is clearly demarcated and the
notice the following. In its simplest form, sus- internal structure is stable. In the complex corner,
376
the knowledge domain is under constant revision introduction into the domain of sustainability is
regarding knowledge elements and their interrela- required. Particularly, the history of the concept
tions, and borders move continuously. It can be is of interest here. Many publications in recent
discussed what the discussion means with regard history have shaped the sustainability debate as it
to the dominance of the various knowledge types currently takes place. We highlight two of them.
in the sustainability space, but that is not the focus The first publication concerns the report of the Club
of the chapter at this moment. of Rome (Meadows et al., 1972), which addresses
Because its underlying assumptions are more the relationship between economic growth and the
realistic (see Faber et al., 2005), we argue that usage of non-renewable natural resources. Using
any serious discussion on the sustainability computer simulations, this think tank predicted a
knowledge domain resides in the complex cor- depletion of key natural resources in the first half
ner of the sustainability space. This implies that of the 21st century. Although the publication was
sustainability problems and their solutions are strongly criticized, it affected peoples mindsets
by definition dynamic, multi-dimensional, and on economic growth around the world. The sec-
require in-depth knowledge about cause-effect ond publication is one we already mentioned in
and process relationships. Therefore, to add an an earlier section, namely the publication Our
economic perspective, they are beyond profit common future (WCED, 1987). This report
or growth. Additionally, an intrinsic demand places the effects of economic activity in a larger
for the continuous generation of new knowledge perspective. Besides the depletion of natural re-
is embedded. Hence, appropriate KM, which is sources, pollution and social impacts are presented
equipped to facilitate the knowledge processing as issues to be addressed under the umbrella of
demands of this domain, is needed. In the next sustainability. Because of the latter publication,
section, we propose a configuration of KM that when currently addressing sustainability, social,
facilitates such knowledge processing. natural, and economic aspects are considered
simultaneously and in an interconnected way.
In spite of this broader perspective, nowadays, a
FROM KNOWLEDGE OF strict technological perspective seems to dominate
SUSTAINABILITY TO the debate on sustainability. The focus is almost
SUSTAINABILITY OF KNOWLEDGE exclusively on environmental and technical issues.
Consequently, technical solutions are thought to be
The previous section added content to our discus- the key in resolving issues of sustainability. One
sion on KM and introduced the knowledge domain seems to focus on increasing the knowledge of a
of sustainability that is dealt with in this chapter. technically oriented sustainability. This is neces-
This knowledge domain is what we label Knowl- sary, but only forms half of the sustainability issue.
edge of Sustainability (KoS). In this section, we Our perspective on sustainability deviates
extend this discussion by linking sustainability from a sheer technological orientation, in that we
to 2nd generation knowledge management. We position human behavior (individually and collec-
aim to show that particularly this combination is tively) at the core of the sustainability debate. More
essential in order to deal with sustainability and explicitly, we argue that sustainability is strictly
with innovation. linked to presence (or absence) of human action.
Before going into depth on how 2nd generation This position follows from the distinction we make
knowledge management and sustainability are in natural and artificial systems. A natural system
intertwined, we need to address the issue of arti- is any system that exists by nature. For instance,
ficial systems we mentioned before. Some further a solar system and ecosystem both are considered
377
natural systems. The artificial system concept outputs, results from the behavior of the artificial
originates from a system-theoretical perspective system. By definition, the behavior of the artificial
(von Bertalanffy, 1951; Simon, 1969) that is quite system depends on the behavior of the human(s)
common within design and engineering. We define and their knowledge operating it, and on the way
an artificial system as any kind of system that is the artificial system is constructed, very often
made and operated by humans. For example, a by humans. Therefore, we see the necessity to
house, a farm and its farmland are all artificial innovate and develop knowledge of ecological
systems. Whereas the example of the house and as well as of social sustainability.
the farm are trivial, using farmland as an example Human behavior and knowledge interact
of an artificial system is not. Although land is (a) (Jorna, 2006). Knowledge that individuals hold in
natural (resource) in origin, it also is an artificial their minds, shape the world and their view on the
system, because the purpose for which it is made world, and consequently the actions they perceive
and used is human-oriented. For instance, in the as possible and that enables them to achieve certain
Netherlands, all land is artificial. It is conquered goals. Hence, for sustainability depends on human
from the sea and cultivated. Large parts of the behavior, and behavior depends on knowledge,
land are demarcated by farmers and arranged to the knowledge people have determines the sus-
grow a specific kind of crop or let cattle graze. tainability of the artificial systems they control.
Furthermore, the land is treated in such a way From the dynamics of artificial systems and
(e.g., fertilization, irrigation) that it provides the a longing for innovation leading to an increased
highest yield or the most nutritious grass. Using Knowledge of Sustainability (KoS), we derive
the definition of artificial system and the argu- another perspective on sustainability, namely
ment that human choice and action are based on Sustainability of Knowledge (SoK). Knowledge
individual and collective knowledge, knowledge is of Sustainability (KoS) refers to the content of
identified as the controlling device of this complex knowledge; the latter to the knowledge processes
artificial system. that handle KoS. KoS consists of (1) knowledge
In the previous section, we explained the sus- content about causes that underlie environmental
tainability of a system as the existence of a balance and organizational problems, and (2) the knowl-
between the system and its environment. To be edge used to solve such problems. The improve-
more precise, sustainability is an expression of the ment of organizational and societal behavior, i.e.
existence of a dynamic equilibrium between an improving the sustainability of organizations and
artificial system and its environment (Tietenberg, societies, builds on the problem solving capabili-
2000). Whenever an artificial system uses inputs ties in which KoS is applied and on the learning
from its environment, it depends on the capac- processes and its content based upon which KoS
ity of the environment to produce these inputs. is learned. SoK, on the other hand, focuses on the
Commonly, the sustainability domain recognizes processes that govern the production, creation
these inputs to be retrieved from sources in the and integration of knowledge. Sustainable in-
(ecological) environment. The outputs that flow novation is innovation that centers on KoS and
from the artificial system to its environment rely SoK (see Jorna, Hadders, & Faber, 2009; Jorna
on the capacity of the environment to process & Hadders 2010).
these outputs. Outputs are absorbed by systems As we indicate in the section Knowledge and
in the environment, which are commonly referred Knowledge Management, second generation
to as sinks in the domain of sustainability. The KM aims to produce new knowledge in addi-
precise configuration of the interactions between tion to 1st generation knowledge management,
artificial system and environment, through in- and which aims to stimulate the distribution and
378
Figure 2. Relation between generations of KM, knowledge, learning and sustainability
use of existing knowledge. From our discussion (the box of) an organization we discern business or
on sustainability and the concepts of KoS and operational processes and operational and strategic
SoK, we argue that sustainability is bound to a management. We also position routine (first order;
knowledge management regime that provides the 1st generation KM) and creative learning (second
functions of knowledge production, distribution, order; 2nd generation KM). We also include KoS,
and use. SoK is realized by 2nd generation KM. SoK and Knowledge Management.
Second generation KM ensures the production
and integration of knowledge that is pointed out
by SoK (Jorna, 2006). In order to contribute to CONCLUSION
sustainability, KoS should be the content of SoK.
In Figure 2, we combine the various concepts Unless we find another planet Earth, the issue
we used in this chapter. We first make a distinc- of sustainability will stay. As much as we have
tion in environment and organization; an adaptive exhausted our natural and social resources in the
systems view. The environment also includes the last three centuries, just as much will we need
real world, science and stakeholders. From a sus- existing and new resources to solve our present
tainability perspective the carrying capacity of the ecological and social problems. This is an innova-
real world is important (McElroy, 2008). Within tive endeavor par excellence. It implies that we
379
have to face and solve poverty, starvation, aging, sustainability concerns a dynamic balance between
untimely deaths of newborns and land and water a system and its environment, adaptation and
distribution problems as issues of sustainability. updating is of the utmost importance. This can
Whether this concerns social or ecological aspects be done by using Sustainability of Knowledge.
is not relevant. In any scenario we need more It concerns doing things differently, meaning
knowledge of sustainability. This is part of our emphasizing processes, dynamics and balanc-
main message. Another part concerns the focus to ing of people in organizations. Sustainability
shift from only profit to people and planet. depends on knowledge, but social sustainabil-
We believe that from the perspective of mankind ity also requires joint knowledge actions. This
any issue of ecological sustainability is also an requires also a new perspective on innovation.
issue of social structure and vice versa. This We should not just innovate to foster continuous
makes sustainability a complex and multi-layered growth - the economic profit dimension -, but
topic. This has already been the case since ages. innovate to keep steady states going on or to return
What has changed, however, over the last three to a steady state or balance (Daly & Cobb, 1989).
hundred years and culminating the last fifty years, This is an enormous challenge to our innovative
is an ever-increasing exhaustion of our natural powers and our knowledge potential. However,
resources. What we did in the last (ten) thousands there are signs that we can do it, but it requires as
years in situations of shortage is looking for new much knowledge of sustainability as we can get.
possibilities and frontiers that can be conquered. In
addition, we succeeded in sending out expeditions
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382
KEY TERMS AND DEFINITIONS Knowledge Types: Classification of knowl-

edge, not based on content or domain, but on
Ecological Sustainability: The sustainability structural characteristics of its representational
of a system with respect to the natural and bio- form. Three representational forms are distin-
logical resources or capacities in system and/or guished here: sensory (behavioural, tacit1), coded,
environment. and theoretical (tacit2) knowledge.
Innovation: Equals knowledge creation, ie., Social Sustainability: The sustainability of
the intentional introduction and application within a system with respect to the social, intellectual,
a role, group, or organization of ideas, processes, and constructed resources or capacities in system
products or procedures, new to the relevant unit and/or environment.
of adoption, designed to significantly benefit the Sustainability of Knowledge (SoK): The
individual, the group, organization or wider society sustainable arrangement of knowledge processes,
(West & Farr, 1990). assuring the continuous creation, distribution,
Knowledge Management: Management of and usage of knowledge of sustainability (KoS).
the knowledge processes of creation, storage, Sustainability: The dynamic relation (might
sharing, distribution, and usage. be a balance) between a system and its environ-
Knowledge of Sustainability (KoS): Knowl- ment that can be maintained for the long run. A
edge in terms of content or domain about ecological system is sustainable if the dynamic relation is in
and/or social sustainability. balance; otherwise it is unsustainable.
383
384
Chapter 21
Dynamic Capabilities and
Innovation Radicalness:
Review and Analysis
Jorge Cruz-Gonzlez
Jos Emilio Navas-Lpez

Pedro Lpez-Sez
Miriam Delgado-Verde
ABSTRACT
The aim of the present chapter is to theoretically analyze the determinants of firms innovation radical-
ness (the degree of novelty incorporated in an innovation) from a dynamic capabilities-based view of
competitive advantage. Nevertheless, due to the fact that dynamic capabilities concept suffers from cer-
tain terminological inconsistence and its components are not entirely clear in current literature, we first
need to carry out an in depth review and analysis of this construct. Based on this review, we argue that
dynamic capabilities arise from firms orientation to knowledge exploration that enables the generation
of new organizational capabilities, and suggest external knowledge acquisition and internal knowledge
combination as its key components. Taking into account this reasoning, we propose a theoretical model
on dynamic capabilities deriving some relevant propositions considering innovation radicalness as its
core output and the key element to compete in dynamic environments.
DOI: 10.4018/978-1-61350-165-8.ch021
Dynamic Capabilities and Innovation Radicalness
INTRODUCTION However, in spite of many theoretical discus-

sions on the effect of radical innovations, the ori-
Since Schumpeter published The Theory of Eco- gins of this kind of innovation have so far received
nomic Development in 1934, there has been a much less attention by researchers (Schoenmakers
rising recognition of innovation as a key factor & Duysters, 2010). Accordingly, the aim of the
for firms profitability and survival. Attending to present chapter is to theoretically analyze the
the degree of novelty of the technology, innova- determinants of firms innovation radicalness (the
tion comes in many different types ranging from degree of novelty incorporated in an innovation).
incremental to disruptive. Incremental innovations In doing so, the theoretical framework in which we
consist of minor changes or plain adjustments sustain our analysis is the dynamic capabilities-
to existing products or technology and are built based view of competitive advantage, which has
on firms current technical capabilities; radical notably improved its relevance during the last
innovations imply the development of a highly decade (Teece & Pisano, 1994; Teece, Pisano &
novel or unique product/service or production Shuen, 1997; Zahra, Sapienza & Davidson, 2006;
process and are based on changes in firms tech- Wang & Ahmed, 2007; OReilly & Tushman,
nological trajectory and associated organizational 2008; Pettus, Kor & Mahoney, 2009). This new
competencies; and disruptive innovations re-write perspective in the strategic management field,
the rules of the competitive game, creating new with important implications for the management
technological systems and sometimes even new of innovation, considers the evolutionary nature of
industries (Tidd, 2001; Benner & Tushman, 2003; the resources and capabilities of the company in
Dahlin & Behrens, 2005). Most innovations can relation to the changes occurred in the environment
be characterized as incremental, whereas radical in which it operates (Lavie, 2006; Pettus et al.,
innovations, and especially disruptive innova- 2009). Hence, the dynamic capabilities framework
tions, are much less frequent (Schoenmakers & tries to link the arguments of those theories that
Duysters, 2010). explain the sustainable competitive advantage
As recognized in recent literature, mere im- based on contextual factors (Porter, 1981), with
provement of products/services or production those that attempt to explain the sustainability
processes is not enough to ensure firms viability of competitive advantage from a purely internal
in current environments, characterized by growing perspective (Wernefelt, 1984; Barney, 1991). In
technological changes and uncertainty (Rosenkopf this sense, the competence-based approach is
& Nerkar, 2001; Danneels, 2002; Schreygg & concerned with the identification, development
Kliesch-Eberl, 2007). To avoid the threat of ob- and exploitation of core competencies based on
solescence associated with this type of contexts, prior experience. However, it fails to address how
organizations must develop new capabilities that firms cope when existing competencies become
depart from current ones and to translate these obsolete, or how firms acquire new competencies
new capabilities into new processes, products (Tidd, 2006: 14). For these reasons, we consider
and services (Tidd, 2006). In other words, in a that dynamic capabilities framework constitutes an
growing number of competitive landscapes, firm adequate background to analyze firms innovation
success depends on its ability to develop innova- radicalness (Galende, 2006).
tions with a higher degree of novelty (Tidd, 2001; Nevertheless, despite its relevance and the
Benner & Tushman, 2003; Jansen, Van den Bosch wide and increasing number of scientific stud-
& Volberda, 2006). ies focused on this perspective, the concept of
dynamic capabilities suffers from certain termi-
385
nological inconsistence (Zahra et al., 2006). This Taking into account the organization as level
fact underscores its initial phase of development of analysis (Tidd, 2006), we identify two basic
(Newbert, 2007). Additionally, the lack of con- sources of new organizational knowledge. On the
sensus with regard to the factors that influence the one hand, firms can conduct an explorative learn-
development of this kind of capabilities by firms ing from the unexplored knowledge located inside
is even more important (Wang & Ahmed, 2007). of it (internal source). On the other hand, organiza-
So, according to the main objective of the chap- tions can explore new knowledge located outside
ter, we first need to carry out an in depth review the firm boundaries (external knowledge) (Bierly
and analysis of this construct. Concretely, we (1) & Chacrabarti, 1996; Zollo & Winter, 2002; Zahra
analyze the concept of dynamic capabilities in & Nielsen, 2002; Lavie, 2006). According to the
order to reconcile the different perspectives that previous discussion, new capability generation
have been developed until now, and (2) identify requires both internal and external organizational
the key components that enable firms to develop learning. In this sense, we analyze the two main
this special kind of capabilities, or the subsets of facets that, according to the literature, allow firms
capabilities in order to build them up. to carry out explorative learning from internal and
Based on a comprehensive review of the external sources. These are: absorptive capacity,
literature, we classify the main theoretical con- which allows the firm to recognize the value of
tributions regarding dynamic capabilities in three new external knowledge, internalizing and ap-
broad approaches to this construct: the innovation plying it (Cohen & Levinthal, 1990; Jansen, Van
approach, the contingent approach, and the capa- den Bosch & Volberda, 2005); and combinative
bility-building approach. Although the definitions capabilities, devoted to combining the existing
provided by each of these perspectives are quite knowledge with novelty and flexibly for gener-
different, we try to offer an integrative defini- ating new organizational knowledge (Kogut &
tion of dynamic capabilities that brings together Zander, 1992; Van den Bosch et al., 1999). By
all these three approaches. The main conclusion analyzing both factors, this chapter highlights
of this theoretical review and analysis is that the some of the main mechanisms that allow organi-
generation of new organizational capabilities lies zations to acquire new organizational knowledge
at the heart of the concept of dynamic capabilities. from external sources and to generate it through
According to several authors framed within the current knowledge combination.
resource-based view and knowledge-based theory Our theoretical review and analysis leads us
of the firm, capabilities are based on collective to develop a research model linking dynamic ca-
and tacit knowledge (Collins, 1994; Pisano, 1994; pabilities with innovation radicalness. Based on
Grant, 1996; Helfat & Peteraf, 2003; Nobre, To- the above reasoning, and taking into account that
bias & Walker, 2010). Therefore, the generation more radical innovations require the development
of new organizational capabilities that enables of new technological capabilities, we propose
firms technological developments requires the that both dynamic capabilities components posi-
acquisition of new knowledge by firms or, in tively influence the degree of novelty of firms
other words, that explorative learning to take innovation. Additionally, we justify and propose
place (March, 1991; Van den Boch, Volberda & the existence a complementary effect between
de Boer, 1999; Rosenkopf & Nerkar, 2001; Dan- them on innovation radicalness. Finally, we take
neels, 2002; 2008; Tidd, 2006; Jansen et al., 2006; into account the role of radical innovations in the
OReilly & Tushman, 2008; Uotila, Maula, Keil success of firms operating in dynamic contexts.
& Zahra, 2009).
386
DYNAMIC CAPABILITIES CONCEPT stands dynamic capabilities as those that enable

the generation of new organizational capabilities
As Zahra et al. (2006) highlights, the concept of (meta-capabilities or second-order capabilities),
dynamic capabilities suffers from certain termi- allowing the firm to sustain its competitive ad-
nological inconsistence. In this section we offer vantage (Collins, 1994; Danneels, 2008). These
the theoretical literature review carried out on capabilities might include the flexibility to shift
this construct. between capabilities more efficiently or faster
than competitors (...), or the ability to respond to
Main Approaches or initiate radical change (Collins, 1994: 148).
Finally, the third perspective is rooted in the
Table 1 shows the major definitions adopted by the contingency theory (Aragn-Correa & Sharma,
main authors framed within the dynamic capabili- 2003). Under this approach, dynamic capabilities
ties perspective. We classify these contributions are defined in terms of fit with firms environ-
in three differentiated approaches (innovation, mental conditions. In this sense, four scenarios
contingent and capability-building) that are dis- can be identified: beneficial strategic change
cussed in the following paragraphs. (fit), insufficient strategic change (misfit), exces-
The contributions classified into innovation sive change (misfit), and beneficial inertia (fit)
approach tend to define dynamic capabilities as (Zajac et al., 2000: 433). Dynamic capabilities
firms ability to innovate in products or services, are classified in the first scenario, this is, when
processes or business models. This approach is firms environment requires a strategic change
based on a Schumpeterian perspective, recogniz- and firm effectively change as needed, resulting
ing innovation as a primary means to achieve the in a higher performance. Hence, authors classi-
necessary organizational renewal for firms ad- fied under this perspective consider that firms
aptation and survival in the current business en- dynamic capabilities follow a schema such as
vironment, characterized by growing changes in external signals-interpretation-response.
technology, customers and competitors (Danneels, After a careful analysis of the definitions in-
2002). cluded in Table 1, we reach the same conclusion
The second approach, this is, the capability- than Zahra et al. (2006): broadly, dynamic capa-
building approach, is rooted both in the resource- bilities definitions are tautological. In this sense,
based view (Wernefelt, 1984; Barney, 1991) the three mentioned approaches define dynamic
and evolutionary economics (Nelson & Winter, capabilities based on its results: innovation, new
1982). According with the resource-based view, capabilities generation, and fit with external condi-
organizational capabilities may lead the firm tions, respectively. This tautological problem can
to achieve a competitive advantage at present. also be found in the resource-based view literature
Nevertheless, under an evolutionary perspec- (Priem & Butler, 2001).
tive, current attributes do not guarantee a firms We do not argue that dynamic capabilities do
future viability (OReilly & Tushman, 2008). A not lead to these results. Nevertheless, we argue
competitive advantage based in the same capa- that a concept, in this case dynamic capabilities,
bilities is not sustainable during a long period of cannot be described based on its output. If we do
time because organizational capabilities may be this, dynamic capabilities will be conceived as
eroded by external changes, such as new actions a black box (Sirmon et al., 2007). In this sense,
carried out by competitors (Collins, 1994; Helfat some of the cited authors have devoted consid-
& Peteraf, 2003; Sirmon, Hitt & Ireland, 2007). erably efforts trying to overcome this problem.
Hence, the capability-building approach under- For example, Helfat and Peteraf (2003) argue
387
Table 1. Main definitions and classification of dynamic capabilities concept
Main Contributions Dynamic Capabilities Definition

Innovation Approach
The innovative capacity is the architect of the process of creative destruction and
Schumpeter (1934) consists in those characteristics of entrepreneurs as key actors in the continuous change
process.
Define dynamic capabilities as the subset of the competence/capabilities which allow
Teece and Pisano (1994: 541) the firm to create new products and processes and respond to changing market circum-
stances
Dynamic capabilities enable firms to create new products and processes and respond
Helfat (1997: 339)
to changing market conditions.
If change is the norm, companies need to develop dynamic capabilities that can be
Zahra (1999: 40)
used as platforms from which to offer new products, goods, and services.
Ability of organizations to innovate and to adapt to changes in technology and mar-
Helfat and Raubitschek (2000: 975)
kets, including the ability to learn from mistakes.
Dynamic capabilities Include difficult-to-replicate enterprise capabilities required to
adapt to changing customer and technological opportunities. They also embrace the
Teece (2007: 1319, 1320)
enterprises capacity to shape the ecosystem it occupies, develop new products and
processes, and design and implement viable business models (2007: 1319-1320).
Capability-building approach
Define core competences evolution based on a hierarchic pyramid of organizational
Nelson (1991)
routines that take place in a Schumpeterian or evolutionary context.
Argues that there are certain organizational capabilities (meta-capabilities or high-order
Collins (1994)
capabilities) that drive the rate of change of ordinary capabilities.
In turbulent environments there is strategic value in being able to develop new capa-
Pisano (1994: 93)
bilities rapidly
The architectural competence o fan organization allows it to make use of its compo-
Henderson and Cockburn (1994: 66) nent competencies: to integrate them together in new and flexible ways and to develop
new architectural and component competences as they are required
The term dynamic refers to the capacity to renew competences. They define
dynamic capabilities as firms ability to integrate, build, and reconfigure internal end
Teece, Pisano and Shuen (1997: 515, 516)
external competences to address rapidly changing environments. Thus, they reflect an
organizations ability to achieve new and innovative forms of competitive advantage.
A dynamic capability for innovation in steel making is a capability whose output is
Winter (2000: 983)
not steel but new capabilities for making steel.
The Schumpeterian dynamic capability view highlights the importance of an alterna-
Makadok (2001: 388) tive rent-creation mechanism namely, capability-building which is rather different
from resource-picking.
Global dynamic capabilities is the creation of difficult-to-imitate combinations of
Griffith and Harvey (2001: 598) resources, including effective coordination of inter-organizational relationships, on a
global basis that can provide a firm a competitive advantage.
A dynamic capability is a learned and stable pattern of collective activity through
Zollo and Winter (2002: 340) which the organization systematically generates and modifies its operating routines in
pursuit of improved effectiveness.
Dynamic capabilities () enable the firm to reconfigure its resource base and adapt
to changing market conditions in order to achieve a competitive advantage. Absorp-
Zahra and George (2002: 185)
tive capacity is presented as a dynamic capability that influences the creation of other
organizational competences
Dynamic capabilities nature is fundamentally based on knowledge and requires the si-
Verona and Ravasi (2003: 579) multaneous presence of three processes at the organizational level: knowledge creation
and absorption, knowledge integration and knowledge reconfiguration.
388
Table 1. Continued
Main Contributions Dynamic Capabilities Definition
Innovation Approach
One can define dynamic capabilities as those that operate to extend, modify or create
Winter (2003: 991)
ordinary capabilities.
By definition, dynamic capabilities involve adaptation and change, because they build,
Helfat and Peteraf (2003: 997)
integrate, or reconfigure other resources and capabilities.
The abilities to reconfigure a firms resources and routines in the manner envisioned
and deemed appropriate by its principal decision-maker(s) Presence of rapidly
Zahra et al. (2006: 918; 921) changing problems (an environmental characteristic) for which the firm has the
ability to change the way the firm solves its problems (a higher-order capability to alter
capabilities).
The notion of dynamic is devoted to addressing the continuous renewal of organiza-
Schreygg and Kliesch-Eberl (2007: 914)
tional capabilities, thereby matching the demands of (rapidly) changing environments
Dynamic capabilities refer to the (inimitable) capacity firms have to shape, reshape,
Augier and Teece (2007: 179) configure and reconfigure the firms asset base so as to respond to changing technolo-
gies and markets.
Firms behavioural orientation constantly to integrate, reconfigure, renew and recreate
its resources and capabilities and, most importantly, upgrade and reconstruct its core
Wang and Ahmed (2007: 35)
capabilities in response to the changing environment to attain and sustain competitive
advantage.
An organizations dynamic capabilities refer to its capability to develop and seek
Ng (2007: 1486)
new resources and configurations that match the changing conditions of the market.
The first form of dynamic capability is the competence to build new competences,
Danneels (2008: 519, 520)
defined as ability of the firm to engage in exploration.
Dynamic capabilities refer to the ability of firms to maintain or create firm value by
Oliver and Holzinger (2008: 496-497) developing and deploying internal competences that maximize congruence with the
requirements of a changing environment.
Dynamic capabilities involve the organisational processes by which resources are
utilised to create growth and adaptation within changing environments. () these
Pettus et al. (2009: 188-189)
capabilities are the fundamental drivers of the creation, evolution and recombination of
other resources to provide new sources of growth.
Contingent approach
Dynamic capabilities consist of specific strategic and organizational processes like
product development, alliance, and strategic decision making that creates value for
Eisenhardt and Martin (2000: 1106)
firms within dynamic markets by manipulating resources into new value-creating
strategies.
Competitive advantage results from a firms strategic response to changes in its
Cockburn, Henderson and Stern (2000: 1129)
environment or to new information about profit opportunities.
Dynamic fit () represents the situation where an organization faces the necessity to
Zajac, Kraatz and Bresser (2000: 433) change (i.e., as defined by environmental an organizational contingencies) and does
change as needed, resulting in a performance benefit.
Use the term continuous morphing to describe profound transformations occurring
Rindova and Kotha (2001: 1264) inside the firm to achieve dynamic fit with these environments (hypercompetitive,
high-velocity or rapidly changing).
In particular, dynamic capabilities are conceived as a source of sustainable competitive
Lee, Lee and Rho (2002: 734) advantage in Schumpeterian regimes of rapid change where the window of profit-mak-
ing opportunities by selling existing products is limited.
Dynamic capabilities, by definition, vary with the level of market dynamism and en-
Aragn-Correa and Sharma (2003: 73)
able an organization to adapt to changes in the general business environment.
389
that dynamic capabilities are oriented to the gen- new market segment (Danneels, 2008). These new
eration, integration, or reconfiguration of firms technological and market capabilities are essential
resources and capabilities. Verona and Ravasi for firm survival in the face of changes affecting
(2003) propose that dynamic capabilities nature technology or customers demand patterns (Lavie,
is fundamentally based on knowledge and require 2006; Sirmon et al., 2007). So, at this point, it is
knowledge creation and absorption, knowledge necessary to consider the capability-building ap-
integration and knowledge reconfiguration. Simi- proach as the central perspective in the academic
larly, Zahra et al. (2006) consider that dynamic literature focused on a dynamic capabilities-based
capabilities consist in new reconfiguration of view of competitive advantage.
firms resources and routines. In the same way,
Augier and Teece (2007) include in their dynamic The Role of Environmental
capabilities definition the processes of shape, Dynamism
reshape, configure and reconfigure of the firms
assets base. Another valuable example is provided Another question emerging from the analysis of
by Wang and Ahmed (2007) when athors argue that the definitions included in Table 1 is the consid-
dynamic capabilities consist in firms behavioural eration of external factors as key element in the
orientation constantly to integrate, reconfigure, dynamic capabilities perspective. It can be seen
renew and recreate its resources and capabilities. how most authors include environmental condi-
Note that all these definitions have been classified tions as a fundamental factor of their dynamic
into the capability-building approach. capabilities definition. Furthermore, the tendency
Once this rider has been added, it can be seen to consider environmental dynamism increases
that the capability-building approach is the per- in the most recent works. This can be explained
spective in which more authors have been classi- because a growing body of literature argues that
fied. One explanation provided by the literature is the value of firm resources and capabilities is
that new capabilities generation is required both context-dependent (Collins, 1994; Brown &
for innovation as well as for adaptation to envi- Eisenhardt, 1997; Teece et al., 1997; Eisenhardt
ronmental turbulence (Henderson & Cockburn, & Martin, 2000; Rindova & Kotha, 2001; Priem
1994; Zahra & George, 2002; Dannels, 2002, & Butler, 2001; Barney, 2001; Helfat & Peteraf,
2008; Jansen et al., 2006; Lavie, 2006; OReilly 2003; Benner & Tushman, 2003; Jansen et al.,
& Tushman, 2008). Accordingly, we argue that, 2006; Lavie, 2006; Sirmon et al., 2007).
although different, the three approaches identified Under this reasoning, firms current capabili-
are not incompatible. Hence, new capabilities ties, while valuable if they can provide competi-
generation (capability-building approach) may tive advantage at present, do not ensure that the
allow the firm to innovate in products, processes or firm would be able to change in the face of a
business models (innovation approach), enabling new threat (Tidd, 2006; OReilly & Tushman,
it to be adapted to a turbulent environment (con- 2008). In this sense, rapid technological prog-
tingent approach). Therefore, new organizational ress is considered as the most important source
capabilities have to be considered as the direct environmental dynamism (Benner & Tushman,
output of dynamic capabilities. If a firm develops 2003; Uotila et al., 2009), being a serious threat
new technological capabilities, it may improve its of obsolescence in firms current technological
ability to produce better products, new products, and market capabilities, since new technology
or the same products at a lower cost. Similarly, if developed or assimilated earlier by competitors
a firm develops new market capabilities, it may will enable them to invent new products, improve
better serve its current customers, or to serve a the existing ones, or to produce at a lower cost
390
(Danneels, 2008; Uotila et al., 2009). Hence, under DYNAMIC CAPABILITIES AND
the dynamics of Schumpeterian external regimes, INNOVATION RADICALNESS
competitive advantage sustainability lies in firms
ability to continually reconfigure its technological Until now, we have argued that firms need to
capabilities base (Danneels, 2002, 2008; Benner continuously seek new technological and market
& Tushman, 2003). knowledge to develop their dynamic capabilities
Core competencies can represent a set of tacit and to be adapted to a dynamic environment.
and collective knowledge which is developed As Tidd points out, a central task in corporate
through learning processes (Nobre et al. 2010: strategy is (and perhaps more important), to
392). In this sense, firms survival in the face of identify and explore the new competencies that
external turbulence lies in its ability to accomplish must be added if the functional capability is not
an explorative learning that expands its current to become obsolete (2006: 8). But, where can
knowledge base, allowing organizational capa- firms find new knowledge that enables firms
bilities regeneration (March, 1991; Levinthal & capability reconfiguration? And how leads this
March, 1993; Danneels, 2002, 2008; Sirmon et capability renewal to firms adaptation to fast-
al., 2007; 0Reilly & Tushman, 2008; Uotila et changing competitive contexts? In this section we
al. 2009). However, it would be wrong to fully try to identify the basic sources of new knowledge
assimilate dynamic capabilities to environmental for organizations and argue that firms success
dynamism. This tendency to equate the presence (adaptation) in dynamic contexts is achieved
of dynamic capabilities to environmental condi- through translating new capabilities generation
tions is one of the main sources of confusion in the into more than just incremental innovations (Tidd,
literature (Zahra et al., 2006). Although it seems 2006). Again, following Tidd, the fit with exist-
clear that the usefulness of dynamic capabilities is ing competencies is an important consideration
higher in turbulent environments, it is necessary when determining new product development
to avoid confusions between external conditions strategy. This is particularly so for more novel
and firms internal capabilities (Zahra et al., 2006). or complex products (2006: 14). Alternatively,
In a similar fashion to the arguments given in the this author also suggest that there is an opposing
previous section when stating that dynamic capa- motive, consisting in learn or acquire new capa-
bilities should not be confused with their outputs, bilities. According to the exposed reasoning, firms
we must highlight here that neither should they should focus on this second motive more than on
be confused with the optimal conditions for their leveraging current capabilities in their innovation
implementation. process when facing environmental dynamism.
Based on the previous discussion, we define Additionally, Tidd also addresses an interesting
dynamic capabilities as firms ability to constantly problem in organizational learning research when
explore new market and technological knowledge he stays that much of the research on technology
in order to build new organizational capabilities. management and organisational change has failed
This ability is especially valuable in the face of to address the issue of organisational learning.
rapid changes in markets and/or technologies. Instead, it has focussed on learning by individuals
Thus, the greater the environmental dynamism, the within organisations (2006: 16). So, to overcome
greater should be the ability of the firm to engage this problem, we must depart from individual
in explorative learning that enables capability learning and to focus on explorative learning at
reconfiguration. organizational level.
391
In doing so, literature argues that, at orga- demand (Greve, 2007: 945), so the essence of
nizational level, there are two basic sources of exploration is experimentation with new alterna-
new knowledge: internal and external sources. tives (March, 1991: 85). This process should not
According to Bierly and Chakrabarti, internal be based only on external sources, but also on the
learning occurs when members of the organization firms uncharted internal knowledge. As Grant
generate and distribute new knowledge within the argues, the essence of organizational capabili-
boundaries of the firm, while external learning ties is the integration of individuals specialized
occurs when boundary spanners bring in knowl- knowledge (1996: 375). Thus, according to Kogut
edge from an outside source via either acquisition and Zander (1992), new capabilities creation relies
or imitation and the knowledge is then transferred on firms ability to generate new applications for
through the organization (1996: 124). These and existing knowledge and to discover the unexplored
other authors sustain that internal learning allows knowledge located inside the firm, so, internal
the firm just to improve its current capabilities learning may be also explorative when it promotes
(knowledge exploitation), whereas external learn- new combinations of current knowledge (Van den
ing is required to develop a broader knowledge Bosch et al., 1999; Rosenkopf & Nekar, 2001;
base (knowledge exploration), becoming critical in Jansen et al., 2006; Danneels, 2008). A firms
dynamic environments. In this sense, Lavie (2006) ability to novelty recombine and utilize its current
carries out an interesting review of the method knowledge base is what Kogut and Zander (1992)
for capability reconfiguration through three main define as combinative capabilities. This internal
mechanisms: capability evolution, substitution and knowledge combination enhances knowledge
transformation. Based on evolutionary econom- exchange between individuals and disciplinary
ics, capability evolution involves incremental boundaries and generates new organizational
learning through experimentation from internal knowledge (Henderson & Cockburn, 1994; Jansen
sources of knowledge. Capability substitution is et al., 2006; Tidd, 2006). In other words, bound-
rooted in the competence-enhancing/destroying aries matter; here it is not only the boundary that
framework and involves radical learning from separates the organization from its environment,
external sources, such as industry associations, but it is also internal boundaries that have arisen to
alliance partners, newly acquired subsidiaries, organize various technological subunits (Rosen-
and newly hired employees. Finally, capability kopf & Nekar, 2001: 289) within the organization.
transformation is an intermediate mechanism for This reasoning leads Rosenkopf and Nekar (2001)
firm capabilities reconfiguration that combines to propose two types of organizational knowledge
internal and external learning. exploration: external boundary-spanning and
By contrast, many other authors argue that internal boundary-spanning.
not only external knowledge, but also internal Therefore, it seems that firms can develop its
knowledge sources are important for developing ability to build new capabilities through explor-
a successful explorative learning process (Hen- ative learning by investing in a special kind of
derson & Cockburn, 1994; Zahra, 1999; Zollo & internal learning based on its current knowledge
Winter, 2000; Rosenkopf & Nekar, 2001; Tidd, combination, and by creating linkages to external
2006; Jansen et al., 2006; Morrow, Sirmon, Hitt knowledge sources. As Nobre et al. (2010) stays,
& Holcomb, 2007; Sirmon et al., 2007; Danneels, organizational capabilities are key sources for
2008). innovation, and the higher the degree of novelty
Attending to its definition, exploration is incorporated in an innovation, the higher must
search for new knowledge, use of unfamiliar tech- be the required firms technological capabilities
nologies, and creation of products with unknown renewal for its development (Tidd, 2001; Benner
392
& Tushman, 2003; Dahlin & Behrens, 2005). So, of the key components of dynamic capabilities.
in the following subsections we present the role Table 2 presents the identified mechanisms that,
of the two identified learning mechanism on in- according to literature review, enable external
novation radicalness. knowledge acquisition by organizations.
Henderson and Cockburn (1994) argue that
External Knowledge Acquisition one key form of integrative or architectural
and Innovation Radicalness competences especially relevant as source of
sustainable competitive advantage in a dynamic
External knowledge acquisition by firms is the context, as pharmaceutical research, is the abil-
way in which organizations carry out an external ity to access new knowledge from outside the
boundary-spanning exploration that integrates boundaries of the organization (1994: 66). As
knowledge from other organizations (Rosenkopf Rosenkopf and Nerkar (2001) highlights, greater
& Nerkar, 2001). We consider this element as one levels of reliance on the firms own prior knowl-
Table 2. Mechanisms for external knowledge acquisition
Mechanism Author
Kogut and Zander (1992); Karim and Mitchell (2000); Zahra and George
Mergers and acquisitions
(2002); Lavie (2006)Morrow, et al. (2007)
Kogut and Zander (1992); Mowery, Oxley and Silverman (1996); Dyer and
Singh (1998); Lane and Lubatkin (1998); Zahra (1999); Beinhocker (1999);
Alliances and cooperation agreements Tidd (2001); Zahra and Nielsen (2002); Zahra and George (2002); Blyer and
Coff (2003); Lavie (2006); Tidd (2006); Morrow, et al. (2007); Danneels
(2008)
Tidd (2001); Jansen et al. (2005); Galende (2006); Teece (2007); Arbuss
Information exchanges with customers and suppliers and Coenders (2007); Grimpe and Sofka (2009); Escribano et al. (2009);
Murovec and Prodan (2009); Pettus et al. (2009)
Information exchanges with competitors and comple- Galende (2006); Teece (2007); Grimpe and Sofka (2009); Escribano et al.
mentary (2009); Murovec and Prodan (2009)
Benchmarking activities Leonard-Barton (1992); Helfat and Raubitschek (2000); Teece (2007)
Reverse engineering Kogut and Zander (1992); Galende (2006)
People, teams or organizational units specifically de- Cohen and Levinthal (1990); Helfat and Raubitschek (2000); Schoenmakers
voted to capture external knowledge (gatekeepers) and Duysters (2010)
Henderson and Cockburn (1994); Lenox and King (2004); Galende (2006);
Arbuss and Coenders (2007); Danneels (2008); Bierly et al (2009); Grimpe
Relations with universities and research centres
and Sofka (2009); Escribano et al. (2009); Fabrizio (2009); Murovec and
Prodan (2009)
Outsourcing and licensing Zahra (1999); Zahra and Nielsen (2002); Zahra and George (2002)
Kogut and Zander (1992); Zahra and Nielsen (2002); Figueiredo (2003);
External personnel recruitment
Lavie (2006)
Zahra and Nielsen (2002); Figueiredo (2003); Jansen et al. (2005); Murovec
Active use of technical assistance and consultants
and Prodan (2009)
Lavie (2006); Arbuss and Coenders (2007); Danneels (2008); Escribano et
Participation in professional associations activities
al. (2009)
Attendance and/or participation in congresses, confer-
Arbuss and Coenders (2007); Danneels (2008); Murovec and Prodan (2009)
ences, exhibitions and fairs
Scientific and professional journals Arbuss and Coenders (2007); Danneels (2008); Escribano et al. (2009)
External R&D Cohen and Levinthal (1990); Murovec and Prodan (2009)
393
edge is associated with more innovation, but this is especially evident in the concept and selection
innovation has a lower level of novelty, because stages of innovation development (Tidd, 2006).
not all technological knowledge can be effec- For example, scientific journals may be a source
tively generated or embodied solely within the of great deal of publicly available knowledge for
firm (Bierly et al., 2009). This occurs because R&D teams (Escribano et al., 2009). Similarly, col-
inwardly focused learning is one of the hallmarks laborations with universities and research centres
of core competence. But such myopic behaviour may enable the firm to access more rapidly and
leads to the development of core rigidities (Leon- at a lower cost to new technological knowledge
ard-Barton, 1993) and competency traps (Levin- necessary for new product development (Fabrizio,
thal & March, 1993). In other words, it is not 2009). Likewise, participation in professional
possible to carry out an explorative learning only associations activities may lead the firm to have
based on firms current knowledge combination access to new trends in the market and technology,
(Sirmon, et al., 2007). Therefore, firms need providing some clues about the future evolution
continually acquire diverse and new knowledge of the industry (Danneels, 2008). In addition, if
that serve as the seed for future technological organization uses gatekeepers, managers will
developments (Miller, Fern & Cardinal, 2007; be able to take new initiatives to react faster to
Escribano et al., 2009). changing market and technological conditions
External knowledge acquisition has been (Andersen, 2004). These arguments lead us to
extensively studied in the field of absorptive ca- derive our first proposition.
pacity literature (Cohen & Levinthal, 1990; Van
den Bosch et al., 1999; Zahra & George, 2002; Proposition 1. External knowledge acquisi-
Jansen et al., 2005; Lane, Koka & Pathak, 2006; tion by a firm positively influences the degree of
Todorova & Durisin, 2007). In their seminal paper, novelty of its innovations.
Cohen and Levinthal define absorptive capacity
as the ability of a firm to recognize the value of Internal Knowledge Combination
new, external information, assimilate it, and apply and Innovation Radicalness
it to commercial ends (1990: 128). This ability to
scan and acquire new external knowledge is criti- According to the reasoning followed in this chap-
cal for firm innovation (Zahra & George, 2002). ter, we consider internal knowledge combination
Recent empirical results in the field of radical by firms as the second key component of dynamic
inventions suggest that emergent technologies are capabilities. It can be defined as the way in which
key to achieve radical innovations (Schoenmakers organizations carry out an internal boundary-
& Duysters, 2010), highlighting the importance spanning exploration that integrates technologi-
of speed in understanding emergent technologies. cally distant knowledge residing within the firm
Learning from external sources expands the firms (Rosenkopf & Nerkar, 2001). As in the previous
knowledge base, enhances the recognition of op- case, we have carried out a literature review to
portunities and threats, and provides access to new identify the mechanisms for internal knowledge
ideas that promote the generation of new techno- combination by organizations (Table 3).
logical capabilities (Miller et al., 2007; Danneels, In addition to scanning the environment, the
2008). As more radical innovations are based on ability to integrate knowledge flexibly across
distant knowledge and capability reconfiguration, disciplinary () boundaries within the organiza-
it is expected that external knowledge acquisition tion (1994: 66) is also considered by Henderson
by organizations contributes to develop innova- and Cockburn as a key form of architectural
tions incorporating a higher degree of novelty. This competences. This internal organizational knowl-
394
Table 3. Mechanisms for internal knowledge combination
Mechanism Author
Lenox and King (2004); Morrow, et al. (2007); Arbuss and Coenders
Internal R&D
(2007); Murovec and Prodan (2009)
Cohen and Levinthal (1990); Bierly and Chakrabarti (1996); _Arbuss
R&D Intensity
and Coenders (2007)
Cohen and Levinthal (1990); Henderson and Cockburn (1994); Zahra
Cross-functional and inter-disciplinary teams and Nielsen (2002); Jansen et al. (2005); Tidd (2006); Leskovar-Spaca-
pan and Bastic (2007); Schoenmakers and Duysters (2010)
Shared spaces Figueiredo (2003)
Rosenbloom (2000); Zahra and Nielsen (2002); Figueiredo (2003);
Shared-problem solving
Leskovar-Spacapan and Bastic (2007); Danneels, (2008)
Regular meetings to discuss new market and technology trends Zahra and Nielsen (2002); Figueiredo (2003); Jansen et al. (2006)
Van den Bosch et al. (1999); Rosenbloom (2000); Andersen (2004);
Participation in decision-making
Jansen et al. (2005)
Tolerance to failure Leskovar-Spacapan and Bastic (2007); Danneels (2008)
Organizational structure that promotes flexible information Van den Bosch et al. (1999); Rosenbloom (2000); Zahra and Nielsen
flow (2002); Jansen et al., (2006); Leskovar-Spacapan and Bastic (2007)
Van den Bosch et al. (1999); Zahra and Nielsen (2002); Jansen et al.
Promotion of informal relationships
(2006)
Cohen and Levinthal (1990); Van den Bosch et al. (1999); Jansen et al.
Job rotation
(2005)Figueiredo (2003)
Flexible job descriptions Van den Bosch et al. (1999); Leskovar-Spacapan and Bastic (2007)
Van den Bosch et al. (1999); Zahra (1999); Murovec and Prodan
Firms investments in training
(2009)
edge combination is what Kogut and Zander important for knowledge creation and application,
(1992) defined in their seminal paper as combina- and hence for innovation. As Tidd points out,
tive capabilities. the development of new products may demand
In contrast to the conventional wisdom that new technology-product-market linkages and,
radical innovations are based less on current therefore, require close collaboration between
knowledge (Bierly & Chakrabarti, 1996; Lavie, different divisions (2006: 18). This author con-
2006), Schoenmakers and Duysters (2010) find siders information distribution a key process for
that they are to a higher degree based on existing organizational learning and innovation, defining
knowledge than non-radical innovations. These it as the process by which information from dif-
results have important implications for the man- ferent sources within an organization is shared,
agement of firms internal knowledge, showing leading to new knowledge or understanding. This
the need for more coordination of the knowledge reasoning leads Tidd to stay that firms with fewer
within the organization, and more internal open- divisional boundaries are associated with a strategy
ness because different divisions might possess based on capabilities-broadening, whereas firms
knowledge that, when put together, could poten- with many divisional boundaries are associated
tially deliver a radical innovation. with a strategy based on capabilities-deepening
Again, it can be seen how, as Rosenkopf and (2006: 19). So, attending to the characteristics of
Nekar (2001) maintain boundaries matter. But not both incremental and radical innovations, firms
just external boundaries, but also internal ones are with many (or strong) divisional boundaries tend
395
to develop more incremental innovations, whereas market views and technological perspectives to
organizations with less (or weak) divisional bound- be considered in innovative decisions, which
aries tend to develop more radical innovations. should lead to more marketable radical inventions
Van den Bosch et al. (1999) refer to lateral (Schoenmakers & Duysters, 2010). Job rotation of
ways of coordination that enhance the scope and employees who each possesses diverse and varied
flexibility of organizational learning through knowledge enhances the diversity of background,
relations between its members and groups. This increases the problem-solving skills and develops
kind of capabilities can be developed as a result organizational contacts that may increases employ-
of training and job rotation, cross-functional in- ees ability to identify technological opportunities
terfaces and participation of subordinates in the (Jansen et al., 2005). In the same way, because
decision-making process (Van den Bosch et al., radical innovation requires non-routine problem
1999; Jansen et al., 2005). This internal knowl- solving and deviation from existing knowledge,
edge combination enhances knowledge exchange organizational forms promoting formalization
between different individuals and groups within and centralization of decision making are likely
the firm, so encouraging the development of new to reduce the degree of novelty of firms innova-
knowledge and promoting radical innovation. As tion (Jansen et al., 2006). Accordingly, our second
Zollo and Winter highlights, important collective proposition stays as follows:
learning happens when individuals express their
opinions and beliefs, engage in constructive con- Proposition 2. Internal knowledge combina-
frontations and challenge each others viewpoints tion by a firm positively influences the degree of
(2002: 341). This constructive conflict refers to novelty of its innovations.
the vigorous debate of ideas, beliefs, and assump-
tions by organizational members that enable the Complementarities between
discussion of opposite views, leading to make External Knowledge Acquisition and
better decisions and to develop new organizational Internal Knowledge Combination
capabilities required for incorporate major changes
in technological trajectory (Danneels, 2008). In previous paragraphs we have exposed our
R&D intensity of a firm has been tradition- reasoning about the effect that, ceteris paribus,
ally used as a primary input variable to internal external knowledge acquisition or internal knowl-
learning (Bierly & Chakravarty, 1996). In this edge combination has on innovation radicalness.
sense, internal R&D is a way to put together the However, nothing was mentioned about the
knowledge possessed by the firms scientific staff. possible existence of a joint effect between both
Although Cohen and Levinthal (1990) used this elements. In other words, what could be the ef-
variable as a proxy of firms absorptive capacity, fect on innovation radicalness if a firm develops
they were based on their argument that firms need its ability in external knowledge acquisition and
some previous related knowledge to assimilate internal knowledge combination simultaneously?
new external information. Another example of Indirectly, we have already answered this question
internal knowledge combination is the use of in previous discussion when proposing both ele-
cross-functional interfaces. This practice support ments as the key components of firms dynamic
organizational members in rethinking the nature of capabilities that enable a major renewal of firms
existing products and services and revisit the ways technological competences and subsequently in-
in which components are integrated (Henderson troduce a higher degree of novelty on innovations.
& Cockburn, 1994; Jansen et al., 2005). Similarly, As noted, Schoenmakers and Duysters (2010)
participation in decision-making promotes more results highlight the importance of speed in un-
396
derstanding emergent technologies for innova- is, firms dynamic capabilities) on the degree of
tion radicalness. But this speed is higher when novelty of its innovations. So, if a firm acquires
a firm is able not only to gets an early access to new external knowledge and combines current
new technology as consequence of great efforts and new acquired knowledge its innovations will
devoted to environmental scanning, but also when be more radical than if it only develops one of
it is able to carry out a fast dissemination of this these abilities.
new external knowledge within the organization
throw internal knowledge combination. In this Innovation Radicalness
sense, authors conclude that firms that are quick and Adaptation to
in understanding the possibilities that emergent Environmental Dynamism
technologies posses, and that therefore are able
to combine this knowledge with mature and Benner and Tushman stays that the ability to
well understood knowledge, might be better at develop new technological capabilities rapidly is
delivering radical inventions (Schoenmakers & especially critical in environments characterized
Duysters, 2010: 1057). by rapid innovation and change (2003: 249). We
Following our reasoning, it seems clear that have argued that this occurs because the value
external knowledge acquisition is imperative to of firms resources and capabilities, that is, its
introduce new knowledge within the organiza- potential to generate economic rents, is context-
tion necessary to develop more radical innova- dependent (Priem & Butler, 2001; Barney, 2001;
tions. Nevertheless, although necessary, external Benner & Tushman, 2003; Jansen et al., 2006;
knowledge acquisition per se may be not enough Sirmon et al., 2007), and dynamic environments
to carry out a complete explorative organizational are value-destroying (Teece et al., 1997; Uotila
learning required to incorporate more novelty on et al., 2007). In other words, firms current tech-
innovations. If not only external, but also internal nological and market capabilities, while valuable
boundaries matter (Rosenkopf & Nekar, 2001), in that they can provide competitive advantage
new external knowledge acquired by the firm may at present, do not ensure that the firm would be
be trapped by internal boundaries and therefore able to maintain its competitive advantage in
that knowledge will not reach the knowledge place the face of rapid external changes (OReilly &
where it would be relevant within the organization, Tushman, 2008).
or not at time (and speed also matters - Schoenmak- But the market does not value firms capabili-
ers & Duysters, 2010). This may explain why firms ties directly. It values organizational capabilities
exposed to the same amount of external knowledge indirectly through valuating their outputs. And
flows might not derive equal innovation results in this chapter we have followed the argument
(Escribano et al., 2009). In addition to external that innovation is an output of an organizations
knowledge scanning, firms need to develop its technological capabilities (Tidd, 2006; Nobre et
ability in internal knowledge combination in al., 2010). Concretely, we have argued that inno-
order to rapidly understand, distribute and apply vation radicalness is an output of firms dynamic
current and newly acquired external knowledge capabilities that enable organizational capabilities
to develop radical innovations. Following this, reconfiguration. Attending to its definition, incre-
we reach our third proposition. mental innovations are based on firms current
technological capabilities, whereas more radical
Proposition 3. There is a complementary ef- innovations are based on the development of new
fect between firms external knowledge acquisi- technological capabilities (Tidd, 2001; Benner
tion and internal knowledge combination (that & Tushman, 2003; Dahlin & Behrens, 2005). In
397
this sense, as Jansen et al. points out, dynamic contexts that develop more radical innovations
environments make current products and services will increase their long-term performance.
obsolete and require that new ones be developed
(2006: 1664). Accordingly, if competitors (current Proposition 4. Environmental dynamism
or potential) introduce new products based on a positively moderates the relationship between
new technology that clearly outperforms a firms the degree of novelty of firms innovations and
products and technology, and the firm just tries its long-term performance.
to improve its current products, the results will The reasoning and derived propositions devel-
be highly unsatisfactory. This occurred to IBMs oped in this chapter can be graphically represented
slow response to personal computers (Benner & as it appears in our theoretical research model (Fig-
Tushman, 2003) or in Kodaks inertia at introduc- ure 1). Note that propositions 1, 2 and 3 combine
ing in digital photography (Kaplan & Henderson, the arguments offered by capability-building and
2005). In both cases, radical innovations developed innovation approaches identified when analyzing
by other firms fundamentally changed the nature dynamic capabilities concept. That is, the develop-
of the industry and IBM and Kodak had to spend ment of new organizational capabilities leads to
billions to survive. Many other firms without those innovations with a higher degree of novelty. On
financial resources directly died. the other hand, proposition 4 combine innovation
So, to reduce this threat of obsolescence, orga- and contingency approaches. In this case, radical
nizations must introduce more radical innovations innovation is not an output, but an input to firms
that depart from existing products, services and adaptation to its context. In this way, our model
markets. Organizations that pursue such innova- highlights the central role played by innovation
tions can capitalize on changing circumstances by radicalness in what Tidd (2006) denominate the
creating opportunities for above-normal return by competence cycle.
targeting premium market segments and creating
new niches (Levinthal & March, 1993). Accord-
ingly, we expect that firms operating in dynamic
Figure 1. Dynamic capabilities effect on innovation radicalness and adaptation
398
CONCLUSION Considering the argument given by Benner and

Tushman that because organizational outcomes
Inadequate responses given by organizations to are affected by delayed or inadequate responses
growing environmental dynamism (especially to to environmental turbulence, (...) adaptation to
rapid technological progress) found in a greater environmental uncertainty and variation requires
number of competitive landscapes may be the similar variety within the firm (2003: 250), this
explanation of the reduction in average life chapter has tried to theoretically identify the orga-
expectancy of firms in recent times (OReilly nizational antecedents of innovation radicalness,
& Tushman, 2008). In this sense, as people do, since radical innovations are based on changes
organizations tend to fail in a success trap, that in firms technological trajectory and associated
is, firms are inclined to repeat the same actions organizational competencies. In other words, we
that have been previously rewarded (Levinthal have tried to answer the question of what attributes
& March, 1993). This reasoning is supported by lead firms to achieve variety. In doing so, we have
recent empirical results suggesting that stabilised drawn on the dynamic capabilities-based view of
companies tend to systematically overemphasize competitive advantage.
exploitation (Uotila et al., 2009). Such behaviour Our theoretical review and analysis of the con-
leads firms to specialize in exploiting their current cept has leaded us to define dynamic capabilities
knowledge domain, thus being more efficient. as firms ability to constantly explore new market
However, if the decision-maker adopts this be- and technological knowledge in order to build
haviour in a rapid change context, its decisions new organizational capabilities and to consider
will be generally unsatisfactory, since in this type this ability especially valuable in the face of rapid
of environments new challenges do not usually changes in markets and/or technologies. This
coincide with the already passed. As OReilly & definition constitutes an attempt to integrate the
Tushman highlight, being large and successful three identified approaches on dynamic capabili-
at one point in time is no guarantee of continued ties in a sequential way: new capabilities genera-
survival (2008: 186). tion (capability-building approach) is necessary
So, understanding why some organizations to develop more radical innovations (innovation
sustain their competitive advantage when facing approach), enabling firms adaptation to environ-
environmental dynamism while others can not has mental dynamism (contingent approach).
emerged as one of the essential questions for re- The next step was to identify the mechanisms
cent strategic management literature (Teece et al., that allow firms to carry out an explorative learning
1997; Jansen et al., 2006; Uotila et al., 2009). The at organizational level (that is, to develop their dy-
efforts directed in answering this question have namic capabilities). By reviewing organizational
supplanted traditional and more static theories learning literature, we have identified several
of strategy, such as industrial economy (Porter, mechanisms that can be classified into two fac-
1981) or the resource-based view (Wernefelt, tors: external knowledge acquisition, which allows
1984; Barney, 1991), with dynamic approaches the firm to have access to externally generated
exploring how some firms acquire, recombine and information; and internal knowledge combination,
integrate their resources to adapt to market and which leads the firm to newly recombine current
technological changes (Tidd, 2006; OReilly & and acquired knowledge and to distribute it along
Tushman, 2008). Dynamic capabilities framework internal boundaries.
is one of the most promising approaches in this Taking into account both organizational learn-
arena (Teece et al., 1997; Zahra et al., 2006). ing mechanisms, we have derived a theoretical
model linking dynamic capabilities and firms
399
adaptation to environmental dynamism proposing or product line extensions, whereas technology

that innovation radicalness plays a central role push is necessary for more radical innovations.
on this process, that is, radical innovations are In the same line, it would be also interesting
considered an output of dynamic capabilities and, to investigate if some mechanisms for external
at the same time, an input of firms adaptation to knowledge acquisition may be more adequate
environmental dynamism. So, managers of firms than others for developing radical innovations
operating in rapid change contexts should promote depending on the industry in which firms oper-
some of the identified mechanisms for explorative ate. For example, it seems that collaborations
organizational learning in order to develop more with universities and research centres is highly
than just incremental innovations that may be important in experimental sciences sectors,
rapidly obsolete in their competitive arenas. such us pharmaceutical industry (Henderson &
Cockburn, 1994), whereas in the automobile
industry it could be more important to develop
FUTURE RESEARCH DIRECTIONS collaborations with suppliers. Similarly, differ-
ent competitive sectors may demand different
The first research challenge emerging from our mechanisms for internal knowledge combination.
theoretical analysis consists in to carry out em- Just few recent studies have tried to fill this gap,
pirical tests. Most of the empirical studies in the and have focused exclusively in some mechanism
field of dynamic capabilities are qualitative (Wang for external knowledge acquisitions, such us col-
& Ahmed, 2007). This fact, again, underscores laboration with universities (Bierly et al., 2009).
the initial state of the perspective. Our work has In this sense, the results obtained by Grimpe &
highlighted some measures and possible scales Softka (2009) support this reasoning. These au-
for operationalizing dynamic capabilities based thors find that a search pattern that targets market
on internal organizational process which may be knowledge (customers and competitors) provide
very useful for researchers interested in this field. superior innovation success in low-technology
In addition to innovation, it may be interest- sectors, whereas technological knowledge leads
ing to empirically address the link between the to higher innovation success in high-technology
two explorative learning mechanisms proposed sectors. It can be explained because, as Tidd
and other elements of firms strategy, such as (2006) argues, market knowledge contributes
diversification, changes in competitive strategy or to more incremental innovations which lead to
higher levels of internationalization, among oth- better results in relatively static environments,
ers. All of these strategic decisions should require whereas technological knowledge contributes
new knowledge on markets and technology to be to develop more radical innovations leading to
successful and dynamic capabilities may lead to higher performance in turbulent environments.
changes not only in the resource and capabilities But more evidence is needed.
base, but also in the way that they are managed In addition, the moderating role of environ-
and in where they are employed. mental dynamism also needs to be tested. If our
One relevant research issue consists in to de- proposition that predicts a greater effect of radical
terminate what external knowledge sources may innovations on firm performance is supported,
have a higher impact on the degree of novelty important managerial implications will be derived.
of innovations. This is related to the debate on In this sense, managers should overcome their risk-
market pull vs. technology push knowledge taking aversion and try to increase their emphasis
strategies. In this sense, Tidd (2006) argues that on exploration when the environment requires
market pull is better for incremental adaptations it. Our review has highlighted some mechanism
400
that managers may use in order to promote Benner, M. J., & Tushman, M. L. (2003). Ex-
knowledge exploration, and as a result innovation ploitation, exploration, and process management:
radicalness, in their organizations (Tables 2 and The productivity dilemma revisited. Academy of
3). Again, empirical research about exploration Management Review, 28(2), 238256.
of new knowledge, innovation radicalness and
Bierly, P. & Chakrabarti, A. (1996). Generic
environmental dynamism is very scarce (Jansen
knowledge strategies in the U.S. pharmaceutical
et al., 2006; Danneels, 2008, Uotila et al., 2009),
industry. Strategic Management Journal, 17(Win-
so the gap is just beginning to be filled.
ter Special Issue), 123-135.
Bierly, P. E., Damanpour, F., & Santoro, M. D.
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406
Section 5
R&D&T Management and
Innovation
408
Chapter 22
Research Profiles:
Prolegomena to a New Perspective
on Innovation Management
Gretchen Jordan
Sandia National Laboratories, USA
Jonathon Mote
Southern Illinois University, USA
Jerald Hage
University of Maryland, USA
ABSTRACT
Despite the increasing importance of the management of research for innovation, the range of differ-
ences among types of research, as well as projects and programs, is not adequately captured in current
theories of either project or organizational innovation. This chapter offers preliminary discussions for
a new perspective about alternative styles of management for different types of research, whether basic,
applied, product development, manufacturing, quality control or marketing. Based on these discussions,
the chapter proposes a framework for a new perspective of innovation management, called Research
Profiles, which is derived from a literature review and extensive field research. This new perspective
delineates four research profiles on the basis of two dimensions of research objectives and two dimen-
sions of research tasks. In matching the research objectives and tasks, we identify inherent dilemmas
that managers must address and this developing perspective suggests some appropriate research man-
agement approaches.
DOI: 10.4018/978-1-61350-165-8.ch022
Research Profiles
INTRODUCTION than the organization, the whole organization,

and inter-organizational networks of various
Despite the central importance of scientific and kinds. Indeed, what makes a proposed theory of
technological research, including product develop- management styles necessary is the considerable
ment, for national competitiveness and security, at range in the ways scientific and technology re-
present there is not an adequate theory about the search is organized. While many small research
appropriate managerial styles needed to address projects funded by the National Science Founda-
alternative kinds of research objectives at the tion (NSF) and the National Institutes of Health
research project, program or inter-organizational (NIH), such as those found in academia, tend to
level. Organizational innovation theory stemming be the standard structure, a considerable amount
from Burns and Stalker (1961) typically focuses on of research is conducted in large-scale organiza-
the entire organization and, we would suggest, one tions and programs, such as mission agencies
organizational model (the organic organization), like the National Aeronautics and Space Admin-
rather than recognizing the existence of differ- istration (NASA) and the National Oceanic and
ent kinds of research work. More critically, the Atmospheric Administration (NOAA), as well as
organic model does not include either the concept large scale inter-organizational research programs
of complexity (Brown & Eisenhardt, 1995; Hage, such as the Human Genome Project. For the same
1999) or external networks of expertise, which are reason, the new and growing literature on projects
precisely the ones that are increasingly important (Brown and Eisenstadt, 1995) overlooks what
in the growth of knowledge network communities might be called Big Science as represented in
(Mohrman, Galbraith, & Monge, 2004; Shinn, the research conducted at the large national and
2002), and the spread of inter-organizational re- international laboratories such as Argonne in the
lationships (Alter & Hage, 1993; Hagedoorn & US and CERN in Switzerland.
Duysters, 2002; Powell, 1998; Powell, Koput, & Further, as Clarke (2002) has discussed in
Smith-Doerr, 1996; Van De Ven & Polley, 1992). comprehensive detail, the management of a large
Indeed, in the organizational innovation literature number of researchers is very different from the
there is only one study that examines the structure typical management issues involved in contem-
and performance of research laboratories and it porary firms or public bureaucracies. Among
does not include external relationships of any other differences are the oft-cited assertions that
kind (Hull, 1988). researchers are more motivated by intellectual
Although we are beginning to see an increasing curiosity than monetary compensation, the longer
number of studies of research labs (Brown, 1997; and more uncertain time horizons for success-
Joly & Mangematin, 1996; Jordan, Streit, & Matia- ful objectives, and, perhaps most importantly,
sek, 2003; Menke, 1997), inter-organizational al- work that is seldom standardized and difficult
liances (Gomes-Casseres, 1996) and a few studies to evaluate.
of research consortia (Browing, Beyer, and Shelter, While a theory about the diversity of research
1995), the fact remains that none of these studies management styles would necessarily differ from
have connected the measurement of scientific and more general theories of organizations, the logic
technological research objectives, to the nature of in the construction of our perspective is basically
the research tasks and their appropriate manage- the same. First, one must specify particular kinds
rial styles. The research literatures cited above of research objectives and identify the potential
stand largely in isolation, often ignoring other trade-offs. Then one must also distinguish differ-
kinds of research work. Specifically, the level of ent kinds of research work and tasks. Finally, the
the project is overlooked, which is a smaller unit management styles appropriate for the linking of
409
Research Profiles
the typology of research tasks with a typology ignores the concept of complexity, which has
of research objectives at the levels of project, proven to be fundamental when combined with the
program and inter-organization networks have organic model and the strategy of risk-taking in
to be determined. In this chapter, we present our explaining differences in innovation rates (Hage,
argument for a diversity of research management 1999). Finally, as argued previously, the organic
styles in three sections. First, we provide a more model is not designed to handle the varying sizes
detailed justification of the need for our perspec- of units in which research is conducted, from
tive on of management styles. Second, we specify the very small project within an organization to
a typology of research work and a typology of the very large mission agencies such as NOAA
research objectives and provide a theoretical and NASA or a research consortium such as SE-
linkage between the two. Finally, we offer our MATECH (Browning, 1995) or various strategic
proposed view of Research Profiles and discuss alliances (Gomes-Casseres, 1996).
the managerial styles necessitated by the kinds More recently, the importance of both the orga-
of management challenges that are presented in nizational learning perspective (Grant, 1996; Kim
each profiles combination of research tasks and & Wilemon, 2007) and the theory of idea innova-
research objectives. tion networks (Hage & Hollingsworth, 2000; Kline
& Rosenberg, 1986) are implicitly calling attention
to the importance of research as a mechanism for
BACKGROUND: THE NEED FOR A learning. Further, these perspectives suggest the
NEW PERSPECTIVE OF RESEARCH importance of inter-organizational networks that
MANAGEMENT STYLES connect two or more of the six arenas of research:
basic, applied research, product development,
Essentially, we identify two lines of argument manufacturing research, quality research, and
for justifying a new perspective of management commercialization research. In fact, the latter
styles. We take as a given that the central impor- literature necessitates a considerable revision
tance of scientific and technological research, not of the organic model, specifically to allow for
only for competitiveness but many other national external relationships.
goals, speaks to the need for greater attention. In short, the organic model, and organizational
First, the closest appropriate specialty, namely innovation research in general, needs to be linked
organizational innovation research, needs to be in various ways to the research project literature
altered in the light of new theoretical and concep- (Brown & Eisenhardt, 1995; Hobday, 1998;
tual developments (see Hage, 1999). Second, the Shenhar, 2001) and the abundant literature on
literature on scientific and technological research inter-organizational relationships cited above. One
is missing a conceptual apparatus that would of the reasons for this is the dramatic changes that
allow for the accumulation of findings across a have occurred because of the explosive growth
myriad of studies. and globalization of R&D and the way in which
The first argument is based on the fact that most science and technology are evolving (Hage &
current and past innovation research continues Hollingsworth, 2000). Furthermore, the linkages
to be dominated by Burns and Stalkers (1961) between arenas (for example basic and applied) of
seminal work on the organic model. In many ways, research are usually at the project/program level
this model has become outdated. For example, the and therefore research projects and the problems
model is largely focused on new product devel- of how to manage them should be the analytical
opment by engineers, rather than scientific and focus.
technological research. This model also largely
410
Research Profiles
The second line of reasoning that justifies the fundamental dilemmas, tensions and prob-
the need for a theory of research management lems of conducting research. Since our interest
styles is that much of the social studies of science is in making meaningful distinctions, we want to
literature have emphasized concrete categories isolate multiple dimensions of research objectives
rather than general dimensions that would allow and tasks. Another concern is to connect choices
one to accumulate evidence about how best to about objectives as much as possible to the exist-
manage research. For example, the outcomes ing literature and, in particular, to the literature
of research are typically measured in concrete on innovation.
categories, such as papers, patents, peer review To provide new insights about research
assessments, and citations. As we discuss below, management styles across a wide range of dif-
we propose a reconceptualization of these ideas ferent kinds of research projects, programs and
so that they can be used as general dimensions, inter-organizational networks, we conducted an
such as the degree of radicalness of the outcome of inductively-based exploratory study, funded by
the research or the scope of the research outcome, the U.S. Department of Energy (DOE), to help
that can be applied to basic or applied research, identify the critical factors facing the research
product development research, manufacturing workers and managers. Utilizing the Competing
research, and so on. Similarly, research work is Values Framework as an organizing framework
often described by such terms as scientific and for understanding the pursuit of research (Cam-
technological research or the specific content, eron & Quinn, 1998; Quinn & Rohrbaugh, 1983),
i.e. physics, chemistry, or biology. Again, there a number of focus groups were conducted with
is a need for general dimensions of research tasks scientific researchers to more specifically identify
that can be applied across these various situations attributes of a research environment. The focus
such as the degree of complexity or diversity in group discussions uncovered a number of unique
the research team and the size of the research pro- tensions in managing research, which demon-
gram or inter-organizational network. Until these strated not only that competing values exist in
general dimensions are developed and linked, it the research environment, but that these values
is not possible to identify the correct managerial differ depending on the research objectives and
practices for linking the nature of the research task tasks. For example, a tension mentioned often in
with the kind of desired outcome. In summary, these discussions was between researchers desire
the increasing importance of research and these and need for autonomy and managements desire
two lines of reasoning provide a compelling case and need to focus research and meet deadlines. In
for the importance of our perspective of Research their study of productive climates for scientists,
Profiles based on tasks, objectives, as well mana- Pelz and Andrews (1976), found similar tensions
gerial styles and managerial challenges. such as these prevalent and important to consider
in managing scientists because of their significant
impact on performance. The findings of the ex-
THE BASIC DIMENSIONS FOR ploratory study and subsequent surveys suggest
RESEARCH MANAGEMENT STYLES that the diversity of research projects, programs
and organizations can be sorted according to two
What characteristics might one desire in a catego- primary dimensions for research objectives and
rization of research management styles? Ideally, two primary dimensions for describing the nature
one should encompass dimensions that tap into of the research work or task.
411
Research Profiles
The Research Objectives Dimension and industrial innovation literature for scientific
and technological research.
We define the research objectives dimension as As we have already observed, the question of
Degree of Radicalness in the Scientific or Techno- the amount of the scientific advance can involve
logical Advance on a continuum from incremental multiple outcomes, that is, the number of vari-
to radical. In slight contrast to the Schumpeterian ables or processes that are being researched at
notion of the degree of radicalness, which fo- the same time. Some disciplines have a systemic
cuses primarily on the competitive impact of an quality, that is, a large number of variables have
invention (Dahlin & Behrens, 2005), we would to be considered at the same time. Further, not all
argue that the degree of radicalness in research scientific problems can be approached with small
includes the degree of change in the state of the research teams; some of them require a large scale
art, the centrality of the research problem, and the focus. While progress in mapping and sequencing
discovery of a pattern that upsets existing theory the human genome could have proceeded with
or a technology that creates a market niche. For small research teams, it took a large-scale inter-
scientific research, the task environment is the organizational program to coordinate a range of
knowledge world or the state of the art, that is, efforts so that the time needed to complete the
how much is known, and what is considered to be entire genome was appreciably lessened. Indeed,
an important scientific concern or requirement. the systemic quality of some types of research
Radical advances in science sometimes occur is frequently overlooked as a critical dimension
when a central problem is solved, such as the to the scientific problem. One example of what
identification of the structure of DNA (Judson, might be called a systemic problem is research
1979). Sometimes this also happens when a major on the weather, which encompasses both oceanic
discovery is made, such as the observation of the and atmospheric systems. NOAA was created in
first candidate black hole in 1971 (Cygnus X-1), 1970 to unify and coordinate the governments
or when a research finding challenges an existing research efforts on various aspects of the global
theory, such as the discovery of skeletal remains environmental system, including the National
in the Americas estimated to over 1,000 years Weather Service (NWS). Altogether, the scope
older than it was theorized that the Americas were of NOAAs mandate necessitates quite expensive
colonized or the discovery in China of fossils of and specialized equipment and teams to collect the
dinosaurs with feathers. relevant data, including satellites, ships, buoys,
The second dimension of research objectives and planes. Indeed, one could argue that the choice
is the Scope of Focus, a continuum from narrow to conduct large scale data collection represents
to broad, defined by the number of variables or one form of a broad scope focus.
processes or components or the number of levels Just as science has a systemic quality in some
or systems involved, or the extremeness of the areas that cannot be easily divided into small
environments of the work. In product develop- projects, there are technical systems that neces-
ment, this includes the number of performances sitate a large program of product development
affected as well as the need to change supply that may last many years. Leifer and colleagues
chains and distribution chains and create idea (2000) observe in a series of case studies that this
innovation networks or strategic alliances, as is a common characteristic of radical product in-
discussed in great detail by Shenhar (2001) and novation. Further, the research involves not simply
Hobday (1998). The challenge is adapting these the program, but also supporting technologies
concepts of scope from the product development as well. For example, research on high speed
trains, hydrogen-fueled cars, or fusion research
412
Research Profiles
also necessitates accompanying research on in- organization, such as a national laboratory, to

frastructure, distribution and delivery systems. mission agency or inter-organizational network,
Taken together, these two dimensions of re- as in a research consortium. At the extreme is the
search objectives, or intended outcomes, can be cost of a space shuttle, with a price tag of over 20
cross-classified to generate a typology of research billion dollars expended over ten to twenty years
objectives (see Table 1). In this manner, the choice (Gels, 1999).
of the relative emphasis on the radicalness of the Significant work can be accomplished in small
scientific discovery or technological advance and projects, such as the theoretical advances involv-
focus scope generates four distinctive kinds of stra- ing DNA (the double helix structure) and RNA
tegic choices. In general, the research of Shenhar (the messenger), which were radical advances in
(1993; 2001) on engineering projects is suggestive scientific knowledge, involved relatively small
of how these two dimensions of research objec- and complex research teams working within a
tives can be operationalized in scientific research, circumscribed knowledge community (see Judson,
where both the idea of scientific or technological 1979). In contrast, the mapping of the human ge-
uncertainty and systemic scope are in effect. In nome necessitated a large research program that
science and technology, it is the combination of required the coordination of multiple research
objectives such as superconducting at room tem- teams and inter-organizational relationships since
peratures that reflects a radical advance. there were over 3,000 genes. In systemic research,
it is the large number of variables or properties
The Research Tasks Dimensions of the system that require large scale programs to
test and develop theories. In large organizations,
Research tasks can also be characterized by two programs of research are frequently housed in
dimensions. The first, and most obvious, dimen- separate divisions because they focus on a specific
sion is the relative size of the research project, area of research.
measured by the number of researchers, the This dimension of size is similar to the fun-
number of different instruments, the number of damental distinction in the Competing Values
technicians that are involved, and the number of Framework between flexibility and controlled
teams and organizations involved. Furthermore, structures, with the idea that larger projects are
as is obvious, as the costs increase--the movement those that are more likely to be controlled. But
from 10 million to 100 million to one billonthere the dimension of size also encompasses a number
is a need for significant changes in the organization of consequences that create tensions about coor-
and management of the research. These changes in dination and control mechanisms that inevitably
organization roughly parallel the movement from impact on project autonomy that are discussed at
research project to research program or research greater length below. Some would classify the cost
Table 1. A typology of research objectives
Degree of Radicalness in Scientific or Technological Advance

Scope of Focus Incremental Radical
Narrow Minor advances in a limited area, a few Major advances in a limited area, a few performances or com-
performances or components ponents
Broad Minor advances in a system or on multiple Major advances in a system or on multiple performances of a
performances of a system; Changes out- system; Changes outside of system.
side of system.
413
Research Profiles
of a project as an indicator of radicalness of the as our research on Sandia National Laboratories

innovation (McDermott & OConnor, 2002), but research projects and programs demonstrates,
we would argue this should be kept quite separate typically each year, new scientific and engineering
from measures of revolutionary breakthroughs in specialties were added and in some cases, others
science or in technology because the cost of these were dropped. In other words, complexity has not
projects is variable. Beyond this, the issue of the only a static dimension but a temporal one as well.
cost leads naturally into the more critical question This dimension of structure typically measures
of the size of the research project. whether expertise exists within an organization or
The other dimension of research projects is the within external organizations. Since complexity
complexity or diversity of research on a continuum is essentially a measure of the knowledge pool of
from specialized to very diverse, as represented the research effort, it is to be expected that not
by the variety of scientific and engineering dis- all of the necessary skills and attributes needed
ciplines involved. This dimension is equally well are to be found in the same research unit or even
established in the literatures on organizational within the same research organization, even in
innovation (Hage, 1999) and contingency theory large organizations such as the national labo-
more generally (Lawrence & Lorsch, 1967), as ratories or mission agencies. The literature has
well as in science more generally (Mote, 2005). consistently demonstrated that as the complexity
In our research at Sandia National Laboratories, of the research effort increases, there is frequently
we have found that many research projects had the need for expertise outside the research orga-
only six to ten people but in some cases, this nization (Alter & Hage, 1993). In this manner,
represented six or more departments; in other the search for additional expertise or knowledge
instances, it reflected only one or two departments fosters a greater external focus within the research
(Jordan, Hage, Mote, & Hepler, 2005). Thus, even project or program.
in relatively small research projects, there can be The two dimensions of size and complex-
a considerable variation in the degree of diversity ity (see Table 2) yield four distinctive types of
in the composition of the researchers and techni- research projects: (1) small complex research
cians. Above, we have stressed the importance of projects; (2) large complex research programs
the technicians and the equipment as one aspect or research organizations; (3) large specialized
of the size of the project. These factors also rep- research programs or research organizations; and
resent an element of complexity that is frequently (4) small specialized research projects. Earlier, we
ignored. For example, one of the more interesting emphasized the importance of adding the external,
aspects of complex research projects is the variety inter-organizational dimension to the variations
of research equipment that is utilized. In Latour on the organic model. Small complex research
and Woolgars (1979) well-known study of the projects are usually connected to knowledge or
research laboratory, they found ten different in- practice communities, but typically in a more
struments used for the purposes of measurement. informal manner, and perhaps one inter-organi-
Diversity or complexity in the number of re- zational relationship. In contrast, large complex
searchers and technicians can change across time. research programs are more likely to be connected
Furthermore, as research findings develop, one to set of inter-organizational relationships and
begins to recognize the need for still other kinds maybe even a consortium, as in global alliances
of equipment or of other kinds of expertise, that is, (Gomes-Casseres, 1996) or research consortia
knowledge areas. The changes in the knowledge such as SEMATECH (Browning, 1995). Again,
composition of the research project or fluidity over these are general dimensions with a considerable
time are yet another measure of complexity. Again, range of variability.
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Research Profiles
Table 2. A typology of research tasks
Degree of Complexity or Diversity

Size of Research Effort Some A Lot
Small Specialized research projects Complex research projects; knowledge communities
Large Specialized research programs or research Complex research program or research organization;
organizations inter-organizational relationships
The Amount of Choice Involved in But the most interesting constraints on choice
the Selection of Research Objectives emerge from the nature of the research problem.
and Tasks Natural systems that are at the extremes of scale,
from the very small (subatomic) to the very large
Although we have employed the word choice, (outer space), require quite expensive equipment,
there still remains a question of the latitude that numerous technical personnel and many research-
managers have in selecting particular research ers to study them. It is the case that the research
tasks. For instance, the choices may be dictated problem might be capable of compartmentaliza-
to them by the environment, whether because of tion so that it can be pursued as smaller research
the agendas of funding agencies, control exerted projects. Obviously, when this is possible, the
by the state, or certain socialization practices that pursuit of a smaller research project presents it-
create a distinctive world view (DiMaggio & self as a viable research choice. But if one wants
Powell, 1983). An example is that the culture sur- to study the system in its entirety, then either a
rounding the peer panel review process in general large research organization, mission agency or a
creates a bias toward what is often termed normal research consortium becomes necessary.
science, that is, toward incremental advances in
knowledge (Braun, 1998). Dilemmas in the Choice of Research
Crises can also affect the choice of research Objectives and Research Tasks
objectives and tasks. For example, the cyclical
nature of environmental concerns has been mani- The influence of the external world is not the only
fested in rising and falling pressures on public pressure that affects the choice of the research
research laboratories and private companies and objectives and tasks. Other, perhaps more critical,
shifting choices of research objectives and tasks pressures are the different kinds of management
from incremental ones, such as minor improve- dilemmas that accompany each choice. These
ments in gas mileage, to more radical ones, such need to be discussed in some detail because they
as the hydrogen fuel car. As this illustrates, not all reflect important management challenges and
pressures are necessarily directed towards radical provide examples of how management style could
advances in knowledge. For instance, the press- make a difference.
ing need for immediate improvements in national Two very common terms in the management
security after the events of September 11, 2001 literature, especially in discussions of innovation,
in the United States might necessitate the need to are the terms risk and uncertainty. Both of
place greater emphasis on incremental advances, these apply to the choice of the research objectives
that is, to quickly transfer current technology into and reflect dilemmas, particularly in the notion
security applications (Trajtenberg, 2006). of how much risk one should absorb and how
much uncertainty. While the terms are frequently
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Research Profiles
used interchangeably in the literature, we would or small, especially at multiple levels, there are
propose making the following distinctions: risk a large number of potential unknowns or avenues
is a measure of the degree of radicalness in the of research.
research objective, while uncertainty is a measure One might assume that the simple solution
of the scope of the focus on possible outcomes. to reducing risk is by pursuing a greater number
A review of the literature on the management of of smaller, incremental research projects. In one
innovation indicates that when one shifts to the sense, this is a familiar dilemma faced by manag-
language of uncertainty, the issue becomes simply ers of research in risk-averse, budget-conscious
a matter of counting the number of uncertainties. organizational environments. But there are times
In other words, there are not only technological when progress can only be made by taking a
uncertainties but market uncertainties and others, radical approach, and failures can still result
although the role of the market in many areas of in a scientific advance in the sense that learning
basic and applied research are not readily clear took place. In this regard, one is reminded of
(Clarke, 2002). And while it follows that a large Thomas Edisons remark the he did not fail, he
number of uncertainties, almost by definition, simply found ways that did not work. Similarly,
translates to high risk, the converse is not neces- one might assume that the simple solution for
sarily true. Indeed, there might only be a few reducing uncertainty is to pursue a small-scale
technological uncertainties but still the choice to project that is highly focused on a smaller range
pursue a radical outcome would entail high risk. of unknown factors, but this can result in losing
For example, Shenhar (1993) and Hobday (1998) what many might call the big picture, a problem
suggest that technological uncertainty is related in any systemic science or multiple component
to the degree in which new devices, knowledge technology.
or techniques are embodied in a product. But it Managerial dilemmas are not restricted simply
could be the case that one seeks a radical research to the choice of research objectives but also exist
outcome, yet still utilize existing technology to in the selection of research tasks. Research projects
do so. of a large size require a significant investment
In short, we propose the idea of using risk and in management control and coordination. Such
uncertainty in somewhat different ways, while projects also typically need a substantial support
still recognizing that the combination of many staff and support systems for required services,
uncertainties with high radicalness presents the such as accounting, human resources, and library
most difficult management tasks. In this manner, resources. Further, larger teams also need effective
we are suggesting that each dilemma flows from leaders who can allocate resources and maintain
a different set of issues than that found in new communication and focus among team members.
product development and industrial organiza- Finally, management also must define and com-
tion. Attempting to make a significant advance municate clear goals and strategies in order to
in science or technology development obviously align large groups with strategies. Indeed, the
carries a large risk of failure. Uncertainty, how- success of a large research project often depends
ever, flows more from the scope of the focus that on management correctly positioning the research
one is desiring to achieve because as the implicit to fulfill a need or fill a niche. Overall, a unify-
number of unknowns increases, it becomes more ing system-wide scope makes it possible to set
and more uncertain as to which set is the most specific goals and track progress. The dilemma
critical. Stated another way, when the focus is is that in increasing size and, correspondingly,
on understanding an entire system, either large
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Research Profiles
internal coordination and control, there is less and Constructing the Research
less research autonomy and more bureaucracy. Profiles and Management Styles
Clearly, the distinction between autonomy and
internal control is one of the basic structural dilem- A central idea in contingency theory is that
mas. Therefore, given the tight connection between structure must follow from strategy, thus the two
size and managerial control, we have included the basic dimensions of research objectives discussed
degree of coordination of the research project or above must dictate how the research tasks should
program on the vertical dimension of the typol- be structured. The creation of general variables
ogy of structure. The desired independence and that is accomplished with the typologies describ-
autonomy of academics are well known, as is the ing both the research objectives and the research
fact that researchers are motivated as much by the tasks allows one to develop several hypotheses
recognition of their work and the intrinsic pleasure about the match between task and objective or
of doing their research as by extrinsic rewards. intended outcome, the equivalent at the project or
The tension between autonomy and control also program level to the match between structure and
manifests itself in another way, which is the need strategy. The heart of our perspective is connect-
to search for expertise as complexity increases. ing the typology of research objectives with the
In so far as one locates this expertise outside the typology of research tasks, which results in four
organization, another structural dilemma emerges kinds of research profiles. And since each choice
because it conflicts with organizational autonomy of outcome and of task also has a set of related
given that some external control comes with the dilemmas, it is also the case that there are four
external expertise. In this regard, coordination general areas of managerial problems.
difficulties across organizational boundaries are
a dominant theme in the inter-organizational Connecting Research Tasks
literature. to Research Objectives
We note that there is a certain irony in this
dilemma. Those projects that are already more As we stated above, the matching of research task
complex because of their revolutionary strategy with research outcome is the heart of the theory of
are precisely the ones that are most likely to rec- management styles. The construction of the new
ognize the need for other pools of knowledge. perspective is based on a series of hypotheses that
This flows from their aspirations and thus makes emphasize the range of each of the dimensions
the strategic choice so critical, as Zammuto and used to identify research objectives and research
OConnor (1992) argued in explaining the adop- tasks. Of these hypotheses, we present two, both
tion of the radical process technology of flexible of which draw heavily on contingency theory.
manufacturing. Meeus and Faber (2006) also
observe this is true on the inter-organizational 1. The greater the emphasis on the radicalness
side of the structure as well. of the outcome in science or technology, the
In summary, we have identified a number of greater the need to emphasize the complexity
dilemmas attached to both the choice of research or diversity of expertise in the research proj-
outcome and the choice of research task within ect, program or inter-organization network.
the constraints of how the contexteconomic,
political and scientificconstrain the choices The more that managers choose to pursue a
that are made. And as we combine the choice of radical breakthrough in science, then the research
outcome with the choice of task, these dilemmas project itself must become complex, particularly
multiply, a subject we turn to in the next section. in terms of different types of knowledge. As
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Research Profiles
discussed before, this flows from the need to involved in the research and the choice to study
synthesize different perspectives as a way of multiple levels, components of systems or entire
achieving the radical breakthrough. In this vein, systems. Many of the national public laboratories
Shenhars (2001) study of engineering projects in the U.S. were created to work on difficult and
provides at least some evidence for the fit between intractable problems. For example, the origins of
the choice of a revolutionary strategy and the need both Los Alamos and Sandia National Laboratories
for expertise; projects coded as most uncertain reside in the Manhattan Project and the drive to
had the highest proportion of academic degrees. construct the first atomic weapon. In response,
Research findings on the positive relation- the Europeans created CERN in 1954 to reverse
ship between complexity and industrial innova- the brain drain of physicists to the United States
tion defined as new products or services have and to restore and rebuild European research in
been accumulated over a forty-year time period. high-energy physics.
Damanpour (1991) summarized the first thirty In general, these types of large national labora-
years of work in a meta-analysis that explored tories and mission agencies are quite different from
the relative importance of complexity vis--vis the smaller academic research projects funded
other variables while controlling for a number by the National Science Foundation (NSF) or
of alternative possibilities. Hage (1999) updated National Institutes of Health (NIH). Furthermore,
this study and noticed the absence of research within these national laboratories and mission
on complexity and radical innovation in science. agencies, additional distinctions can be made
For instance, in discussions about the importance between problems that can be approached with
of the discovery of the double helix structure of small projects and those that require a more ex-
DNA, it is often overlooked that Watson had been tensive program of research. If the project focuses
trained as a biologist and Crick as a physicist on a system, then almost by definition, one needs
(Watson, 2001). In a study of the Institut Pasteur, a large-scale research program to handle all the
the relationship between complexity and radical aspects of the system, if not a mission agency or
innovation holds quite strongly at the level of national laboratory. Oceanographic ships, space
project (Hage & Mote, 2008). shuttles, and radio astronomy observatories are all
examples of quite expensive equipment needed
2. The greater the emphasis on a broad scope to study particular natural systems, which in turn
of focus, the greater the need to increase means quite large support staff and a large number
the size of the research project, program or of technicians for their operation.
inter-organizational network. Another aspect of scientific research is what
might be called the difficulty of the research
As the scope of research broadens, the specific problem, that is, studying phenomena under ex-
expertise that is needed may not reside within treme conditions. For example, consider the case
the research organization and must be sought of conducting research on flora and fauna at the
outside the organization, either informally, as in bottom of the ocean or the difficulty of study-
knowledge or practice communities, or formally, ing black holes at the other end of the universe.
as in inter-organizational alliances or consortia. Again, the presence of extreme conditions often
The search for expertise suggests that the research necessitates a large scale program of research.
unit increases in size as a consequence, moving With these two hypotheses, we can delineate
along the continuum from project to program four distinctive kinds of Research Profiles, each
to inter-organizational network. The movement with their own distinctive management challenges
along this continuum is driven by the notion that and dilemmas. We now turn to a discussion of
scope is a measure of the number of variables these four Research Profiles.
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Research Profiles
FUTURE RESEARCH DIRECTIONS: even by research sponsors, of the importance of

RESEARCH PROFILES AND some of this work.
MANAGEMENT STYLES Two important general qualifications need to
be made about the four Research Profiles. First,
Combining the two dimensions generates four the dimensions on which the Research Profiles
ideal-type Research Profiles, each of which can are based have considerable range. In other words,
be used to define a particular management style. one must remember that the underlying dimen-
In addition, because we have suggested that sions are the degree of radicalness, the broadness
there were a series of dilemmas associated with of the focus, the degree of complexity, and the
the choices of the degree of radicalness and the size of the project, program, or inter-organiza-
degree of scope and similarly with the degree of tional network. Of course, this means that the
complexity and the size of the project, we want specific managerial problem discussed occurs in
to explore ways in which these dilemmas can be varying quantities accordingly. Second, we rec-
managed. ognize that each of these dilemmas exists to a
In Table 3, we have combined the dilemmas certain degree in each quadrant. For example, if
associated with the strategic structural choices on we focus on the Small Radical Research Profile,
the assumption that structure follows strategy as the two primary managerial problems are to en-
we have hypothesized above. Within each quadrant courage risk-taking and integration of diverse
are potential solutions to the dilemmas associated perspectives. But these same issues exist in the
with each Research Profile. It is critical that one Large Radical Research Profile, only now they
interpret this figure as suggesting dilemmas in are overshadowed by the larger number of uncer-
all four quadrants. While it is easy to argue that tainties and the greater amount of coordination
high risk or many uncertainties pose managerial needed to conduct research. In contrast, in the
problems that necessitate solutions, it is much Small Incremental Research Profile, the motiva-
harder to recognize that too little risk or too few tional problems are more centered on the issue of
uncertainties also pose managerial problems that keeping abreast of the discipline or the competi-
require solutions. In particular, the combination tion. As a consequence, a very different set of
of little risk and few uncertainties, which is part managerial solutions are needed because of the
of the Small Incremental Research Profile, raises greater research autonomy. In the Large Incre-
issues about the loss of competitiveness of the mental Research Profile, the same motivational
research organization in which the project of this problems exist but now they emerge at the level
nature are located, as well as lack of understanding of research teams within the program and thus
necessitate a different set of managerial solutions.
Table 3. Research profiles: Strategic and structural dilemmas and associated management challenges
Strategy Lower Risk/Payoff Higher Risk/Payoff

Structure Less Integration More Integration
Small specialized projects; Small complex projects
Lower Uncertainty Less Coordination Value the individual; Encourage exploration and risk taking;
Provide professional development. Integrate ideas externally and internally.
Large specialized programs; Large complex programs; Clearly defined
Good internal allocation of revision, project goals;
Higher Uncertainty More Coordination
sources; Build strategic relationships.
Good technical management.
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Research Profiles
In this respect, we associate dilemmas and Re- is to create enough time to think and to explore,
search Profiles where the problems tend to be encourage the willingness to take risks and also
accentuated. have an atmosphere of challenge. A potential so-
To help set the stage for future research on this lution is to provide sufficient flexibility, with the
perspective, we identify one managerial problem resources and freedom to pursue new ideas. This
associated with the choice of the research outcome suggests that it is necessary to give researchers
and one problem associated with the choice of in this profile enough time while resisting the
the research task. Many of these examples arose pressure of deadlines that may be coming from
from the discussions in the focus groups that were those higher in the hierarchy.
conducted in the development of the research As we have discussed, increasing the radical-
environment survey instrument discussed earlier ness of the outcome requires that one increase the
(Jordan & Streit, 2003; Jordan, Streit, & Binkley, complexity of the research team, adding multiple
2003; Jordan, Streit, & Matiasek, 2003) disciplines, specialties within them, and techni-
cians and their specialized equipment. But here
Small Radical Research Profile we face a critical managerial problem associated
with this Research Profile: How does one integrate
It goes without saying that most, if not all, research- across the various disciplines and equipment so
ers would like to have a radical breakthrough in that there is access to tacit knowledge? Further-
their scientific or technological research, and many more, as Nooteboom (1999, 2000) has observed,
often tend to think that their research is geared although one creates radical innovation by increas-
toward that end. However, as we have suggested, ing cognitive distance, the tendency is for people
it is important to view this along a dimension with to communicate less as the cognitive distance
considerable range. In our work at Sandia National increases. Clearly, the managerial solution is to
Laboratories, we identified several examples of develop a number of mechanisms to encourage
small projects (under 10 million funding over five the sharing of tacit knowledge (Judson, 1979),
years) with complex research teams that achieved that is to encourage integration across diverse
radical breakthroughs, such as the project that perspectives. Furthermore within the context of
developed a particulate trap for diesel engines science and smaller research projects that address
that reduced particulates by 400 percent as well only a component of a larger system or area, we
a project focused on the development of semi- would suggest that this requires more than the
autonomous, modular robotic control technology classical mechanisms suggested by Lawrence and
that greatly decreases the necessity of human Lorsch (1967), because this involves ensuring
control. Within NOAA, we identified a project the cross-fertilization of ideas and managing the
focused on new compression methods for satellite external collaborations with various knowledge
data which achieved compression rates of almost communities.
a factor of 3 over a current compression standard
(Mote, Jordan, & Hage, 2007). Large Radical Research Style
Two managerial problems associated with this
Research Profile are encouraging researchers to As one moves from a project that costs less than
take intellectual risks and to integrate them as a ten million dollars over a five year period to a
team. In other words, the motivation issue is how program that costs more ten million dollars, and
to encourage a team of researchers to think and even upwards of a billion as in the example of
act boldly. The managerial solution associated NASAs space program, a new set of problems
with the choice of pursuing radical objectives emerge that necessitate a different managerial
420
Research Profiles
style. Indeed, the increase in scale magnifies the intensive. Hence, continued funding over long
problems described above, but alters them in time periods is essential. Therefore, projects and
interesting ways. programs in this profile often endure well beyond
One of the earliest examples of a large-scale the shorter time horizon of smaller projects, as
program of research is the famous Manhattan Leifer et al (2000) have observed.
Project that produced the first atomic weapon. But an increase in scope of focus also creates
Since that time, large-scale research programs have new difficulties with managing the complexity of
been initiated to pursue a number of high-profile multiple research teams in networks of organiza-
topics, with recent examples being the Human tions, all of which have to be integrated. And in
Genome Project and the National Nanotechnology large programs and research organizations, it is
Initiative (NNI). On a somewhat smaller scale, important to maintain coordination and control
Sandia National Laboratories has initiated a hand- over the research efforts. As research autonomy
ful of relatively large projects under the category is reduced in this manner, so too are the oppor-
of Grand Challenges, which are designed to be tunities to create a radical breakthrough. One of
first to solve a major technical challenge. One the ways in which this reduction in autonomy
recent example has been a research project on the impacts on the creativity of the research is the
feasibility of wide-scale, mainstream use of light inherent conflict between creativity and maintain-
emitting diodes (LED), which requires advances ing progress and schedulesan important issue
in both semiconductor design and manufacturing. in large complex programs. While measuring
In this Research Profile, not only does one want and tracking progress is an essential part of the
to encourage taking risks and to integrate diverse solution to this managerial problem, it must be
perspectives, but one also has to be concerned done in a way that does not force researchers to
about handling the number of uncertainties and focus on shorter term, incremental, measurable
the multiple research teams, including teams that products, benchmarks, or milestones, or take too
cross organizational boundaries. What are the much time away from research.
solutions? To maintain an emphasis on a radical
breakthrough in a larger scale program of research, Small Incremental Research Profile
one must put forth a clear and consistent vision that
provides much of the motivation for the research The managerial problems shift dramatically in
teams. Part of this vision is the investing in future small scale research projects designed for incre-
opportunities that may provide the breakthrough mental improvements in science and technology,
in either the knowledge or technology needed which, of course, are the most common ones in
to advance. The problem of handling the many academia, government and in industry. Interesting
uncertainties is dealt with by developing a clear examples from our work with NOAA include the
set of project goals and strategies so that the many ongoing, incremental improvements in the cali-
different research teams and organizations that are bration of satellite data, as well as the identifica-
cooperating together in this effort can understand tion of a new type of hurricane that maintains its
their responsibilities. The clarity of the vision, such intensity for a longer time period. A project from
as Project Apollos explicit goal to land a man on our work at Sandia National Laboratories also
the moon and return him safely to Earth, is critical helps to illustrate this profile. This research project
for the success of these large scale and complex seeks to understand the nature of soot formation
efforts. Initially, the process of determining the from unsteady, dirty flames; previous research
right research strategy and achieving a consensus primarily focused on the properties of steady
on that strategy can be both time and resource flames generated by simple, pure hydrocarbon
421
Research Profiles
fuels. As these examples demonstrate, as well as solution includes providing greater recognition
many of the research projects funded by the NIH to the contributions of researchers who have not
or the NSF, the research is not necessarily aimed experienced similar achievements.
at radical advances but at incrementally pushing
the knowledge boundaries. Large Incremental Research Profile
Since the projects in this profile are relatively
smaller, the effectiveness depends much more The combination of less radical and broad scope
upon the individual researcher and, at most, a of focus research is frequently found in the vari-
small team. Therefore, one of the managerial ous national laboratories and mission agencies
problems in this profile is to ensure continued funded by federal governments. This profile is
professional development, particularly with regard characterized by large-scale and functionally
to maintaining and improving skills. Left to their specialized teams. For example, NOAA maintains
own devices, researchers often tend to focus on separate research programs on both the atmosphere
the same set of problems across much of their and the oceans, each of which encompasses a
professional life. In this regard, a kind of human number of integrated research projects. Further,
capital decay sets in because not enough new the development and implementation of a new
issues are being considered to really continue to weather satellite typically entails a substantial
master a particular specialty. Professional devel- program that includes teams from a number of
opment, such as continued education, seminars, mission agencies, such as NOAA and NASA,
and conferences, becomes a key mechanism for the military and private contractors. This type
increasing their human capital. Individual growth of research is focused largely on incremental
is also encouraged when there is an atmosphere of advances and poses different managerial chal-
cooperation rather than competition among diverse lenges than research efforts focused on radical
research projects in an organization. Under these advances, such as hydrogen fuel-based cars or
circumstances, individuals are more willing to unmanned aerial vehicles.
interact and talk with others about their research, Paradoxically, the large scale of research in this
particularly scientific challenges they might be profile poses two managerial problems that are also
facing and need help in overcoming. observed in small, specialized projects discussed
Unlike the Small Radical profile, the problem above, that is, professional development and indi-
here is potentially too low a level of aspiration vidual respect. Given the larger scale of research,
rather than one that is too high. Again, the mana- however, the existence of these two problems in
gerial solution to this problem is in various ways this profile reflects the need to overcome the im-
to indicate to the individual that they are valued personality of layers of bureaucracy and, hence,
and their work is valued even if it does not need suggests different management strategies. A major
to take intellectual risks or a broad focus. This difference in which the handling of motivation in
can be accomplished by providing respect for the this profile differs from that above is that rather
individual and valuing their ideas and opinions than value the individual or the few individuals in
which can be achieved by allowing autonomy the team, here the problem is proper recognition
in decision-making, as well as more latitude in of each team. Unlike the Large Radical Profile,
choosing areas of research. While this may ap- which also emphasizes teams and teamwork, this
pear to be quite simple, it is, in fact, often more profile emphasizes the pursuit of incremental
difficult because typically the rewards are given advances, primarily on components of an overall
to those scientists and research teams that make system and use of functionally specialized teams.
the big breakthroughs. Therefore, part of the It goes without saying that coordination among
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Research Profiles
these teams relies not only on management that innovation and R&D management in the current
is well informed about the research and reward- literature. The Research Profiles should help
ing and recognizing individual merit, but also on with portfolio level decisions because it proposes
good internal allocation of funding. Cultivating general categories of research objectives and
well-informed, technically adept management tasks that can be applied across various arenas of
within the research project is always difficult, for research from basic to manufacturing research to
it requires skill in administration and management inform strategy decisions and to judge progress
of people as well as knowledge and skills in the and effectiveness. Thus, our perspective about
research area. This is particularly important given the diversity of research projects, contained in
that the research expertise may lie in separate the Research Profiles, has an incredible spread
departments not under the immediate control of of potential impact. Of course, a test of this as-
the program manager. Indeed, it is this kind of sertion is the number of insights that one obtains
profile that led to the creation of matrix authority from the perspective and below we identify and
structures and, as is well known, this particular discuss three such insights.
structure has not always functioned well because One of the insights is the revision of the orga-
employees find it difficult to serve two masters, nizational learning perspective. In this respect, we
discipline (or department) and project (Tushman would argue that the Research Profiles represent
& OReilly, 1999; Tushman & OReilly, 1996). four different kinds of learning. The strategic
For all of these reasons, the need for clear cut choice of pursuing a radical breakthrough is prob-
measures of technical progress for each team is ably going to lead to more learning than the pursuit
essential so that progress can be measured care- of an incremental strategy. This corresponds to the
fully and appropriately. notion of competency destroying innovation and
As indicated in the Large Radical profile, one competency enhancing innovation, which largely
of the major issues for large projects is the lack looks at the impact on other organizations. The
of research autonomy. Shenhar (2001) provides a Research Profiles perspective suggests that the
vivid description of how managers in this profile organization that has the radical breakthrough
attempt to bureaucratize the coordination of the is learning a great deal and building its capabili-
disparate parts of the research program or teams. ties in the process. As has been indicated in our
But, in fact, this solution is what creates many discussion of each of the four profiles, whether
of the problems within this research profile. In the organizational structure and management
addition to the impersonal effects, bureaucratic style match the research strategy will determine
control also has negative impacts on technical if the desired scientific and organizational learn-
management in requiring time for administrative ing actually takes place. In each instance, differ-
tasks that can detract from time spent on research. ent obstacles to learning present themselves. A
Indeed, in this situation, team leadership becomes second insight is the revision of organizational
very desirable as a solution (Hage & Mote, 2008). innovation theory, particularly the emphasis on
the organic model, and the integration with the
inter-organizational literature. The diversity of
CONCLUSION research projects shifts the attention in organiza-
tional innovation to the study of where the research
In summary, our argument is that the management is largely accomplished, while recognizing that
of different types of research, including basic, ap- there is not just the organic model but four profiles
plied, product development, and quality control, of research activity.
necessitates an adaption of existing theories of
423
Research Profiles
The third insight is the discussion of inherent Burns, T. R., & Stalker, G. M. (1961). The man-
dilemmas and problems. Rather than perceive agement of innovation. London, UK: Tavistock.
low risk and low uncertainty as presenting no
Cameron, K. S., & Quinn, R. E. (1998). Diagnos-
managerial dilemmas, we have suggested that
ing and changing organizational culture: Based
they do. And unlike traditional contingency argu-
on the competing values framework. Reading,
ments that assert that the correct fit ameliorates
MA: Addison-Wesley.
any managerial problems, we are suggesting quite
the opposite. Even with a good fit, there are still Clarke, T. E. (2002). Unique features of an R&D
managerial problems associated with each of the Work environment and research scientists and
four types of Research Profiles. These problems engineers. Knowledge in society, 15(3), 58.
flow from the dilemmas that have been delineated.
Dahlin, K. B., & Behrens, D. M. (2005). When is
We have suggested what some of the solutions to
an invention really radical? Defining and measur-
these dilemmas are and then indicated that these
ing technological radicalness. Research Policy,
define specific management styles. This is clearly
34(5), 717737. doi:10.1016/j.respol.2005.03.009
not the usual perspective in either contingency
theory, or management theory in general, but we Damanpour, F. (1991). Organizational innovation:
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426
Research Profiles
KEY TERMS AND DEFINITIONS the concept of the organic organization (Burns
& Stalker, 1961). In recent years, a great deal of
Competing Values Framework: The Compet- attention has focused on radical innovation (Leifer
ing Value Framework is a theoretical framework et al, 2000, McDermott & OConnor, 2002).
for assessing an organizations culture. The Networks: A network is a pattern of re-
framework consists of two dimensions, organi- lationship among actors, from individuals to
zational focus and decision making control, from organizations. Within the innovation literature,
which one can derive four distinct organizational the types of networks studied have included intra-
cultural archetypes: Clan, Adhocracy, Hierarchy, organizational networks (Mote, 2005), knowledge
and Market. (Cameron & Quinn, 1998; Quinn & communities (Mohrman, Galbraith & Monge,
Rohrbaugh, 1983) 2004; Shinn, 2002), interorganizational networks
Idea Innovation Network: The idea innova- (Alter & Hage, 1993; Powell, Koput & Smith-
tion network theory is a conceptual framework for Doerr, 1996), and strategic alliances (Hobday,
understanding the generation of innovations across 1998; Shenhar, 2001).
organizations. The theory posits that research is R&D Organizations: Research and develop-
differentiated among six arenas reflecting basic, ment (R&D) organizations are public or private
applied, product development, production, quality organizations, or subunits of these organizations,
control and commercialization/marketing (Hage focused on the development of scientific or prod-
& Hollingsworth, 2000). uct innovations (Trajtenberg, 2006). Many have
Innovation: Involves the creation of a new argued that such organizations have unique work
idea, method, process or device. One of the earliest environments (Clarke, 2002), which require dif-
contributions on organizational innovation was ferent approaches to management (Geles, 1999).
427
428
Chapter 23
Determinants and
Consequences of R&D
Strategy Selection
Diana A. Filipescu
Autonomous University of Barcelona, Spain
Claudio Cruz Czares

Autonomous University of Barcelona, Spain
ABSTRACT
Nowadays firms are not able to achieve all innovation in-house due to the specific set of technologies
required by most products and processes, obliging firms to access external knowledge. In this context,
the aim of this chapter is two-fold with the final goal of increasing our knowledge on firm innovating
behavior. First, this chapter analyzes the determinants of the R&D strategy (RDS) selection posting the
make, buy and make-buy as the three RDSs. Second, this chapter analyzes the consequences that each
of the RDSs has on firm innovativeness. Results show that commercial and organizational resources,
jointly with the information sources, influence the selection of the strategy. As for the second part of the
analysis, we see that all RDSs have positive effects on firm innovative performance but these effects are
not straightforward and simple since they vary depending on firms type and on the radicalness of the
innovation achieved.
INTRODUCTION the continual renewal of competitive advantages

through innovation (Cho and Pucik, 2005) and the
In order to survive in the competitive scene that development of new capabilities (Grant, 1996)
companies have faced in recent years and which is has become necessary (Danneels, 2002; Branzei
characterized by a high level of dynamism (Teece, & Vertinsky, 2006). In this context, technology
1998; Lpez & Garca, 2005; Diaz et al., 2008), represents one of the most important factors in
increasing the national and international competi-
DOI: 10.4018/978-1-61350-165-8.ch023
Determinants and Consequences of R&D Strategy Selection
tiveness of firms, while successful technological predictable results, offering solutions to some
innovation in new products and processes is gradu- problems related to a lack of capacity. However,
ally more regarded as being the central issue in it does not stand for competitive advantages since
economic development (Porter, 1998). Moreover, there is a high probability that competitors attain it
as highlighted by Shrivastava and Souder (1987) as well. As for the combination between them, the
and Bone and Saxon (2000), a key element in the make-buy strategy, it enhances both the advantages
competitive business strategy is the combination and disadvantages of make and buy RDSs, being
of technological innovation and R&D activities. extremely complex to manage it.
Since the objective of R&D strategies (RDSs) Taking this into consideration, this study has
is to guide the firm in acquiring, developing and a two-fold focus. Firstly, it aims at finding the
applying technology in order to generate sustain- determinants of the innovation strategy selection
able competitive advantages (Swan & Allred, and, secondly, it has the objective of understand-
2003), it is extremely important for the firm to ing which of the RDSs produce the best results in
select the best way of achieving the technology term of firms innovative performance. In order to
needed (Clarke et al., 1995). It is emphasized in reach this objective, data from the Technological
the literature that firms establish their boundaries Innovation Panel (PITEC) provided by the Na-
based on the decision regarding the type of R&D tional Statistics Institute from Spain are analyzed,
activities whether they should be integrated precisely the period 2004-2007.
within the company or not. In fact, Williamson As for the main contributions of this study,
(1975) identified a dichotonomous decision be- they are as follows: Firstly, we look at RDSs as
tween make (internal) and buy (external) RDS; a whole process, considering the determinants of
later on, Veugelers and Cassiman (2006) added selecting one strategy over another, and next their
a third, complementary one, make-buy RDS1. consequences over a firms innovative perfor-
The effect of these RDSs over firms innova- mance. Secondly, we consider the R&D Capital
tive results has been thoroughly studied; however, Stock Model developed by Grilliches (1979),
there is no general conclusion except that all of which emphasizes the relation between RDSs
them are, in a way, highly significant in a firms and a firms innovative performance, employing
innovative impetus. Explicitly, Diaz et al. (2008) lagged values of RDSs in order to improve pros-
find that the three RDSs have a positive impact, pects of valid causal inference (Baum, 2006) and
while Veugelers and Cassiman (2006) suggest that to reduce possible endogeneity problems (Bernard
only make-buy yields the best results, whereas and Jensen, 1999; Salomon and Shaver, 2005).
buy has the lowest ones. Even more, most of Thirdly, we will look at both manufacturing and
the research studies carried out in this field of service industries, aiming at offering a better
investigation focus on the choice between make understanding of the latter, which has not been
and buy strategies, the attention towards a make- analyzed in the sense that our investigation does.
buy one or to the reasons behind the selection of The study is organized as follows. First, the
one strategy as opposed to another being almost advantages and disadvantages of each of the
inexistent (e.g., Veugelers & Cassiman, 1999). RDSs are presented. Next, the determinants and
When referring to the make RDS, firms un- consequences of RDSs are described, with their
derstand a sole source of knowledge and, thus, respective hypotheses, based on the absorptive
important sources of competitive advantages capacity and open innovation approaches as well
achieved with high costs whose results cannot be as the resource-based view (RBV) theory. The
clearly foreseen. The buy strategy, on the other conceptual model is then presented, followed by
hand, is a relatively low-cost one with more the description of the methodology employed in
429
this analysis. Results and discussions are offered to a lack of capacity, increases the speed of access
in a late section, finalizing the study with the to new technology, and reduces risk (West, 2002).
conclusions, contributions, limitations and future When firms decide to externalize the R&D, they
research lines of investigation. acquire access to new knowledge areas (Haour,
1992) through the productive networks that are
created (Nishiguchi, 1994). Value creation, agil-
R&D STRATEGIES: ADVANTAGES ity, quality of technology commercialization, and
AND DISADVANTAGES transfer cost of technology are some factors which
condition the buy RDS (Tsai & Hsieh, 2006).
The make strategy is defined as the internal devel- Nevertheless, acquiring external technology
opment of R&D activities, being such a complex is not a competitive advantage per se, since it is
one that it requires the creation of internal depart- available for competitors as well (Barney, 1991),
ments in order to develop it (Dosi, 1988). The providing a short-term strategy to the firm (Ku-
information flow between the R&D department rokawa, 1997). External dependence, functional
of the firm and those which will use the resultant inequalities, and coordination problems are other
technology could considerably increase as a result disadvantages of the buy strategy (Kotabe &
of the integration of R&D activities (Fernandez, Helsen, 1999). In addition, if a firm has a learn-
2005). At the same time, in-house R&D consti- ing gap it will be unable to take advantage of the
tutes a unique source of knowledge and allows technology acquired (Steensma, 1996).
for an objective assessment of real innovation As for the complementarity between make
needs (West, 2002), with economies of scale and buy RDSs, it is based on the assumption that
being enhanced, transaction costs avoided and existing products are more complex, as they must
barriers against imitation constructed (Contractor be technologically feasible and economically vi-
& Lorange, 1988). able, this complexity requiring multidisciplinary
However, choosing to achieve R&D internally knowledge that may sometimes be exclusively
has some disadvantages: It is less cost-effective, found beyond the firms boundaries, involving
riskier and less predictable, it takes longer to the combination of internal and external R&D
commercialize the new product (West, 2002), (Chesbrough & Crowther, 2006). Two different
and the firm might remain isolated in only one theoretical approaches hold that the make and buy
technology if the R&D department is not flexible strategies may be regarded as complements rather
(Perrons & Platts, 2004). than as alternatives. In this way, the make-buy
The speed of development in new technologies strategy would be characterized by the advantages
is increasing, and due to this some firms prefer to and disadvantages for the make and buy strategies
externalize R&D activities since it is not feasible but with the additionality that it is more complex
for them to develop such specific technologies to manage and more expensive to achieve.
internally (Quinn, 2000). Moreover, as stated in The first approach highlighting the comple-
the RBV, it is not necessary for firms to own all the mentarity of the make and buy strategies is the
resources and capacities when they could access absorptive capacity (Cohen & Levinthal, 1990),
them externally (Barney, 1999). The buy strategy being defined as the firms ability to recognize
is valuable because it is more reliable and firms the value of external knowledge and to assimilate
results are more predictable, since the technology and apply it for commercial ends (Abecassis-
has been already developed and tested (Kessler & Moedas & Mahmoud-Jouini, 2008). Acquisition,
Bierly, 2002). In addition, it allows risk calculation assimilation, transformation and exploitation are
a priori, offers solutions to some problems related the four organizational capabilities constituting
430
the firms absorptive capacity (Zahra & George, DETERMINANTS OF

2002). Complementarity between make and buy R&D STRATEGIES
should be emphasized since firms must develop
in-house R&D in order to generate or increase Based on the RBV, we consider that the main
their capabilities to scan (acquisition-assimilation) determinants of RDS selection are the firms
and to integrate (transformation-exploitation) the resources. Amit and Schoemaker (1993) charac-
external knowledge acquired through the buy terized firm resources as the stock of available
strategy (Arora & Gambardella, 1990). In other factors owned and controlled by the firm. Tan-
words, a firm will not make the most of the buy gible factors, like financial and physical assets,
strategy efficiently if it does not develop R&D and intangible factors, such as human capital and
activities internally (Colombo & Garrone, 1996). technological know-how, are the components of
Furthermore, greater knowledge gained through firm resources (Grant, 1991). Firm capability is the
in-house R&D may serve to modify or improve ability to use and transform the owned resources
external technological acquisitions (Veugelers & into a desired end. Without these capabilities, the
Cassiman, 1999). mere possession of a large amount of resources
The second theoretical background underlying does not guarantee the creation of a competitive
such complementarity is the open innovation ap- advantage (Song et al., 2007). Thus, according to
proach (Chesbrough, 2003). It argues that firms Penrose (1959), Barney (1991) and Grant (1991),
have changed from the closed-innovation process a firm should possess certain intangible assets
to a more open process of innovation, where that competitors cannot copy easily, in this way
knowledge and technology flow are two-fold: gaining a sustainable competitive advantage in
inside-out and outside-in. The former implies that the market.
the internal inventions not used by the firm should A firms organizational resources are viewed as
be commercialized in order to profit from them. determinants of RDS selection since they reflect
The latter, more important in this research, refers the efficiency and synergy between the depart-
to the fact that not even large firms can afford to ments involved in the R&D process (e.g., R&D,
solely rely on their internal research and might production, and marketing). These resources also
acquire external knowledge though buying patents, embody management and organizational excel-
licenses, or establishing cooperation agreements, lence and enable the integration of internal and
or licensing processes or R&D activities. That is, external knowledge (Bughin & Jacques, 1994; Dy-
open innovation is the combination of internal erson & Mueller, 1999), enhancing the absorptive
and external ideas and technologies in order to capacity. However, these internal resources have
achieve new products, processes and technologies been analyzed as a fostering factor in innovation
and to reduce time to market (Enkel et al., 2009). processes (Bughin & Jacques, 1994; Galende &
As a consequence, those firms acting within a De la Fuente, 2003), but not as a determinant of
closed innovation perspective will reduce their RDS selection, a gap in the research literature that
knowledge-base over the long term (Koschatzky, this contribution aims at filling.
2001). Theory considers a firms experience as an
intangible asset which represents the basis for
obtaining a sustainable competitive advantage
(Nonaka et al., 2000; Barney et al., 2001). A
firms experience is also understood as attainment
431
of knowledge. It is worth underline that a firms tions which are usually needed for entry into new
experience is related to a better management of international markets (Etflie et al., 1984; Galende
communication and of necessary creativity to and De la Fuente, 2003). When a firm becomes
innovate, and to a more effective capacity for international, it creates new networks and, at the
absorption (Rothwell, 1986; Cohen & Levinthal, same time, gains access to foreign information and
1990). Hence, it is more likely that experienced communication technologies, as well as produc-
firms develop the make RDS since it requires tion methods, transportation, and international
organizational capabilities to control the complex logistics, which could reduce business transaction
process of R&D, and due to the fact that it is usu- costs with potential suppliers, facilitating the buy
ally more risky and expensive (West, 2002). On strategy. Considering this, we state the second
the contrary, firms which lack experience are more hypothesis of this study:
prone to select the buy strategy so as to externalize
risk and overcome environmental uncertainties H2: The greater a firms commercial resources,
(Poon & McPherson, 2005). These arguments the greater the probability of selecting the make-
lead us to pose the following hypothesis: buy strategy.
H1: The greater the firms organizational We consider that the technological/knowledge
resources, the lower the probability of selecting intensity might also affect the RDSs selection.
the buy strategy and the higher the probability of Industries experiencing a large number of tech-
selecting the make-buy strategy. nological changes estimate R&D externalization
to be the best option because it does not seem
A firms relations with foreign clients (Galende right to rely on internal R&D when the market is
& Surez, 1999), regularly measured by its inter- changing substantially (Noori, 1990). Similarly,
national achievements, are important intangible when there is great technological diversity in
assets as well. International achievements are the market, firms are likely to externalize R&D
often considered useful for properly exploiting (Cesaroni, 2004).
technological innovations (Teece, 1986). As ar- On the other hand, it is suggested that when
gued by Prashantham (2005), internationalization technological changes are unpredictable, R&D
often leads to crucial growth and useful learning integration becomes necessary (Shrivastava &
outcomes; it also increases a firms market size, Souder, 1987) so as to prevent technological
thus favoring innovation activity (Galende & innovations that dramatically threaten market
Surez, 1999). Some studies have analyzed the stability (Cooper and Schendel, 1976). In the
firms internationalization as a determinant of end, a balance between these two poles might
R&D activities and found a positive relationship be found in the absorptive capacity and the open
(Kumar & Saqib, 1996; Salomon & Shaver, 2005; innovation approaches; that is, firms need to be
Vila & Kuster, 2007; Filipescu et al., 2009). In aware of shifts in technology and gain greater
the study carried out by Veugelers and Cassiman flexibility through the buy strategy. At the same
(1999), it was observed that export intensity re- time, however, they might also develop in-house
duces external R&D selection. R&D in order to integrate the acquired technol-
One of our arguments is that international firms ogy efficiently and gain a competitive advantage.
are more likely to combine make and buy strategies Finally, information sources are also impor-
since technological advances are achieved through tant in the selection of a specific type of RDS.
the development of internal R&D, increasing Explicitly, firms which positively assess internal
competitiveness and enacting disruptive innova- information tend to look for the complementar-
432
ity between the two RDSs (Veugelers & Cassi- understandable if we consider that those firms
man, 1999). Thus, in order to take advantage of solely externalizing R&D activities will not take
external knowledge, firms develop their internal advantage of it since they have not previously
capabilities. When the external knowledge is generated the absorptive capacity.
highly valued, firms will avoid solely developing There is empirical evidence showing that inter-
the make or buy strategies, as they will prefer to nal R&D produces better results than on external
combine them in order to make the most of external one. For example, Beneito (2006) found that the
knowledge through internal R&D development. buy strategy had positive effects on incremental
innovations, while the make strategy had positive
effects on both incremental and radical innova-
CONSEQUENCES OF tions. Haro-Dominguez et al. (2007) and Chen and
R&D STRATEGIES Yuan (2007) observed positive effects of external
and internal R&D on new product development,
The R&D Capital Stock Model developed by although the effects were greater for internal R&D.
Grilliches (1979) emphasizes the positive rela- Results of studies where both the make and buy
tion between RDSs and the firms innovative strategies were analyzed are also quite diverse.
performance. This model stresses that R&D Jones et al. (2001) observed that external R&D
activities enhance innovations and these foster significantly detracted from firm performance in
firm performance. Furthermore, Grilliches (1979) terms of product, market and financial measures,
also argues that the R&Ds effects on innovations while the make strategy had a positive effect on
are lagged since R&D projects take a minimum new product development. Diaz et al. (2008)
of one year to be completed. However, there is concluded that both internal and external R&D
no evidence which accounts for lagged effects of increased the probability to achieve innovations.
make, buy and make-buy RDSs, and this is one of Santamara et al. (2009) considered low-, medium-
the contributions of this study. and high-technology industries and found that the
The empirical evidence of the effects of the make strategy was significant for both groups,
make and buy strategies on firm innovativeness is while buy was positive for process innovations in
insufficient and somehow controversial. Interest- the former and product ones in the latter.
ingly, the buy strategy has always been associated Scarce is also the empirical evidence of the
with negative effects when it was the only RDS complementarity between make and buy strategies
evaluated. Kessler et al. (2000) analyzed how on firm innovativeness. Beneito (2006) observed
RDSs affect new product development and found that external R&D had no effect on innovation
that the buy strategy during the generation of the output per se; however, when it was combined with
idea was negatively related to product competitive- internal R&D, positive effects arose. Adopting
ness and that externalization during the techno- the supermodularity and productivity approaches,
logical development decreased innovation speed. Veugelers and Cassiman (2006) found support
Lanctot and Swan (2000) developed a scale for for this complementarity. They observed that the
measuring a firms tendency to externalize tech- make-buy strategy had the highest impact on sales
nology development and discovered a negative due to new products. Nevertheless, following the
effect of externalization of product and process same methodology, Schmiedeberg (2008) did
technology on the firms success. Finally, Fey and not observe any trace of complementarity for a
Birkinshaw (2005) found a negative relationship sample of German firms. Tsai and Wang (2007)
between contracting R&D and the creation of concluded that external R&D had no effect on firm
new products and technologies. These results are performance when used in isolation; rather, its ef-
433
fect depended on internal R&D efforts. Hence, the MODEL

level of knowledge positively influenced inward
technology for improving firm performance. In The conceptual framework developed in this study
2009, the authors analyzed inward technology for is presented in Figure 1. As mentioned, this study
low- and medium-technology firms and found is composed of a two-step analysis. In the first
contradictory results. Internal R&D negatively part, aiming to explain the determinants of the
moderated the role of external R&D on sales due RDS, we set Hypotheses One and Two, arguing
to new products. that the organizational resources and commercial
Drawing on the discussion above, the follow- resources will condition the firms selection of a
ing hypotheses are formulated: certain RDS. Furthermore, we consider that the
firms information sources will also influence
H3: All RDSs will have a positive effect on firms selection. Additionally, at this first stage we
the firms innovative performance. control for the technological/ knowledge intensity,
However, we do not expect all RDSs to have the the fact that a firm belongs to a holding group and
same impact on firm innovativeness. Based on the the firms size. In the second stage of the analysis,
open innovation (Chesbrough, 2003), innovation following the R&D Capital Approach, we assume
network (Pyka & Kppers, 2003) and absorptive that these strategies will have a positive and
capacity (Cohen & Levinthal, 1990) approaches lagged effect on firms innovative performance.
and on previous empirical research (i.e.,Veugelers The firms size and the technological/ knowledge
& Cassiman, 2006; Cruz-Czares et al., 2010), intensity are also used as control variables in the
we believe that the make-buy strategy will pro- model estimation. We do not consider that the fact
duce the greatest effect on the firms innovation that a firm belongs to a group might affect the
performance because innovations occur mainly firms innovative performance. In the Methodol-
through the combination of ideas, resources and ogy section, the variables operationalization and
technologies (Fey & Birkinshaw, 2005). the modes estimates to test the model presented
in Figure 1 are described.
H3a: The make-buy strategy will have the high-
est impact on the firms innovative performance.
Finally, despite the flexibility gained through METHODOLOGY
the externalization of the R&D activities, coordina-
tion problems, transactional costs and functional Data
inequalities emerge when externalizing R&D
(Kotable & Helsen, 1999), and researchers have The empirical analysis carried out in this paper
found empirical evidence of these limitations draws on the Technological Innovation Panel
(i.e.,Kessler et al., 2000; Fey & Birkinshaw, (PITEC) dataset (2003-2007). The PITEC dataset
2005). Thus, based on theoretical and empirical is conducted by the Spanish National Institute of
evidence, we would argue that the buy strategy Statistics (INE) in collaboration with the Spanish
will have the lowest impact on the firms innova- Science and Technology Foundation (FECYT)
tive performance. and the Foundation for Technological Innova-
tion (COTEC). Particularly, PITEC compiles
H3b: The buy strategy will have the lowest the information provided by the Spanish Com-
impact on the firms innovative performance. munity Innovation Survey (CIS), which follows
the guidelines of the Oslo Manual (OECD, 1997).
It includes data on the technological innovation
434
Figure 1. Conceptual framework
activities like the main obstacles for achieving and service firms, the panel dataset was divided
innovations, the main technological information into two samples, the first one containing 6,776
sources, innovation and R&D expenditures, quali- observations of 1,694 service firms, and the second
fications of the R&D personnel, outsourcing R&D one 14,188 observations of 3,547 manufacturing
activities classified by origin and type of partners, firms. As observed, both samples are balanced
and the effects the innovation achievements. This panels. Following Miotti and Sachwald (2003),
dataset is available in a set of files for each year innovative and non-innovative firms are included
(i.e., a file for each year 2003, 2004 2007). in the panel in order to prevent bias in the sample.
However, due to sampling procedure limitations The main advantage of estimating the model
for the year 2003, we specifically used data for in a panel dataset is that it allows for solving the
the period 2004-2007, with a sectoral coverage endogeneity problem by including the independent
of manufacturing and service firms2. variables lagged, thus improving the inference of
In order to have a consistent longitudinal causal effects (Baum, 2006).
dataset, we excluded those firms that have ex-
perienced any important contingency during the Variables Definitions
period 2004-2007 from the sample (i.e., mergers
and acquisitions, fusions, changes in the industrial Dependent Variables
activity and missing values in some of the years
corresponding to the period under analysis). In As commented, this study is composed of a
addition, we excluded those firms belonging to two-stage analysis. In the first stage we evaluate
the primary sector (agriculture and mining) and the determinants of RDS selection, leading us
those involved in construction and energy pro- to consider the different strategies as dependent
duction and/or distribution activities. In order to variables. This variable was constructed by the
observe the differences between manufacturing two original variables of internal and external
435
R&D expenditures. Firms were asked to report recent creation and 0 otherwise. The degree of firm
the percentage of R&D expenditures for each of internationalization is considered as a proxy for
the internal and external activities over the total measuring the organizational resources (Filipescu
innovation expenditures. Thus, if a firm reported et al., 2009). This variable has the value of 1 if
zero expenses on both activities, the resultant the firm commercializes its products in a local
variable has the value of 1 (no R&D), if the firm and national market, 2 if the firm commercializes
reported positive internal expenditures and zero in other EU countries and 3 if the firm sells its
external, the dependent variable has the value of 2 products in any other country. The last independent
(make), for firms with zero internal expenditures variables for the determinants of the RDS selec-
and positive external expenditures, the variable has tion are the firms information sources. With the
the value of 3 (buy), finally, if the firm reported PITEC sample, there are eleven different items that
positive expenditures for internal and external capture the importance of each of the information
R&D, the composed variable has the value of 4 sources. Firms are asked to mark, from 1 to 5, with
(make-buy). As observed, the resultant variable the latter being the highest degree, the importance
has four levels, each for one strategy, and these given to that specific information source. Using
levels are mutually exclusive. a factorial analysis those eleven items were re-
For the second stage of this study, when evaluat- duced into three different factors. The first one
ing the consequences of the RDSs on firm innova- captures the information coming from the firms
tive performance, we consider the percentage of market, the second one gathers the information
sales due to new products - new to the firm-, as from public organisms and the latter represents the
the first dependent variable. Additionally, we also information from conferences and publications3.
attempt to measure the novelty of the innovations As observed, all of these information sources are
achieved, thus, a second dependent variable is beyond firm boundaries and, following the open
considered which measures the percentage of sales innovation approach, we expect that the higher
due to new products that are new to the market. their assessment, the more prone firms will be to
Measuring the effect of the innovation activities externalize R&D activities.
as the percentage of sales due to new products is The dichotomous variable of belonging to a
accepted in the literature (Veugelers & Cassiman, group is included as a control variable since firms
2006). The main advantage of considering this with access to group technology will have incen-
indicator of innovative performance is that it does tives to achieve the buy strategy due to a reduction
not merely measure the innovations achieved but in the transaction costs. For controlling the industry
also the successful innovations that reached the effect, a dummy variable was included which has
market (Cano & Cano, 2006). the value of 1 if the service firm belongs to one of
the industries considered with a high knowledge
Independent Variables intensity according to Felixs (2000) classification.
The Oslo Manual (OECD, 1997) classification
As argued in the theoretical background, for the was used to categorize manufacturing firms de-
first stage of the analysis, we consider that organi- pending on their technology intensity being low,
zational and commercial resources will influence medium or high. The logarithm of the number of
the selection of the RDSs. The age of a firm is employees is included to account for firm size.
considered a proxy for measuring the organiza- The main explanatory variables of firm innova-
tion resources since it represents experience and tive performance are the RDSs which, contrary to
learning capacity (Galende & De la Fuente, 2003). the first stage of the analysis, are separately intro-
This variable has the value of 1 if the firm is of duced into the model as dichotomous variables,
436
with four resulting variables: no R&D, make, buy the importance of achieving R&D activities in
and make-buy. To assert the lagged effect of the order to obtain radical innovations. Observe that
RDSs, we included these variables at t-1 and t-2. for those firms without R&D activities the per-
The commercial resources, measured as the degree centage of sales for products new to the firm is
of firm internationalization, are considered inde- quite similar to those firms achieving any RDSs;
pendent variables so as to explain firms innovative however, for the percentage of sales for products
performance. The firms technological resources new to the market, the difference between those
are also considered to be an explanatory variable firms achieving the make or make-buy strategies
of the firms innovative performance, and they are is considerably higher than in those firms without
measured as the percentage of R&D expenditures R&D activities. Additionally, we could assume
over total innovation expenses. In order to solve that the buy strategy does not influence the prod-
the endogeneity problem, both technological/ ucts new to the market since its percentage is very
knowledge and commercial resources at t-1 were low.
introduced into the model. Finally, the knowledge
and technological intensity levels and firm size Determinants of RDS Selection
are included in the model as control variables.
Since the dependent variable of the first stage of
the analysis is a categorical one, we estimate a
RESULTS multinomial logit model with random intercepts
that accounts for the individual, unobservable
Descriptive Analysis heterogeneity4. In Table 3, the model estimates
for the determinants of RDSs selection for service
Next, Table 1 shows the distribution of RDS selec- and manufacturing firms are seen. Two models
tion among service and manufacturing firms. As were estimated for each sample; in the first one,
observed, 38.90% of those service firms in low- the make strategy is the reference variable which
knowledge sectors do not achieve any RDS. This is compared with buy and make-buy strategies. In
percentage is reduced by more than half for those the second model, the buy strategy is the reference
firms in high-knowledge sectors. We can observe and it is compared against the make-buy strategy.
the same behavior for manufacturing firms, since By doing so, we are able to compare the prefer-
the percentage of firms with no R&D decreases ence for selecting one strategy against the others5,
as the technological intensity increases. There is a something that the previous literature failed to do
clear tendency for all sectors: the make strategy is (e.g., Veugelers & Cassiman, 1999).
the most selected, followed by the make-buy and As observed in Table 3, organizational re-
finally the buy strategies. Interesting is the fact sources determine RDS selection. For service and
that the highest percentage of firms developing the manufacturing firms, the negative and significant
buy strategy is represented by the low-knowledge- effects of buy and make-buy strategies in Models
intensity service firms. A and C indicate that when organizational re-
Table 2 shows the relationship between the sources are high firms tend to select the make
RDSs achieved and firm innovative performance. strategy. From Models B and D we see that there
As commented, we consider the percentage of is no significant difference between buy and make-
sales due to new products for the firm and for the buy. These results lead us to reject Hypothesis 1
market as two variables accounting for the firms and contradict previous studies that highlight that
innovative performance. For service and manu- young firms lacking organizational resources
facturing firms, these descriptive results highlight avoid the make strategy since they are likely to
437
Table 1. Percentage of RDSs by knowledge/technology intensity
a. Service firms b. Manufacturing firms

Innovation
Strategies Low-knowledge High-knowledge Low-Tech. Medium-Tech. High-Tech.
intensity intensity intensity intensity intensity
no R&D 38.92 14.64 20.12 19.09 9.49
make 28.77 44.59 42.95 39.81 47.82
buy 11.03 5.72 6.41 8.33 4.07
make-buy 21.27 35.05 30.53 32.78 38.62
Table 2. Percentage of RDSs by sector
a. Service firms b. Manufacturing firms

Innovation Strategies
New to the firm New to the market New to the firm New to the market
no R&D 15.53 5.88 15.06 6.57
make 16.14 16.13 17.00 10.81
buy 14.86 7.07 15.51 6.44
make-buy 16.11 18.63 16.44 12.65
select the buy strategy in order to externalize risk those firms aware of changes, tendencies and
and overcome uncertainties (Poon & McPherson, facilities of competitors, clients and equipment
2005). suppliers look forward to gaining the flexibility and
Hypothesis 2 states that the higher commercial speed through externalizing while, simultaneously,
resources, the higher the probability for selecting developing internal R&D to create knowledge
the make-buy strategy; however, this hypothesis and barriers to imitations.
cannot be supported. Again, for Models A and C Against what was expected, the negative and
we can observe that the make strategy is preferred significant sings of the buy and make-buy strate-
over the other two, while make-buy is preferred gies in Models A and C show that when firms
over the buy strategy for Models B and D. These highly value the importance of information com-
results are in line with those of Veugelers and ing from public institutes, they tend to select the
Cassiman (1999), who stated that the higher the make strategy. As for the information coming from
commercial resources, the lower the probability conferences and publications, it does not seem not
to select the buy strategy. so clear to determine RDS selection since it is not
The information sources for innovations also significant for any case in the service sample, and
determine RDSs selection although not in the for the manufacturing firms results merely show
expected direction. For both service and manu- that the make strategy is preferred over buy.
facturing firms, the information for innovation As for the belonging to a group variable, ob-
coming from the firms market reduces the pos- serve in Model A that buy and make-buy strategies
sibility to solely externalize the R&D activities have a positive and significant coefficient showing
(Models A and C); however, -due to the positive that the make strategy is the less preferred. These
sign of make-buy in all models-, it does influence results indicate that belonging to a group, due to
the selection of the make-buy strategy. This fact a reduction in the transaction cost, stimulates the
highlights the open innovation approach since externalization of R&D, being in isolation or in
438
Table 3. Determinants of RDS selection
Service firms Manufacturing firms

Variables A. make as ref. B. buy as ref. C. make as ref. D. buy as ref.
buy make-buy make-buy buy make-buy make-buy
Organizational -1.9380* -0.7352** -2.2619** -0.9865**
0. 9709 (1.5614) 1.0978 (1.5691)
Resources (1.0599) (0.3627) (1.1165) (0.4960)
Commercial Re- -0.8915*** -0.2472*** -0.3342*** -0.1728***
0.3944* (0.2147) 0.2366* (0.1266)
sources (0.1158) (0.0745) (0.0805) (0.0619)
-0.3773*** 0.0255 0.4344** -0.1848** 0.2224***
Info. firms market 0.4022*** (0.1095)
(0.1107) (0.0706) (0.1782) (0.0774) (0.0542)
Info. public organ- -0.4706*** -0.1638** 0.3678** -0.5679*** -0.1399**
0.4780*** (0. 1220)
ism (0.1119) (0.0730) (0.1853) (0.0788) (0.0540)
Info. conf. & publi- -0.0620 0.0241 -0.3914*** -0.0230
0.2451 (0.2248) 0.1879 (0.1281)
cations (0.1220) (0.0814) (0.0843) (0.0606)
0.6768*** 0.4419*** 0.1243
Group 0.0451 (0.4025) -0.0540 (0.1114) -0.1557 (0.2312)
(0.2135) (0.1610) (0.1478)
-2.8135*** -1.3856*** 1.9523***
High knowledge Int.
(0.2796) (0.2499) (0.4235)
0.3122*
Medium Tech. 0.1581 (0.2499) 0.1278 (0.2767)
(0.1834)
-1.0814*** -0.5303***
High Tech. 0.6147** (0.2463)
(0.1576) (0.1203)
0.3581*** 0.2147*** -0.1901** -0. 1469*** -0.0162
Size 0.1736* (0.0915)
(0.0548) (0.0422) (0.0944) (0.0506) (0.0418)
-0.7542* -0.3465 5.0410*** -1.4963*** -0.6798***
Constant 4.3382*** (0.5221)
(0.3949) (0.3112) (0.7447) (0.2978) (0.2347)
log-likelihood: -5022.4754
log-likelihood: -10316.92 N. observations: 10641
N. observations: 5082
N. firms: 3547
N. firms: 1694
* p <.1; ** p <.05; *** p <.01; standard errors in brackets
combination with internal R&D. Nevertheless, sample, the bigger the firm is, the higher the
these results are not extendable for manufactur- probability to select the buy strategy, while the
ing firms. lowest probability accounts for the make strategy.
Service firms in high-knowledge industries will On the other hand, bigger manufacturing firms
be likely to select the make strategy, while the buy will prefer the make or make-buy strategies over
one is the least preferred. Regarding manufacturing exclusively buying.
firms, we can see that the technological intensity
sector to which the firm belongs also conditions Consequences of RDSs
RDS selection. For medium-technology firms,
the buy strategy seems to be preferred over make, The second-stage analysis aims at evaluating the
while for high-technology firms, the buy strategy effect of RDSs on firm innovative performance.
is the least selected. To do so, the effects of the RDSs are evaluated on
Contrary to the regular effects on service and the percentage of sales due to new products for
manufacturing firms of the determinants described the firm and for the market. Due to the truncated
above, firm size presents almost an inverse effect nature of the dependent variables, we estimated a
for the two samples. On one hand, for the service
439
Tobit model with random effects for service and novation (Chesbrough, 2003) and absorptive
manufacturing firms. capacity (Cohen and Levinthal, 1990) approaches,
As commented, in order to empirically demon- the make-buy strategy produces a greater impact
strate the lagged effect of R&D activities on firm for achieving successful radical innovations,
innovativeness (Griliches, 1979), and looking to confirming Hypothesis 3a. Despite the difficulties
solve any endogeneity problem, we include the that arise when R&D activities are externalized
RDSs in the model lagged at t-1 and t-2. Addition- (Narula, 2001), the buy strategy positively impacts
ally, this double-lagging allows us to capture the the achievement and commercialization of radical
short- and long-term effects of the RDSs on firm innovations for service firms.
innovativeness. When increasing the spectrum, we can clear-
First of all, the results of the new-to-the-firm ly detect the so-called short-term effect of the buy
model corresponding to service firms presented strategy (Kurokawa, 1997) since it is no longer
in Table 4 are surprising. As observed, none of significant at t-2. As for the make and make-buy
the RDSs has any short-term (t-1) or long-term strategies, they still impact on firm innovativeness
(t-2) effect on firm innovativeness. This might two years after they were achieved; nevertheless,
indicate that service firms do not need to attain their effect is reduced by half. Interestingly, the
R&D activities in order to obtain non-radical in- greatest effect of the make-buy strategy loses
novations. Continuing with service firms, we can strength at t-2, and its effect is practically the same
see that all RDSs have positive and significant as the make strategy.
effects over the percentage of sales due to new Important results emerge when paying atten-
products for the market, confirming Hypothesis tion to manufacturing firms. First, considering the
3. However, as predicted in Hypotheses 3a and positive and significant effects of RDSs on sales
3b, not all strategies have the same impact. Due due to new products for the firm, it could be as-
to the complementarity stressed in the open in- sumed that R&D activities are needed to achieve
Table 4. Consequences of RDS selection
Service firms Manufacturing firms

New to firm New to market New to firm New to market
Make t-1 5.3661 (5.6233) 30.2971*** (6.4906) 11.9663*** (2.8946) 20.5586*** (3.1499)
Buy t-1 2.4156 (6.5951) 24.2054*** (7.8600) 9.3077** (3.5386) 3.9463 (4.0303)
Make-buy t-1 3.6505 (5.8399) 36.1143*** (6.7580) 10.7482*** (3.0190) 26.0626*** (3.2936)
Make t-2 4.5290 (3.2322) 17.7258*** (3.9480) 4.1783** (2.1354) 9.4276*** (2.4053)
Buy t-2 -3.2977 (4.7804) -0. 2255 (6.2348) 2.4960 (2.8437) 5.6346* (3.2673)
Make-buy t-2 5.7134 (3.5605) 17.9095*** (4.2867) 4.4934** (2.2567) 12.3009*** (2.5100)
Commercial Resources t-1 0.3342 (1.3543) 6.9480*** (1.4511) 0.9060 (0.9486) 1.0844 (0.9949)
Technological Resources t-1 -0. 0458 (0. 0554) -0.1091* (0.0624) -0.0747** (0. 0258) -0.0778** (0.0277)
High -knowledge Int. -4.5117 (3.8399) 13.9377*** (4.2633)
Medium-Tech. -4.2021* (2.2428) -1.1146 (2.3086)
High-Tech. 1.9892 (1.9301) 5.3593** (1.9791)
Size -0.7496 (0.7361) -1.5860** (0.7895) 0. 2306 (0.6254) -0.7416 (0.6366)
Constant -6.9791 (6.1713) -64.6966 *** (6.9983) -9.5435** (4.0823) -38.4766*** (4.3749)
* p <.1; ** p <.05; *** p <.01; standard errors in brackets
440
non-radical innovations. Here, Hypothesis 3 is knowledge that stimulates these innovations (Fili-
again verified. However, due to the coefficient pescu et al., 2009). Contrary to what was expected,
magnitude, we are not able to support Hypothesis the firms technological resources, measured as
3a since the make-buy strategy does not produce R&D expenditures, negatively influence firm in-
the greatest impact. It seems that for achieving novativeness for service and manufacturing firms.
non-radical innovation, the make strategy is the A possible explanation would be that the innova-
best option for manufacturing firms. In line with tion process is inefficient for most of the firms
Chen and Yuan (2007), the estimates show that the in the sample since those R&D expenditures that
buy strategy is the one with the least significant are not successfully transformed into innovations
effect, confirming Hypothesis 3b. When focusing are sunken costs that negatively affect firm per-
on the long-term effect, the make and make-buy formance (Koellinger, 2008). Finally, knowledge/
strategies still positively influence the innovative technological intensity and firm size little affect
performance but, as service firms, its effect is re- firm innovativeness. This might indicate that the
duced by more than half of that of the year before. knowledge and technology required for achiev-
The buy strategy is no longer significant at t-2. ing this type of innovation is less complex, and a
We are not able to support Hypothesis 3 for the single firm can manage it successfully.
last model since the buy strategy does not seem
to influence the sales due to new products for
the market. Based on the coefficient magnitude, CONCLUSION
Hypothesis 3a is supported, in which we indicated
that the make-buy strategy would produce the Why do firms select one RDS over another? What
greater impact (Veugelers & Cassiman, 2006). The are the effects of the RDSs on firm innovative
same pattern of the long-term effect-reduction is performance? Are these effects similar for all
also detected in this model. Nevertheless, the buy RDSs? Responding to these questions marked
strategy increased when referring to the coefficient the aim of this research. We selected a sample of
size and significance, indicating that this strategy service and one of manufacturing firms in order
influences radical innovations, but exclusively in to empirically answer these questions, thus far
a long-term. The absorptive capacity approach is inconclusive.
useful to clarify this behavior. Those firms that Initially, two hypotheses were stated for the
achieve the make and buy strategies simultane- first part of the analysis - determinants of RDS
ously can profit from the complementarity in selection. In the first hypothesis it was argued that
a short-term since they can easily integrate the firms with higher commercial resources would
external knowledge into the firms routines. On tend to select the make-buy strategy since it could
the contrary, those firms which exclusively buy give the firm the capacity for going beyond the
technology and knowledge can profit from it after local market and, at the same time, a firm with
two years, since the integration of knowledge activities abroad could access new information and
takes longer. networks, thus facilitating the externalization of
Concerning the commercial resources, we R&D activities. However, neither for the service
can observe in Table 4 that they slightly affect nor for the manufacturing sample were we able
firm innovativeness. The only effect registered to support our hypotheses.
in the estimates is positive for the sales due to Our second hypothesis stated that the higher
new products for the market for the service firms, the organizational resources, the higher the prob-
meaning that firm internationalization requires ability for selecting the make-buy strategy and
highly innovative products and allows access to the lower the probability for selecting the buy
441
strategy. The results obtained did not give support ing non-radical innovations. Additionally, this
for this statement either. For high commercial strategy has a slight effect on radical innovations
resources, the make strategy is preferred over the for manufacturing firms, but only two years later.
others for service and manufacturing firms. This Drawing on the absorptive capacity, we could
might indicate that when firms are aware of their assume that those firms which exclusively buy
available resources, they feel confident to achieve technology and knowledge can profit from it after
R&D activities on their own without taking into two years, since the integration of knowledge takes
account the technologies and knowledge available longer in the absence of an efficient absorptive
in the market. Nevertheless, as mentioned next, capacity. On the contrary, those firms that achieve
this excess of self-confidence might be negative. the make and buy strategies simultaneously can
As for the second part of the analysis, three profit from the complementarity in a short-term
hypotheses were proposed. In the first one, op- since they can easily integrate external knowledge
posing some previous studies (Fey & Birkinshaw, into firm routines.
2005), we stated that the make, buy and make-buy This study has academic and managerial impli-
strategies will produce positive effects on firm in- cations. Firstly, as far as the authors knowledge
novative performance and results gave support for goes, this is the first study that empirically looks
it, for both service and manufacturing firms. Based at RDSs as a whole process, considering the de-
on the absorptive capacity and open innovation terminants of selecting one strategy over another
approaches, we hypothesized that the make-buy and next their consequences over firms innova-
strategy would produce the better results and the tive performances. Second, contrary to previous
buy strategy the worse results. These hypotheses research, we consider and use the R&D Capital
were confirmed but with some nuances. We ob- Stock Model (Grilliches, 1979) and observe the
served that the effects of all of the strategies are lagged effect of the RDSs on firm performance,
not straightforward and simple since they vary improving the prospects of valid causal inference
depending on firm type and on the radicalness (Baum, 2006) and reducing possible simultaneity
of innovation achieved. For manufacturing firms, problems (Bernard and Jensen, 1999; Salomon and
the make-buy strategy produces the higher results Shaver, 2005). Thirdly, we look at both manufac-
in firm innovativeness as long as the innovation turing and service industries, aiming at offering
achieved is radical. Nevertheless, when the in- a better understanding of the latter which has not
novation achievement is non-radical, the make been analyzed in the sense that our investigation
strategy is the best option. For service firms there has. Finally, for managers this study can be useful
is not a significant difference between choosing to understand the characteristics of the RDSs and
one strategy or another if the firm aims to achieve their potential impact on innovative performance
non-radical innovations, that is, innovations new to a greater extent.
to the firm, but when the innovation is radical, This study is not free of limitations, which
the make-buy strategy is the one producing the come especially from the fact that we dealt
better results. with a longitudinal sample which, according to
Contrary to some studies which stated that the Baltagi (2007), includes problems in the design,
buy strategy did not affect the innovation output data collection, and data management of panel
(Schmiendeberg, 2008), or affected it negatively surveys. It is also possible that panel data show
(Fey & Birkinshaw, 2005), we found that this bias due to sample selection problems and attrition
strategy positively affects firm innovation perfor- (Wooldridge, 1995). Other limitations are related
mance for service firms when achieving radical to the introduction and measurement of some other
innovations and for manufacturing firms achiev- variables in the analyses, thus conferring a more
442
complete image of R&D activities. Moreover, the Barney, J. B. (1999). How a firms capabilities
approach used to measure some of the factors affect boundary decisions. Sloan Management
may be less precise than desired. Review, 40(3), 137145.
As for future research lines, it would be inter-
Barney, J. B., Wright, M., & Ketchen, D. J. Jr.
esting to be able to realize comparisons between
(2001). The resource-based view of the firm: 10
similar studies. By replicating this investigation
years after 1991. Journal of Management, 27(6),
in distinct geographical contexts, results could
625641. doi:10.1177/014920630102700601
be generalized to larger populations. In this way,
it would reveal if institutional factors play a role Baum, C. F. (2006). An introduction to modern
in influencing the relation (Kogut et al., 2002; econometrics using Stata. Texas, USA: Stata Press.
Peng et al., 2005; Kumar, 2009). Moreover,
Bayona, C., Garcia, T., & Huerta, E. (2001).
comparisons among firms with different types of
Firms motivations for cooperative R&D: An
ownership could be also acknowledged, as well
empirical analysis of Spanish firms. Research
as the employment of other criteria to separate
Policy, 30(8), 12891307. doi:10.1016/S0048-
the database (e.g. size, sector).
7333(00)00151-7
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448
ENDNOTES or private institutes; universities; public

research institutes; technological centers;
1
There is also a fourth RDS, called coop- conferences and expositions; scientific
eration in R&D activities (Colombo and journals or technical articles; professional
Garrone, 1996), but this has usually been or industrial associations.
studied independently due to its specificity 4
For a detailed description for the model
and complexity (Bayona et al., 2001). formulation and the analytical solution of
2
In 2003 PITEC gathered two samples, the integral, see Rabe-Hesketh et al. (2002).
one containing firms with more than 200 5
When estimating each model, we can see in
employees and the other with firms report- the output the probability for selecting each
ing intramural R&D expenditures. This level of the dependent variable against the
limitation was corrected in 2004 to include reference variable; for the first model, the
a representative sample of firms with less probability for buy, make-buy and no R&D.
than 200 employees and/or external R&D However, we do not show the probability for
expenditures, as well as firms with no R&D no R&D since it represents the probability of
activities. A detailed description of the da- enrolling in R&D activities, which is not the
tabase can be found at http://sise.fecyt.es/ aim of this research. For the second model
Estudios/PITEC.asp (in English). the estimates would show the probability of
3
The factorial analysis was carried out fol- make, make-buy and no R&D. Here, due to
lowing a principal factor with varimax redundancy with the first model, we omitted
rotation. The original items of the informa- the make strategy and the no R&D for the
tion sources are: inside the firm or group; same reasons mentioned above.
equipment suppliers; clients; laboratories
449
450
Chapter 24
Institutional Innovation
Practices in Technopoles:
An Example in France
Anne Berthinier-Poncet
Universit de Savoie, France
Rachel Bocquet
Sbastien Brion
Caroline Mothe
ABSTRACT
This chapter aims at filling a void in the literature on the question as to whether organizational proximity
can be fostered within clusters. We address a dimension that has received little attention until recently,
namely the local governance structures of technopoles. The objective was to gain an insight into such
institutional practices and to evaluate their effects on firms innovation performance. By identifying
how geographical and organizational (cognitive and relational) proximity interrelate in the analysis of
cluster forms we sought to contribute to the burgeoning literature on the different types of proximity. The
empirical research relies on a representative sample of 88 firms implanted within the Savoie Technolac
technopole, in the French Rhne-Alpes region. Our results suggest that, even though local governance
contributes to territorial anchoring, only the local labor market had a direct significant impact on the
firms innovation performance. In addition, territorial anchoring combined with the roles played by
governance in terms of matchmaking and support for technology transfer significantly increased the
number of innovation projects. These results suggest that governance has a decisive role in the creation
of communication and interaction structures between firms, which are essential for firm innovation.
This research may have important implications for governance modes, in not only technopoles but also
more generally in clusters.
DOI: 10.4018/978-1-61350-165-8.ch024
Institutional Innovation Practices in Technopoles
INTRODUCTION (2009) have shown that cluster characteristics

also affect the type of governance mode. This is
The established typology of territorial innovation in line with many studies that underline the central
makes it possible to identify the characteristics of role of institutions in the creation of non spatial
specific clusters such as technopoles and technol- forms of proximity in interactive agglomeration
ogy parks (Longhi & Qur, 1993; Levesque, forms (Grossetti, 2004; Pecqueur & Zimmermann,
Fontan & Klein, 1998; Moulaert & Sekia, 2003; 2004; Leloup et al. 2005; Asheim, 2007; Rallet &
Carluer, 2006). Despite the importance of their Torre, 2007; Carrincazeaux, Grosseti & Talbot,
research activities, innovation technopoles are 2008). The French School of Proximity (Torre
often characterized as having weak inter-firm re- & Gilly, 2000; Torre, 2006) explicitly introduces
lationships (Cooke, 2001; Asheim, 2007), thereby the notion of territorial governance to designate
limiting their innovation potential on a collective the institutional and organizational process of
level. Among the factors that contribute to this bringing together different modes of coordination
process, the development of non-spatial forms between geographically close actors (Colletis et
of proximity represents a key explanatory factor al., 1999: 34).
(Markusen, 1996; Angel, 2002; Rallet & Torre, Territorial (or local) governance (Leloup et
2007). The various forms of non-spatial proximal. 2005;Ehlinger et al. 2007;Bocquet & Mothe,
ity can be assimilated to organizational proximity 2009) has been shown to play a role in the cre-
with respect to the interactions between actors, ation of favourable conditions for collaborative
regardless of their nature (Bouba-Olga & Gros- innovation. In interactive technopoles, where firms
setti, 2009). Pecqueur and Zimmermann (2004) already share material and cognitive resources, one
proposed a more nuanced characterization that could think that the coordination challenge associ-
distinguishes between coordination processes ated with governance would be lower. However,
based on direct interaction among actors (orga- this is far from being the case when the cognitive
nizational proximity) and those with no direct distance between firms is weak, leading to higher
interaction (institutional proximity). This distinc- appropriation defaults (Nooteboom, 2009). The
tion seemed particularly relevant to introduce the governance structure can thus play an active role
role that governance may play in order to help in maintaining and developing these resources
develop a local and stable environment, conducive within linear types of technopoles as well as in
to collective innovation (Longhi & Qur, 1993; certain types of interactive forms.
Levesque et al., 1998). Empirical research dedicated to the institu-
Focusing on the dynamics of innovation, two tional innovation practices implemented by local
types of technopoles can be distinguished (Cooke, governance is scarce. The original approach ad-
2001). A linear type, which is typical of science opted in this chapter consists in identifying such
parks la franaise and related to a simple practices within a technopole and in assessing their
localized agglomeration of productive activities impact on its members innovation performance.
that have no real relationship with each other, and We seek here to fill a void in the literature on the
by contrast, an interactive type, which is based question as to whether organizational proximity
on organizational and institutional networking can be fostered by taking into account a dimension
between firms, promoting their ability to innovate. that has been given low consideration, namely
Research has long focused on the impact of the the local governance structures of technopoles.
structural properties of clusters on their perfor- The empirical research concerned a representa-
mance and evolution (Brezis et al. 1993; Suire tive sample of 88 companies affiliated to the French
et al. 2006). More recently, Bocquet and Mothe technopole Savoie Technolac in the Rhone-Alpes
451
region and yielded two types of results. Firstly, ity view and identify the role of the institutional
although the governance was involved in the ter- practices adopted by a technopoles governance
ritorial anchoring of firms, we showed that calling on its members innovation performance.
upon a local labor market had a direct impact on Within technopoles, natural geographical
the firms innovation performance. Secondly, proximity has been shown to influence innovation
together with the inter-firm matchmaking role of performance (Amin & Cohendet, 2005). However,
governance and its facilitating role in technology geographical proximity alone cannot account for
transfer between research and industry, this ter- knowledge flows, learning and innovation (for a
ritorial anchoring also contributed significantly to review, see Ozman, 2009): other forms of proxim-
the implementation of innovation projects within ity may be essential in order to foster interactive
the technopole. As these innovation projects were learning and innovation capabilities (Boschma,
ongoing at the time of the study, their effects on 2005; Rallet & Torre, 2005).
innovation performance were difficult to observe. Since the founding distinction between geo-
This chapter is organized as follows: We first graphical proximity and organizational proximity,
characterize the concept of technopole by fo- different types of proximity were added to refine
cusing on the specificities of French technopoles. the concept of organizational proximity (Bouba-
Then, following the proximity approach, we con- Olga & Grossetti, 2008). For Rallet and Torre
sider the possible influence of institutional prac- (2005), organized proximity designates two
tices on the innovation performance of member types of logics: similarity and belonging. Similarity
firms, and analyze the impact of the institutional includes actors who are alike, who share the same
practices implemented by the local governance on reference space and knowledge, whereas belong-
innovation through the study of Savoie Technolac. ing refers to actors who interact. Other authors,
such as Suire et al. (2006), adopt a similar view
by proposing the concepts of cognitive proxim-
TECHNOPOLES AND ity and relational proximity. Cognitive proximity
DYNAMICS OF INNOVATION suggests that agents are cognitively close, i.e.
share conventions, values and representations.
The technopolitan phenomenon and its associated Relational proximity refers to actors sharing a
technology parks or technopoles have experi- same interaction structure to make transactions or
enced strong growth in many developed coun- to exchange. As mentioned above, Pecqueur and
tries since the late seventies (Longhi & Qur, Zimmermann (2004) differentiate the nature of
1991, 1993; Doloreux, 1999). Technopoles are interactions between actors depending on whether
a tool for the strategic development of regional they are direct (organizational proximity) or in-
innovation systems (Doloreux 1999; Longhi & direct (institutional proximity). This distinction
Qur, 1993). Technopoles are public initiatives enables us to introduce the idea that actors can
designed to promote technological innovation. rely on coordination arrangements without hav-
They are also viewed as local zones created in ing to rely on personal channels such as norms,
order to coordinate existing resources and create standards, directories, human intermediaries. As
new ones. Far from presenting a homogeneous suggested by Bouba-Olga and Grossetti (2008),
model of territorial innovation, recent research has these devices or mediation resources are no lon-
identified two types of technopoles with distinct ger considered at the individual level (cognitive
properties and performances (Cooke, 2001). We or relational proximity) but rather as collective
interpret this distinction following the proxim- coordination resources. Such a perspective seems
452
particularly relevant when establishing the role enrolment and anchoring; (2) cross-fertilization
that governance may play when it has to face a and the development of local synergies between
lack of cognitive and relational proximities. scientific, industrial and financial representa-
More precisely, we propose that cluster local tives; and (3) technology transfer, as the scientific
governance may contribute to foster organizational component is inseparable from the concept of
proximity in linear technopoles. Governance technopole (Doloreux, 2002). Although this model
may enhance cognitive proximity when it is low of technopolitan development has been very suc-
due to high inter-firm heterogeneity (in terms of cessful in developed countries, empirical studies
size, activity, markets, status, etc.) and/or create show a strong heterogeneity in terms of their in-
incentives for relational proximity. Cognitive and novative performance. Despite significant invest-
relational proximities become possible without ments in innovation services and infrastructure,
physical proximity (Amin & Cohendet, 2005) French technopoles seem to be the locus of weak
and the social architecture of learning in firms relationships between co-localized firms (Carluer,
cannot be reduced to territorial ties (ibid: 469) as 2006) and of a lack of synergy between research
knowledge is not linked to particular geographical and industry (Cooke, 2001; Rallet & Torre, 1998).
sites. The extent to which organizational proxim- French technopoles tend to correspond to the
ity can be fostered remains an open question. linear innovation policy (Cooke, 2001). They
We contribute to fill this void in the literature by result from large-scale political investment in
analyzing whether governance structures might public infrastructure. Agglomeration is induced
help to develop innovative networks. and no institutional effort is made to create
links between co-localized actors. This lack of
Technopoles: Cathedrals in the interaction is mainly due to the explicit motiva-
Desert or Networks for Innovation? tion to provide hosting facilities for high-tech
companies instead of facilitating links between
The concept of technopole refers to various forms scientific, academic and industrial potentials
of industrial organization. In the United States, the (Qur, 1996; Doloreux 1999; Longhi & Qur,
Silicon Valley is often cited as a typical example 1991). French technopoles share a set of specific
of a technopole, viewed as a new techno-industrial properties extensively identified in the literature
complex of high-tech firms in which government on local development. Levesque et al. (1998)
and universities play a crucial role for its develop- observed that technopoles are characterized by a
ment (Castells & Hall, 1994). In Great Britain, high number of innovative firms from high-tech
science parks have helped to reinforce the sectors, mainly SMEs. However, they are seldom
power of universities in the face of an important involved in innovation networks, particularly with
disengagement of the State (Longhi & Qur, local private or public partners. In their longitudi-
1991). An economic logic of innovation diffu- nal study of Sophia Antipolis, Longhi and Qur
sion and technology transfer to small local firms (1993) showed that when inter-firm relationships
is predominant in German Technologieparks. existed, these remained essentially vertical in na-
In France, technopoles such as Sophia Antipolis ture. Often isolated from their parent company or
and ZIRST Meylan have emerged as the result of due to their small size, firms are not encouraged
public policies for economic development oriented to collaborate with research laboratories and/or
towards high technology activities (Longhi & neighbouring partners. The main reason is the fear
Qur, 1993). These are organized around three of losing specific expertise. Levesque et al. (1998)
main functions (Faberon, 1990): (1) company confirmed the weakness of contractual relations
453
within linear technopoles: only the largest SMEs innovation; organizational proximity must also be
were successful in finding their place within a considered. Doloreux and Parto (2005) showed
permanent network of business relations. the importance of social relations that support
The lack of trust within the technopole also the activities of production, consumption and
hinders the establishment of informal relationships trade: [they] are made up of symbolic elements,
and of a local labor market, both key dimensions social activities, and material resources that
for territorial anchoring. De Bernardy (1999) define the structure of the interaction among hu-
showed that when these dimensions exist, they mans based on rules, norms, and values (ibid:
remain highly vulnerable to competitive pressure. 146). This dimension is inherent to the concept of
Fierce competition between firms acts against the organizational proximity between actors that are
creation of informal relationships. Carluer (2006) geographically close (Gilly et al., 2004). It guar-
explained the absence of genuine local anchoring antees the viability and stability of the technopole
of firms by the fact that geographical proximity in the long run (Dupuy & Gilly, 1999). When
does not lead to relational embeddedness. Indeed, geographical proximity is observed without any
companies have access to generic, readily avail- form of organizational proximity, the economic
able and transferable resources without having to actors have little chance of maintaining direct rela-
engage in non-market relationships. Altogether, tions (Torre, 2006). This is especially true when
these findings echo recent studies that question the technopole brings together a high proportion
the premise that geographical proximity would of small businesses (Leloup et al. 2005;Ehlinger
be sufficient for the creation and dissemination et al. 2007;Bocquet & Mothe, 2009). Studying
of innovation at a collective level. clusters with a strong concentration of SMEs,
Conversely, interactive technopoles (Cooke, Bocquet and Mothe (2010) showed the difficul-
2001) reject the linear view of innovation and fo- ties that arise when trying to establish synergies
cus on the dynamic learning process taking place between SMEs due to their highly individualistic
in a local milieu (Camagni, 1991; Maskell & behaviour and difficulties to perceive innovation
Malmberg, 1999; Antonelli, 2000) where institu- opportunities. Although cooperation and the use
tions are expected to play a central role (Amin, of external sources are key dimensions to their
1999; Cooke & Morgan, 1998). The success of innovation activity (De Jong & Marsili, 2006;
this second type of technopole no longer relies on Freel & Harrison, 2006; Huet & Lazaric, 2008),
the existence of infrastructures, generic resources not all SMEs have the ability to absorb external
and skilled workforce. It depends on strong territo- resources and/or are reluctant to establish such
rial anchoring and on active networking between relationships. As cross-fertilization is one of the
firms, as well as on closer ties between research main functions of the technopole, it is clearly
and industry. For Longhi and Qur (1991), the challenging the governance to create mediation
innovative network depends on both the comple- resources (institutional proximity) when deal-
mentarity of activities/skills available on site and ing with weak organizational proximity (both,
on the dynamics of the local labor market. These cognitive and relational proximities). Anchor-
two central dimensions, which form the basis for ing appears when the territorial organization
local learning, require a strong synergy between (geographic proximity) is capable of generating
firms and local institutions (Boekholt & Van der organizational and institutional proximity effects
Weele, 1998, Levesque et al., 1998). based on the interaction and cooperation between
Although geographic proximity plays a sig- units operating in the same geographical proxim-
nificant role, approaching innovation from an ity (Zimmerman, 2008: 115).
interactive perspective is insufficient to explain
454
Institutional Practices for ensure consistency and continuity of the local

Innovation in Technopoles labor market in order to enable firms to exchange
expertise and to benefit from localized learning
The emergence of a technopole as an innovative spillovers (Longhi & Qur, 1991).
network can stem from the establishment of a
local governance structure aimed at developing Networking
a cognitive proximity so as to create a sense of
common belonging that will bind actors together, The governance plays a major role in stakeholder
as well as a relational proximity designed to fa- networking in order to develop synergies. This
vour the emergence of innovative collaborations. networking dimension has a formal nature here, as
Gilly and Wallet (2001) identified four modes of opposed to informal relationships that characterize
territorial governance: (1) private governance territorial anchoring. Technological incubators
structured around a broker; (2) collective private also contribute to the promotion of innovation
governance, where the broker is a formal insti- (Doloreux, 1999). Hosting knowledge-intensive
tution that brings together private operators; (3) business services (KIBS) has a strategic impact in
public governance, where the public actors that this cross-fertilization to the extent that KIBS play
manage the network and the private actors who a key interface role between a bunch of generic
benefit from these resources are distinct; and (4) knowledge and a variety of unique and specific ap-
joint governance where dominant players are from plications (Antonelli & Qur, 2002: 1060). The
both public and private sectors. Following this governance can also sustain the development of a
approach, the governance of technopoles should common knowledge architecture among mem-
play a significant role in stimulating innovation bers (Tallman et al., 2004), seen as a translator or
through the quality of the local anchoring, and a knowledge hub between different communities
via networks and cooperation between research (Bocquet & Mothe, 2010). Lazaric et al. (2008)
and industry. highlighted the need for specific coordination
mechanisms (as a knowledge platform) to create
Territorial Anchoring places where to exchange and confront ideas.
Beyond the services and infrastructure developed Cooperation between

to host firms (generic resources), the governance Research and Industry
of the technopole should adopt a strategic approach
(Simmie et al., 2004) to generate diversity and Access to new skills and resources is a key motive
complementarity of activities. The combination in research partnerships (Mowery et al., 1998).
of a common strategy, of the actors involvement University-industry relations are considered to
in social, personal or professional networks and be a determinant of innovation performance, par-
of geographic proximity makes it possible to ticularly in high-technology sectors (Arvanitis et
generate specific resources (Grossetti, 2000). The al., 2008). Although personal contacts and social
governance should therefore develop incentive ties between actors are necessary for innovation,
schemes designed to encourage opportunities they are not sufficient to gain access to knowledge
for formal or informal meetings between actors. often embodied in joint scientific and industrial
This can be achieved through thematic meetings research teams (Breschi & Lissoni, 2001; Balconi
or seminars and the exchange of information & Laboranti, 2006). The technopole governance
between members. The governance must also can play an active role in supporting innovation
455
by facilitating spin-offs and patents or license and (4) Plastics and composite materials. Savoie
registrations, which are essential channels of Technolac has centered its development around
technology transfer (Arvanitis et al., 2008). environmental concerns by offering a pleasant
Overall, the ambition of governance should natural environment. In 2005, this environmen-
focus on building an innovative network through tal dimension was explicitly reinforced with the
appropriate mediation resources (material and establishment of the National Institute for Solar
cognitive) in order to create and sustain the ac- Energy (INES). Savoie Technolac also hosts
tors interest and motivation to collaborate. The firms that belong to the Tenerrdis cluster focused
following empirical section is based on a recent on renewable energies. The resulting economic
study of the French technopole Savoie Technolac. conversion has turned the Solar Valley into a
It presents a first quantitative analysis of the ef- reference for solar industry in France.
fects of the governance institutional practices on
firms innovation performance. Descriptive Data (see Appendix 1.1)
A large proportion of mostly independent very

CASE STUDY OF SAVOIE small firms with less than 10 employees char-
TECHNOLAC acterizes Savoie Technolac. Most firms (87.5%)
operate in service activities, especially in
The study of Savoie Technolac, conducted in knowledge-intensive business services (KIBS):
June 2009, is based on a survey of 125 companies consulting, engineering or R & D. Most firms
located in the technopole. Internet questionnaires are engaged in technological innovation: 55.7%
were sent to all CEOs. After two follow-up mails, in product innovation, 52.3% in service innova-
we received 88 valid questionnaires, thus leading tion and 39.8% in process innovation. Their main
to a final response rate of 70.5%. The final sample markets in 2008 were local or regional (69.4%).
is representative of the business population in 47.8% export their goods or services. 28.8%
terms of sector affiliation and size. are engaged in other innovative clusters at the
regional or national level. Descriptive data show
Background and History that 45.5% of firms were engaged in innovation
projects with co-located partners - but only 15.9%
Savoie Technolac was created in 1987 after the with the local university and less than 5% with
closure of the military air base at the Bourget-du- nearby customers and suppliers.
Lac and is the result of a territorial restructuring.
Following the Silicon Valley model, the technopole Savoie Technolac: A Linear or
emerged from a joint local political and economic Interactive Model of Technopole?
motivation to develop a new territory combining
university, research and high technology ser- Savoie Technolac has a public governance mode
vices. Savoie Technolac is currently made up of made up of a joint syndicate of local authorities
around 180 companies, 19 research laboratories including the department of Savoie, Chambery
and 69 scientific and technical higher education Mtropole and the Community of Municipalities
programmes covering four main activity sectors: of the Bourget Lake. This public governance ex-
(1) Solar energy and environmentally sound presses the motivation for local public institutions
technologies; (2) Information, electronic and to remain independent from regional or national
communication technologies; (3) Design, devel- public policies. From its creation, the local insti-
opment and prototyping of industrial equipment; tutions decided to set up a permanent team that
456
would be in charge of managing and developing above in the descriptive statistics on innovation
the technopole. The executive team of Savoie collaborations, innovation networking remains
Technolac has twelve members. Alongside a CEO to be developed. The low involvement of firms
in charge of the overall strategy and an admin- within on-site innovation networks, either hori-
istrative and financial director, the team fulfils zontal or vertical, is typical of a linear type of
the three above-mentioned governance missions: technopole. However, the firms do acknowledge
that the governance structure of Savoie Technolac
Territorial Anchoring plays a significant role in developing relationships
with on-site and/or off-site partners for innovation.
Building on three major resources large available
space in a highly attractive environment, proximity Cooperation between
of university and academic facilities, and funding Research and Industry
sources - Savoie Technolac succeeded in attract-
ing SMEs as well as scientific departments of Developing industry-research cooperation through
the University of Savoie. It assists firms seeking enhanced networking incentives in order to de-
to relocate in the technopole and helps innova- velop the technology transfer opportunities is a
tive start-ups through an incubator. Among the priority for the governance of Savoie Technolac.
70% of firms that were created on the site, 47% It endeavors to reinforce the circulation of infor-
were incubated, attesting to the dynamism of the mation through specific newsletters or thematic
incubator, also to the spin-off role played by the meetings that will encourage researchers to come
technopole. A vast majority of firms (68.2%) out of their laboratories. The creation of spin-
rely on the local labor market. In order to anchor offs is also sustained.
firms on the territory, Savoie Technolac offers a
wide range of generic services and infrastructure,
which are widely used (by 90.9% of firms). 40% METHOD AND RESULTS
of firms use more specific business services such
as events (theme breakfasts, conferences, open PLS Modelling
days...) to disseminate information, facilitate
meetings between firms and create a dynamic We used the PLS (Partial Least Square) structural
territorial anchoring. equation modeling to process the data1. PLS is
relevant when it comes to evaluating predictive
Networking relationships among variables and for analyses
aimed at building theory (Wold, 1985). PLS is
Savoie Technolac has taken a number of strategic well suited to the exploratory nature of our ap-
initiatives to build innovation networks. It is a proach, bearing in mind the limited research on
member of an innovation network dedicated to governance and determinants of innovation in
French technopoles and incubators. It is also technopoles. Analysis using PLS follows two
involved in two competitiveness clusters in steps. The first aims at validating the relevance of
the Rhne-Alpes region: Tenerrdis, dedicated to the latent construct from theoretical literature (see
renewable energies, and Plastipolis, specialized in table 1), the second seeks to evaluate the explana-
plastics and composites. It has also developed links tory and predictive dimensions of the structural
with other science parks at the international level model. To highlight the impact of the technopole
- such as the Metropolitan Technopark (Quebec) governance on innovation, we built two successive
and Techno Park (Montreal). However, as shown models corresponding to the interactive model of
457
the technopoles (Cooke, 2001). The first (PLS1) innovation and service innovation. In the second
shows the direct effects of governance on business model (PLS2), a fourth binary dependent variable
innovation. The second (PLS2) highlights the ef- was introduced to clarify whether companies had
fects of governance on collaborative projects for used innovation projects in collaboration with
innovation within the technopole. other partners. In this second model (PLS2), this
variable was interposed between governance
Variables variables and the dependent variables of the first
model (PLS1).
Dependent Variables
Independent Variables
Following the Oslo Manual and the approach
adopted in the CIS surveys, we focused on the Two latent variables were constructed to illustrate
subjective approach to innovation (Archibugi & the institutional practices serving innovation in
Pianta, 1996; Mairesse & Mohnen, 2010). Data the technopole. The first latent variable illustrated
were collected at company level. Respondents the collective services used by firms on site. A
were asked to declare whether they had introduced second variable indicated whether the firms used
an innovation in the three years preceding the local labor. Together, these two variables captured
survey (2006-2008), and, if so, what type of in- the quality of local anchoring. A third variable
novation. In the first model (PLS1), the following measured the networking activity within the
three binary variables corresponded to our three technopole. This variable consists of three items
dependent variables: product innovation, process describing collaborations with customers and
Table 1. Composition of latent variables
Independent Variables Items Measures

Networking activity per- Did the Savoie Technolac team put you in relation with another organization, located Binary
formed by the technopole on or off-site, that became: Binary
(NetworkingST) 1. An innovation partner (RelaPART) Binary
(De Jong et Marsili, 2. A customer (RelaCLST)
2006;Favoreu et al.2008) 3. A supplier (RelaFOST)
Quality of Territorial An- Does your firm use the business services offered by Savoie Technolac? Binary
choring (ServiceEnt) 1. Specific business services (themed business breakfasts, conferences, symposium, Binary
(Cooke et al., 1997; Gros- E-entrepreneur Club, open-day visits) (Servent)
setti, 2000;Carluer, 2006) 2. Services dedicated to business creation (incubators, personalized counselling,
providing help to request funds) (Servcrea)
Control Variables
Innovation Expenses (Ex- 1. What percentage of your firms turnover was dedicated to R&D in 2008? Continuous
penseInno) (DepRD) (Value Ln)
(Freel, 2006;De Jong & 2. How much working time (in %) did your firm dedicate to innovation in 2008? Binary
Marsili, 2006) (LaborIn)
Clusters affiliation Is your firm member of another cluster: Binary
(Cluster) 1. In the Rhne-Alpes region ?(CluRegR) Binary
CIS 2006 2. Outside the region? (ClusHreg)
Innovation sources within Over the last three years, did your firm use the following sources to innovate? Binary
branch of activity 1. Collaboration with customers (SourcCLSrv) Binary
(Source) 2. Collaboration with suppliers (SourcForSrv)
(Tether, 2003;De Jong et
Marsili, 2006;CIS 2006)
458
suppliers. A fourth and final explanatory variable Validation of the Latent Constructs
assessed the level of technology transfer between
universities and companies within the technopole. Before retaining latent constructs in structural
equation modeling, it is necessary to examine the
Control Variables convergent and divergent validity of the confir-
matory factor analysis (Gefen & Straub, 2005).
Among the five control variables, three were latent. Convergent validity is demonstrated when items
The first (innovation expenditure) is composed measuring a latent variable reach a significant
of two items: the percentage of turnover devoted value on the axis of this variable (t-value). It also
to R&D and the working time dedicated to in- requires that all latent constructs reach a minimum
novation. This latent construct sought to capture average variance extracted (AVE) score of 0.5
the internal effort made by the company to in- (Fornell, 1987). This criterion can be consolidated
novate in a broader manner than the traditional by checking the values of composite reliability
measures of input exclusively focused on R & D for each construct (see Table 2). To investigate
expenses and number of patents. This construct the discriminating validity of latent constructs,
was particularly suited to capture the innovative we used the matrix of factor loadings of the full
efforts of smaller companies, especially services, model. All items exceed the value of 0.7 and each
which are largely dominant within Savoie Tech- item obtained a higher score on its corresponding
nolac. The second latent variable stated whether factorial axis comparatively to values obtained in
the company also belonged to another regional, other areas (see Appendix 2.1 and 2.2). Discrimi-
national or international cluster. The third latent nating validity is demonstrated when the square
variable measured the level of the companys root of the AVE for each construct is greater than
vertical cooperation for innovation by combining any correlation between that construct and each of
upstream (supplier) and downstream (customer) the other constructs (see Appendix 3.1 and 3.2).
collaboration. The two other control variables
were the independent status of the company and Results
its size (less than 10 employees, 10-20 employees,
more than 20 employees). Results for both models, PLS1 and PLS2, are
presented in Table 3. They indicate that, beyond
the traditional determinants for firm innovation
performance, governance also plays a significant
role. Given the relatively high R-square values
Table 2. Indicators of convergent validity
Model 1 (PLS1) Model 2 (PLS2)

AVE Composite Reliability AVE Composite Reliability
Cluster 0,688 0,813 0,699 0,823
ExpenseInno 0,910 0,953 0,910 0,953
NetworkingST 0,630 0,835 0,638 0,840
Source 0,661 0,796 0,662 0,797
ServiceEnt 0,683 0,812 0,683 0,812
459
in each model, we can first conclude that the their firms innovation performance. In addition
variables capturing the institutional practices to these internal resources, these firms also col-
of innovation implemented by the governance laborated upstream and downstream as part of
have a significant impact on business innovation their innovation process, probably through the
performance in PLS1 and / or on innovative col- group to which they belonged (Source: = 0.226,
laborative projects in PLS2. t =2.246, p <0.05). However, given the risk of
potential leakage of specific expertise, belonging
Model PLS1: The Effect of to another cluster represents a barrier to product
Governance on Innovation innovation (cluster: =- 0.229 t = 2.536, p <0.01).
Performance Firms engaged in process or services innova-
tion presented a distinct innovation profile. The
According to the three institutional practices previ- results show that only internal expenses (Expen-
ously identified, three key results show the impact seInno: = 0.282, t= 2.581, p <0.01) represent a
of the technopoles governance on the innovation key determinant with respect to process innova-
performance of co-located firms: tion. By contrast, firms that innovated in services
The first result concerns the quality of the lo- benefited only from external sources related to
cal anchoring, which does not have a full impact their affiliation with another cluster (cluster: =
on business innovation. The results show that 0.276, t = 3.538, p <0.01).
although the local labor market has a significant
impact on product innovation (=0169, t=2,027, p Model PLS2: The Role of
<0.05), this is not the case for the specific services Governance for Collaborative
offered by the governance, regardless of the type Innovation Projects
of innovation concerned.
The second result shows the significant effect The second structural model aimed to highlight the
of technology transfer between universities and explanatory power of the cluster governance on
firms within the technopole on product innovation the firms collaborative innovation projects. Un-
(=0174, t= 2,071, p <0.05). The effect of this like the previous model (PLS1), specific business
covariate (CollUniST) is positive and indicates services offered by the governance contributed
that governance plays a role in supporting scien- positively to collaborative innovation projects
tific collaboration. ( =0.231, t = 2.204, p <0.05) whereas the local
The third result concerns the networking prac- labor market had no influence. The results of
tices implemented by the governance. No direct this second model are particularly interesting for
effect of these institutional practices has been the institutional practices of networking. They
measured on the different types of innovation. confirm an impact of these practices on collab-
Moreover, we noted that the traditional de- orative innovation projects (=0.314, t=3.631, p
terminants of innovation also had a significant <0.001). Finally, collaboration with the university
influence on the innovation performance of firms remains significant (=0.243, t=2.841, p<0.01),
within the technopole. This was particularly attesting to the persistent nature of technology
pronounced for product innovative firms. These transfers between universities and companies as
were rather small (=- 0348, t = 3.683, p <0.001) part of innovative projects. Thus, we note that
and belonged to a group (Indepr: = - 0455, t= the institutional practices implemented by the
4.819, p <0.001). Thus, the internal resources governance have an impact on the innovation
at their disposal for innovation (ExpenseInno: projects rather than on innovation itself. This
=0,447, t = 5.282, p <0.001) positively affected result is not surprising since the projects are still
460
Table 3. Results of PLS Model
PLS1 PLS2
Dependent Variables Dependent Variables
Innovative
Product Process Service Product Service
Process Innovation Collaborative
Innovation Innovation Innovation Innovation Innovation
Projects ST
InnoPDT InnoPROC InnoSRV InnoPDT InnoPROC InnoSRV ProjetInnoCollabST
T t t t t t t
Independent
Variables
CollUniST 0,174 2,071* 0,133 1,337 -0,039 0,407 0,243 2,841**

WorkST 0,169 2,027* 0,112 1,114 0,152 1,440 0,017 0,187
NetworkingST -0,046 0,354 0,012 0,104 0,176 1,291 0,314 3,631***
ServiceEnt 0,154 1,581 0,165 1,407 0,127 1,035 0,231 2,204*
Control Variables
Cluster -0,229 2,536** -0,013 0,103 0,188 1,767* -0,134 1,409 -0,013 0,865 0,276 3,538***
ExpenseInno 0,447 5,282*** 0,282 2,581** 0,079 0,670 0,416 4,914*** 0,298 2,826** 0,079 0,635
Indep -0,455 4,819*** 0,038 0,344 -0,048 0,423 -0,410 4,358*** 0,097 0,943 -0,048 0,425
Source 0,226 2,246* 0,098 0,916 0,150 0,916 0,234 2,465** 0,132 1,321 0,231 2,284*
Size -0,348 3,683*** -0,074 0,675 -0,027 0,233 -0,307 3,613*** -0,059 0,641 -0,066 0,689
R 0,423 0,206 0,230 0,362 0,161 0,148 0,264
* p <.05 (One tailed test: 1.645, df = 499) ; ** p <.01; (2.326, df = 499) ; *** p <.001 (3.090, df = 499).
461
ongoing. The traditional determinants of innova- Specific business services (start-up support,
tion represented by the control variables showed themed breakfasts, conferences, I-entrepreneur
a close proximity with the results of PLS1. Rare club, seminars, etc.) are transverse enough to en-
differences remained, particularly in terms of able the different actors to meet, to get to know
sources of innovation for vertical firms engaged each other and to create a common language.
in innovation in the services sector (=0.231, t = These services appear to be a prerequisite for the
2.284, p <0.01). creation of organizational proximity. However,
proposing such services does not compensate
for inter-firm heterogeneity. The focus on the
DISCUSSION AND CONCLUSION solar industry should improve this aspect soon,
leading to the emergence of a dominant activity
This first quantitative analysis of the role of gov- and a critical threshold (Levesque et al., 1998),
ernance in a French technopole not only confirms essential for local anchoring and its effectiveness
the fact that traditional variables effectively in terms of innovation.
foster innovation performance for co-localized Networking practices for innovation are ef-
firms, but it also emphasizes the role played by fective with partners within Savoie Technolac.
the technopole governance. Of the three identified However, the technopole is linear in its form,
dimensions - technology transfer, local anchor- as these relationships are limited to local partners
ing and networking - only technology transfer on one hand, and have no direct effect on product
between research and industry had an impact innovation on the other hand. This result can also
on both product innovation and collaborative be explained by the specific nature of our sample.
innovation projects. Territorial anchoring had a Indeed, firms engaged in product innovation are
more ambiguous effect: recourse to local labor mainly subsidiaries. They largely depend on
market had a positive effect on product innova- resources held by their parent company in order
tion, whereas providing business services only to innovate. Their business opportunities are gov-
promoted inter-firm collaboration for innovation. erned and often enhanced by the group to which
A similar result was found with the networking they belong, thus limiting the use of calling upon
practices implemented by the governance: the co-located actors.
latter affected collaboration for innovation but no After 20 years of existence, Savoie Technolac
direct effect was evidenced on innovation. relies on a dynamic local labor market and has
Following Longhi and Qur (1991), we con- partly succeeded in implementing networking
firmed the importance of territorial anchoring on incentives. Although industry-research collabo-
product innovation through the existence of a local ration boosts firms product innovation thanks
labor market. This suggests that the governance to the presence of university laboratories on site,
of Savoie Technolac has succeeded in creating inter-firm networking is still not very satisfactory
mediation resources and incentive schemes for due to its restricted perimeter and its low direct
collaboration, which, in fine, enhance the firms effect on the firms innovation performance. This
innovation performance. By contrast, the other fact is not singular as most studies show that a
dimensions (territorial anchoring through business certain lapse of time is required in order to estab-
services, networking and technology transfer) had lish a network of relationships between industry,
no direct effect on firm innovation. This can be research and education (Levesque et al., 1998).
explained by the fact that: Time is indeed a key variable for the construction
462
of a common history (Torre, 2006). Examples This research is not without limitations, in
of successful technopoles suggest a maturation particular due to the specificities of our sample.
period of 15 to 20 years and a long initial start- Although representative of Savoie Technolac
ing process that enables the development of a firms, it mainly focuses on SMEs in the service
sufficiently stable context of inter-organizational industry. The measures used to assess the role and
relationships (Levesque et al., 1998). action of the governance could also be enriched.
In parallel to the development observed with Future research could be undertaken in order to
Sophia Antipolis (Lazaric et al., 2008), which enrich empirical knowledge pertaining to organi-
evolved from a satellite platform toward a high- zational proximity and to the role of institutional
technology cluster thanks to the emergence of practices aimed at boosting firms innovation
specific local skills rooted in global innovation performance. It could be of particular interest to
networks, the question remains as to whether compare the actions taken by the governances of
Savoie Technolac will be able to evolve gradually several technopoles or, more broadly, of clusters
from a linear form to an interactive technopole such as the recent French competitiveness clusters.
(Cooke, 2001). In order to accelerate the current Such a comparative approach could provide a more
evolution of the technopole towards an interac- nuanced characterization of the role played by
tive model, the public institutions in charge of the governances by controlling the distinct structural
governance of Savoie Technolac need to reinforce dimensions of the clusters involved.
their commitment toward the solar industry and
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467
APPENDIX 1.1
Descriptive Statistics (n=88)
Table 4. Economic Characteristics of firms implanted within Savoie Technolac
Economic Characteristics of firms implanted within Savoie Technolac n (%)

Variables Definition 0 1
KIBS =1 if the firm belongs to the sector of knowledge intensive business
35 (39,8) 53 (60,2)
services (0 if not)
INCUB =1 if the firm was incubated in the technopole (0 if not) 46 (52,3) 42 (47,7)
INDEP =1 if the firm belongs to a group (0 if not) 60 (68,2) 28 (31,8)
1 2
NAF =1 if the firm belongs to the service sector ; =2 if the firm belongs to
71 (80,7) 17 (19,3)
the manufacturing sector
1 2 3
SIZE =1 if less than 10 employees ; = 2 if 10 to 20 employees ; =3 if more
58 (65,9) 15 (17) 15 (17)
than 20 employees.
COMPET During the last three years (2006-2008), how would you describe the
competitive environment of your company?
39 (44,3) 28 (31,3) 21 (23,9)
(=1 if weak to medium competitive intensity ; =2 if intense competi-
tion ; =3 if very intense competition
EXPORT How much of your turnover (in %) did your export sales represent in
2008?
54 (61,4) 6 (6,8) 28 (31,8)
(1= if export % < 2% of total turnover; =2 if export % between 2 and
10%; =3 if export % > 10%)
MARKET On which geographic market did your firm sell its goods or services
between 2006 and 2008? 61 (69,4) 40 (45,5) 42 (47,8)
(1=Regional; 2=France; 3=International)*
AGE Since how many years does your company exist?
(1= if firm age < 5 years ; =2 if age between 5 and 10 years ; =3 if firm 21 (23,9) 24 (27,3) 43 (48,8)
older than 10 years)
ANCIEN Since how many years is your company established in Savoie Techno-
lac?
14 (15,9) 45 (51,1) 29 (33)
(1= if establishment < 2 years; =2 if establishment between 2 to 10
years ; =3 if more than 10 years)
* Note that the total percentage is superior to 100% as multiple responses were permitted
468
Table 5. Innovation Profile of firms located in SAvoie Technolac
Innovation Profile of firms located in SAvoie Technolac 0 1

InnoPDT =1 if the firm introduced goods innovation during the last 3 years
39 (44,3) 49 (55,7)
(0 if no product innovation)
InnoSRV =1 if the firm introduced service innovation during the last 3 years
42 (47,7) 46 (52,3)
(0 if no service innovation)
InnoPROC =1 if the firm introduced new manufacturing process during the last 3 years (0
53 (60,2) 35 (39,8)
if no process innovation)
SourcCLSrv =1 if the firm did collaborate with co-located customers in order to innovate
85 (96,6) 3 (3,4)
(0 if not)
SourcForSrv =1 if the firm did collaborate with co-located suppliers in order to innovate (0
84 (95,5) 4 (4,5)
if not)
SourcConSrv =1 if the firm did collaborate with co-located competitors in order to innovate
87 (98,9) 1 (1,1)
(0 if not)
CollUniST =1 if the firm did collaborate with co-located university or other higher educa-
74 (84,1) 14 (15,9)
tion institutes to innovate (0 if not)
InnoCollabST =1 if the firm did have innovation projects together with co-located partners
47 (53,4) 40 (45,5)
(0 if not)
Table 6. Territorial Anchoring and Networking on Savoie Technolac
Territorial Anchoring and Networking on Savoie Technolac 0 1

SERVICES =1 if the firm uses offered services to employees and companies /
8 (9,1) 80 (90,9)
0 if not
EmploiST =1 if the firm uses local labor (0 if not) 28 (31,8) 60 (68,2)
RelaPart =1 if the governance team did put the firm in relation with a potential innova-
68 (77,3) 20 (22,7)
tion partner / 0 if not
RelaCLST = 1 if the governance team did put the firm in relation with an organization
72 (81,8) 16 (18,2)
that became a customer afterwards / 0 if not
RelaFOST = 1 if the governance team did put the firm in relation with an organization
76 (86,4) 12 (13,6)
that became a supplier afterwards / 0 if not
APPENDIX 1.2
Table 7. Sector-based distribution of firms (n=88)
Manufacturing Services
HTECH (a) LMTECH (b) KIBS (c) Non KIBS Total
NAF. Rev.2, ISIC 58, 62, 70, 71, 73, 35, 41, 43, 46, 47, 78,
Rev. 4 26 28, 18, 33 74, 85 79, 82, 90, 94
n 7 4 53 24 88
% 8 4,5 60,3 27,2 100
(a) High-Tech = R&D intensity> 7% ; (b) Low-Medium Tech = R&D intensity 7% (cf. OECD, 2005) (c) and (d) KIBS: Knowledge
Intensive Business Services (cf. Miles et al., 1995; Freel, 2006)
469
470
Table 8. Items loading on each factor PLS1
APPENDIX 2.1
CollUni- Depense Indpen- Networking- Service Source-

Cluster EmploiST InnoPDT InnoPROC InnoSRV Taille
ST Inno dants ST Ent filire
CLUSHREG 0,729 -0,107 0,225 0,168 -0,043 0,021 0,001 0,235 0,009 0,156 0,017 0,053
CLUSREGR 0,919 0,152 0,408 0,254 -0,020 0,033 0,232 0,279 -0,004 0,157 0,227 0,260
COLLUNI 0,068 1,000 0,016 0,164 0,230 0,075 0,154 -0,020 -0,027 0,034 -0,053 0,027
LABORINN 0,331 0,092 0,955 0,100 0,051 0,375 0,358 0,254 0,174 0,149 0,152 0,304
DepRDLN 0,436 -0,065 0,952 0,011 0,059 0,380 0,304 0,270 0,269 0,085 0,236 0,343
EMPLST 0,262 0,164 0,059 1,000 -0,048 0,078 0,106 0,178 0,009 0,232 -0,108 -0,041
INDEPR -0,033 0,230 0,057 -0,048 1,000 -0,217 0,156 0,031 0,310 -0,434 0,253 -0,010
INNOPDT 0,034 0,075 0,396 0,078 -0,217 1,000 0,117 0,109 0,110 -0,091 0,185 0,329
INNOPROC 0,174 0,154 0,348 0,106 0,156 0,117 1,000 0,358 0,194 -0,057 0,260 0,231
INNOSERV 0,309 -0,020 0,274 0,178 0,031 0,109 0,358 1,000 0,271 0,014 0,275 0,276
RELACLST -0,167 -0,124 -0,015 0,069 0,259 -0,054 0,099 0,273 0,731 -0,237 0,384 0,095
RELAFOST 0,060 0,008 0,302 -0,013 0,271 0,155 0,218 0,247 0,889 -0,221 0,342 0,192
RELAPART 0,114 0,061 0,237 -0,037 0,196 0,156 0,113 0,084 0,752 -0,149 0,313 0,116
SIZE08R 0,184 0,034 0,123 0,232 -0,434 -0,091 -0,057 0,014 -0,260 1,000 -0,227 0,108
Servcrea 0,152 0,004 0,174 -0,211 0,248 0,179 0,227 0,228 0,420 -0,243 0,845 0,210
Servent 0,135 -0,100 0,154 0,057 0,156 0,117 0,194 0,219 0,272 -0,118 0,780 0,258
SourcCLSrv 0,212 -0,030 0,344 -0,002 -0,051 0,313 0,200 0,157 0,068 0,058 0,248 0,819
SourcForSrv 0,148 0,072 0,219 -0,064 0,033 0,231 0,181 0,297 0,224 0,119 0,224 0,834
Table 9. Items loading on each factor PLS2
APPENDIX 2.2
ProjetInno CollUni- Depense Emploi- Indpen- Inno- Inno- Networking- Service Source-
Cluster InnoSRV Taille
CollabST ST Inno ST dants PDT PROC ST Ent filire
CLUSHREG 0,8043 -0,0269 -0,1068 0,2238 0,1677 -0,0431 0,0213 0,0011 0,2345 0,0218 0,156 0,0157 0,0529
CLUSREGR 0,8668 0,0559 0,1522 0,4072 0,254 -0,0199 0,0327 0,2322 0,2786 0,0083 0,1569 0,227 0,2603
COLLABST 0,0216 1 0,2269 0,1294 0,0356 0,3296 0,0794 0,1441 0,0042 0,4078 -0,1323 0,348 0,0863
COLLUNI 0,0406 0,2269 1 0,0168 0,1637 0,2304 0,0753 0,1544 -0,0198 -0,0157 0,034 -0,0586 0,0268
DepRDLN 0,424 0,0909 -0,0648 0,9507 0,0115 0,0585 0,3803 0,3041 0,2695 0,27 0,0851 0,234 0,3434
LABORINN 0,3157 0,1539 0,092 0,9566 0,1 0,0511 0,3747 0,3581 0,254 0,1801 0,1492 0,152 0,3039
EMPLST 0,256 0,0356 0,1637 0,0599 1 -0,0476 0,0781 0,1065 0,1776 0,0034 0,2323 -0,0945 -0,041
INDEPR -0,0364 0,3296 0,2304 0,0574 -0,0476 1 -0,2165 0,1563 0,0311 0,3022 -0,4343 0,2485 -0,0098
INNOPDT 0,0328 0,0794 0,0753 0,3957 0,0781 -0,2165 1 0,1174 0,1093 0,1183 -0,091 0,182 0,3285
INNOPROC 0,1512 0,1441 0,1544 0,348 0,1065 0,1563 0,1174 1 0,3581 0,1855 -0,0573 0,2584 0,2306
INNOSERV 0,3084 0,0042 -0,0198 0,2742 0,1776 0,0311 0,1093 0,3581 1 0,2497 0,0141 0,2747 0,2759
RELACLST -0,1644 0,2797 -0,1245 -0,0152 0,069 0,2588 -0,0539 0,0985 0,2735 0,7103 -0,237 0,3754 0,0952
RELAFOST 0,0598 0,3688 0,0082 0,3009 -0,0129 0,2714 0,1545 0,2183 0,2471 0,8589 -0,2213 0,3373 0,1922
RELAPART 0,1161 0,3218 0,0607 0,2362 -0,037 0,1958 0,1563 0,1133 0,0839 0,8202 -0,1491 0,3104 0,1158
SIZE08R 0,1867 -0,1323 0,034 0,1239 0,2323 -0,4343 -0,091 -0,0573 0,0141 -0,2513 1 -0,2215 0,1077
Servcrea 0,1362 0,2823 0,0044 0,1737 -0,2113 0,2484 0,179 0,227 0,2284 0,4136 -0,243 0,8125 0,2105
Servent 0,1174 0,284 -0,0995 0,1534 0,0566 0,1563 0,1174 0,1935 0,2187 0,2744 -0,1177 0,8149 0,2582
SourcCLSrv 0,1896 0,0291 -0,0297 0,3435 -0,0022 -0,0511 0,3132 0,2005 0,1565 0,0802 0,0583 0,2528 0,8192
SourcForSrv 0,1381 0,1121 0,072 0,2187 -0,0643 0,0333 0,2314 0,181 0,2969 0,2033 0,1186 0,2239 0,8336
471
472
APPENDIX 3.1
Table 10. Correlations and AVE square roots PLS1
Depense- Emploi- Indpen- Inno- Inno- Inno- Networking- Service- Source-

Cluster CollUniST Inno ST dants PDT PROC SRV ST Ent filire Taille
0,830
Cluster (1)
CollUniST 0,068 1,000
DepenseInno 0,401 0,016 0,954
EmploiST 0,262 0,164 0,059 1,000
Indpendants -0,033 0,230 0,057 -0,048 1,000
InnoPDT 0,034 0,075 0,396 0,078 -0,217 1,000
InnoPROC 0,174 0,154 0,348 0,106 0,156 0,117 1,000
InnoSRV 0,309 -0,020 0,274 0,178 0,031 0,109 0,358 1,000
NetworkingST 0,000 -0,027 0,231 0,009 0,310 0,110 0,194 0,271 0,794
ServiceEnt 0,177 -0,053 0,202 -0,108 0,253 0,185 0,260 0,275 0,432 0,813
Sourcefilire 0,217 0,027 0,339 -0,041 -0,010 0,329 0,231 0,276 0,179 0,285 0,826
Taille 0,184 0,034 0,123 0,232 -0,434 -0,091 -0,057 0,014 -0,260 -0,227 0,108 1,000
(1) AVE square root
APPENDIX 3.2
Table 11. Correlations and AVE square roots PLS2
Cluster CollUniST DepenseInno EmploiST Indpendants InnoPDT InnoPROC InnoSRV NetworkingST ProjetInnoCollabST ServiceEnt Sourcefilire Taille
Cluster 0,836
CollUniST 0,041 1,000
DepenseInno 0,386 0,017 0,954
EmploiST 0,256 0,164 0,060 1,000
Indpendants -0,036 0,230 0,057 -0,048 1,000

InnoPDT 0,033 0,075 0,396 0,078 -0,217 1,000
InnoPROC 0,151 0,154 0,348 0,106 0,156 0,117 1,000
InnoSRV 0,308 -0,020 0,274 0,178 0,031 0,109 0,358 1,000
NetworkingST 0,017 -0,016 0,234 0,003 0,302 0,118 0,185 0,250 0,799
ProjetInnoCollabST 0,022 0,227 0,129 0,036 0,330 0,079 0,144 0,004 0,408 1,000
ServiceEnt 0,156 -0,059 0,201 -0,095 0,249 0,182 0,258 0,275 0,422 0,348 0,814
Sourcefilire 0,198 0,027 0,339 -0,041 -0,010 0,329 0,231 0,276 0,173 0,086 0,288 0,826
Taille 0,187 0,034 0,124 0,232 -0,434 -0,091 -0,057 0,014 -0,251 -0,132 -0,221 0,108 1,000
(1) AVE square root

1
We used the SmartPLS 2.0 version (Ringle, Wende & Will, 2005, cf. http://www.smartpls)
473
474
Chapter 25
Choosing Locations for
Technology and Innovation
Support Centers:
Methodological Proposal
and Brazilian Studies
Mrio Otvio Batalha

Federal University of So Carlos, Brazil
Daniela Tatiane dos Santos

Nelson Guedes de Alcntara

Srgio Ronaldo Granemann

University of Braslia, Brazil
ABSTRACT
This chapter discusses the structuring of problems of location of Technology and Innovation Support
Centers (TISC) through multicriteria analyses to identify factors of demand and supply of these services.
The methodology uses quantitative and qualitative elements, establishing a sequence of steps that include
a variety of aspects ranging from criteria preferences to global valuation of the model. Multicriteria
analysis was applied to the choice of geographic locations for Brazilian Technology Centers, allowing
for the identification of the most suitable regions for the creation of technology centers and revealing
particular characteristics of the dynamics of such services in the regions in question.
DOI: 10.4018/978-1-61350-165-8.ch025
Choosing Locations for Technology and Innovation Support Centers
INTRODUCTION Above and beyond business interests, a TISC

is also important for other economic and govern-
Many developing countries have made consider- ment agents (Zucker, Darby & Armstrong, 1998,
able efforts to reduce technological disadvantages 2002). Professors and researchers could use TISC
that prevent them from implementing innovations laboratory facilities for research, and a TISC could
to establish high quality standards and internalize be an important tool for politicians to support and
core activities of technical progress (World Bank, boost regional development. However, it should
2008). These efforts have received government be noted that politics will not, per se, ensure the
incentives for innovation, and involved numer- success of a TISC.
ous companies that have come to recognize the Brazilian experience indicates that purely
well-nigh inseparable link between innovation and bureaucratic government initiatives to establish
competitiveness. These companies require a series Technology and Innovation Support Centers
of technological services (assays, calibration, (TISCs) in regions that lack a preexisting indus-
standardization, inspection, new product devel- trial structure have failed. Among the factors that
opment, etc.) of a strongly horizontal nature and have most contributed to the many faulty choices
with multiplying effects on the economy. More- for TISC locations is the lack of qualified human
over, the supply of such services can contribute resources. Thus, when evaluating a location for a
to consolidate more prosperous and industrially TISC, it is necessary to consider regions that have
advanced regions, reinforcing the dynamic effects a relatively consolidated education, productive
of technological demand (Feller, Ailes & Roessner, and technological structure, and will therefore
2002; Kakuta & Luz, 2001). benefit more from it.
The supply of technology support services This chapter starts from the above premises,
plays a dynamizing role in an economy, favoring using elements of demand and supply of technol-
the innovation process by overcoming techni- ogy services to structure problems relating to the
cal obstacles than hinder market action. Many location of TISCs. Multicriteria analysis has not
Technology and Innovation Support Centers been widely used in the literature on innovation
(TISCs) provide a technical basis for specialized management. However, methods of multicriteria
knowledge that reinforces innovation generated in analysis can contribute considerably to decision
companies. The Danish TISCs are a well known ex- making about technology choices by public in-
ample a set of nine large networking laboratories stitutions. The use of methods such as the one
whose activities are broadly cross-sectional and proposed here is aimed at finding solutions for
whose research and development efforts extend the location of TISCs that are less subject to the
far beyond the mere supply of technical services inevitable political pressures that such decisions
(Andersen et al., 2009). The proximity of a TISC engender.
which can provide technological resources to a The starting point for this work is the need to
large number of companies can be considered an identify cities in the Central West (CW), North
element that contributes to cost reductions through (N), and Northeast (NE) regions of Brazil with
transaction economies (Williamson, 1989), and the best conditions to establish a TISC in the area
whose main characteristic is that of facilitating the of materials, limited to one center per region.
acquisition of services. The presence of a TISC This project was funded by FINEP (Study and
can also compensate for competencies companies Project Financing Agency), which is linked to the
lack, enabling them to concentrate on their core Brazilian Ministry of Science and Technology.
business, such as the production process itself. Materials Technology Centers (MTC) contribute
to the core competencies and innovations of lo-
475
cal industries, regions, states, and to the country, as well as some factors concerning the demand
offering technological support in science and and supply of technology services. The third and
engineering areas. In countries such as Brazil, fourth sections focus on applying the multicriteria
MTCs favor innovation-related activities through analysis for decision making about the location
the development of new materials, e.g., biomedi- of centers, as well as the main results and discus-
cal and smart materials, advanced materials for sion. The last section presents the conclusions of
practical applications such as civil infrastructures, this study.
compressor engineering and manufacturing, or
the fabrication of materials and structures. The
strategic management of these Centers would be TECHNOLOGY SUPPORT CENTERS
a fundamental instrument for achieving cumula- AND CHOICE OF LOCATION
tively sustainable competencies that could reduce
the technological gaps existing among nations Technology support centers can be defined as
with different levels of development. institutes engaged not only in providing goods and
The multicriteria method used here was the basic laboratory services but also research activi-
Analytic Hierarchy Process AHP (Saaty, 1990), ties and the development of products and processes
which allowed for the development of a decision (COTEC, 2003). Their most routine activities
process based on quantitative and qualitative involve the short-term demands of companies,
criteria. The results obtained with this method mainly those relating to projects aimed at gener-
were consistent and did not pose any problems ating economies of scale and meeting immediate
of comparison between the criteria and possible market needs. However, more advanced studies
alternative solutions. that favor long-term industrial competitiveness
The AHP was used as a method for location can and should also be conducted by these centers.
choice, and the results obtained indicate the suit- Numerous countries have focused efforts
ability of this approach. The application of AHP towards establishing and consolidating TISCs.
to location decisions has been tested in different There are several different models for creating
types of problems and in different areas. One of institutes with reduced technological intensity
the drawbacks of this method, however, is the (technology transfer centers, support centers to
number of location criteria that can be considered increase competitiveness, technology acquisi-
in the analysis of the problem. The AHP allows tion consortiums) or even more daring ventures
for the consideration of a maximum of 9 criteria involving institutes of high density technology
or a group of criteria, although the ideal situa- (public research and development centers, private
tion would be the use of a minimum of 5 to 7 R&D centers, mixed R&D centers, and NGOs). A
criteria and a maximum of 7 to 9 criteria. There large part of such institutes have achieved results
is no doubt that the determinants involved in the that are highly relevant for the economy of the
choice of technology centers are much greater countries and regions where they are established.
than those considered in this work. Therefore, Nevertheless, a study by Beise and Stahl (1999)
to use the AHP rationally required grouping the that analyzed the effects of public research on
criteria with similar characteristics around aspects industrial innovations in Germany between 1993
of supply and demand for technological services. and 1995 found that many public technology cen-
This chapter is divided into five main sections, ters failed to transfer knowledge to companies.
besides this introduction. The second section fo- Even so, many companies would not be able to
cuses on a review of the literature on the process implement innovations in the absence of these
of choosing the location of technology centers, technology centers. The authors also point out that
476
the role of stimulating innovation is, in most cases, and other institutes. It should be noted that the
attributed to the universities that contain technol- mere presence of such institutes does not ensure
ogy centers rather than to the centers themselves. the success of a clusters technology and inno-
A set of preconditions related to the character- vation activities. Its success depends on a set of
istics of the area where the center is to be located other factors such as interaction and cooperation
seems to be crucial for the successful establish- among local agents, the presence of qualified
ment and development of technology centers. labor in the region, relationships with suppliers,
Some studies on center location, such as that of and, in some cases, the existence of government
Krugman, Fujita and Vernables (1999), have been incentives. Jaffe, Trajtenberg and Henderson
based, to a certain extent, on concepts established (1993) investigated the effects of the geographic
by the classic theory of industrial location (Von proximity of spillovers. An understanding of the
Thnen, 1826; Teruya, 1999; Predhl, 1928). location choice of many Technology Centers may
In general, the aim is to analyze the location of point to the characteristics of technology diffu-
economic activities by identifying factors such as sion in a given region. On the other hand, Beise
raw materials transportation cost and labor cost. and Stahl (1999) discard the hypothesis that the
According to Predhl (1928), economic proximity of public research centers would be
location is a function of the compared costs of a determining factor for the implementation of
transportation of the different production factors technology innovation by companies. Moreover,
(capital, work, and land) and the relative prices. many authors have attempted to adapt some of
Having defined the costs involved and the pos- the classical elements of industrial location to
sible revenue to be obtained, it would be possible the specificities and needs for the establishment
to determine the best combination of factors of regional technology development policies,
that would allow for choice optimization. This including the creation of TISCs.
is a systematic approach to understanding the Public sector policies and the innovation
geographic advantages offered by each location potential of a region are issues that have been ad-
where investments are to be made. dressed by authors such as Breschi and Malerba
The classical theory about location choice (2001) and Salerno and Kubota (2008). It is worth
offers important contributions towards an under- highlighting the importance contemporary theory
standing of the elements that foster the attraction has attributed to the States role as a promoter of
of enterprises. However, such an approach would regional development policies. This role leads to
reduce decision making to strictly quantitative ele- the recognition that natural resources and other
ments that may not always be relevant to a TISC, production factors do not suffice to justify in-
and that are only partially applicable in explaining dustrial location in those areas based on classical
the pattern of location of technology enterprises. competitive advantages.
For example, the availability of labor and parts The location of technology centers is only
for equipment maintenance is more relevant to partially determined by government incentive poli-
the success of a TISC than the availability of cies. The dynamics of technological innovation has
raw material. also provided decisive interpretations in analyzing
In this context, the contribution of industrial the success of TISCs. It has been found that the
clusters has been highlighted by Gordon and Mc- location concentration of technology centers has
Cann (2000) and by Morosini (2004). Research been determined by complex and specialized fac-
and development institutes, like the TISCs situated tors, particularly by scientifically and technically
in industrial centers, would obtain economies of qualified labor, communication infrastructure, and
scale and scope by cooperating with companies sophisticated consumer markets.
477
These factors have made it possible to take the preparation for production and commercializa-
advantage of synergies that result from acting tion, as illustrated in Table 1.
in networks. Many technology centers have the Some elements of the demand for technology
ability to combine the needs of industry and the center services are related to the specificities of
capabilities of local universities in the construc- a regions industrial structure. First of all, it can
tion of new standards of quality in products and be stated that the supply of regional technological
processes. Thus, the various factors set forth in the services appears to derive from the characteristics
classical and contemporary literature concerning of the size of companies situated in the region.
the reasons for locating technology centers in a Wren and Storey (2002) found that the probabil-
given region should be specified based on elements ity of using these services is positively correlated
of the demand and supply of technology services, to the number of employees in a company with a
which is the subject of this study. workforce of up to 150, and negatively correlated
to companies with a larger workforce. A possible
explanation for this finding is the internalization
DEMAND AND SUPPLY OF of research and development by companies whose
TECHNOLOGY SERVICES larger size enables them to carry out activities
in-house which were previously outsourced.
The services of technology centers can be classi- Smaller companies, but with a solid technol-
fied according to different criteria (COTEC, 2003). ogy basis, are strongly dependent on a variety of
One of them classifies technological services ac- technological services. The technological level
cording to their functionality, which may involve achieved by a company is undoubtedly a determin-
knowledge sharing activities (courses, lectures, ing condition for the demand of services from a
and training), activities that promote interaction technology center (Quevedo & Mas-Verd, 2008).
between different economic agents, or even func- It can be stated that companies lacking in techno-
tions that favor the supply of specialized services logical dynamism do not make permanent use of
to a company. This functionality may lead toward services such as patent-related activities, quality
an approach that specifies the services of technol- control, or product certification. However, such
ogy centers according to different stages of the needs are common in companies that have already
production process, encompassing the generation reached higher qualitative standards. Smallbone
and acquisition of knowledge and technology and (1993) found evidence that consolidated or mature
companies, regardless of their size, are more likely
Table 1. Services generally supplied by technology centers
Generation and acquisition of knowledge Preparation for production Preparation for commercialization
Generation of new products and processes Standardization and quality Market studies and business plans
(R&D projects)
Support for the acquisition of technology Pilot facilities Support for investments in new markets
Education and access to new ideas Process modernization and automation Support for the creation of new companies
(spin offs)
Access to qualified resources Assays, tests and certifications Support for the launch of new products
Support for the acquisition of imported equip- Support for the creation of new produc- Support for intellectual property
ment tion lines
Source: Adapted from COTEC (2003).
478
to require outsourced technological services. This the economic autonomy that would render them
indicates the need for the adoption of measures, independent of public sources. This situation is due
besides those traditionally implemented in tech- to the fact that the technological solutions of these
nology centers, aimed at stimulating younger centers have often failed to be market-oriented,
companies to develop innovative ideas. or even because company demands showed little
The export dynamics of companies seems to technological dynamism, focusing mainly on the
be related directly to the technological content acquisition of foreign technology (Kakuta & Luz,
of the production exported by given regions. 2001). Nevertheless, according to these authors,
Exposure to competition from foreign companies knowledge about the forces that drive the demand
leads to the search for competitive advantages in and supply for technological services in Brazil is
terms of product and service differentiation, and still limited, indicating the need for more in-depth
expands the areas to be covered by technology studies on this issue.
support centers (Quevedo & Mas-Verd, 2008).
In this context, the need for higher levels of
competitiveness may explain the greater use of METHODOLOGICAL PROCEDURES
TISCs. In developing countries, companies seek-
ing to expand their share in international trade General Methodological
should adapt to international standards and norms Aspects of this Research
through technological services aimed directly at
overcoming technical and commercial barriers. Multicriteria analysis was used in two distinct
These barriers can be obstacles to growth if a phases of this study. The first phase consisted of
region is unable to overcome the challenges of an extensive review of the literature and searches
technological evolution and the requirements of on specialized websites to find the quantitative
more developed markets (Kakuta & Luz, 2001). variables most commonly used for the identi-
On the other hand, the availability of techno- fication of demand and supply of technological
logical services favors directly the achievement of services. The variables thus identified were then
systemic competitiveness, helping in the definition collected and compiled in tables for an initial
of more industrially advanced areas. Qualified multicriteria analysis. The purpose of this analysis
human resources such as specialized researchers, was to select, among the 19 states in the Central
whose expertise can be used by these institutes, West, North, and Northeast regions of Brazil, the
and the availability of laboratory infrastructure, ones that would be the object of a detailed field
machinery and equipment, as well as training research. This initial analysis was necessary due
courses related to the activities of the TISC, are to the limited time and resources to carry out the
elements consistent with the aforementioned study. Several states therefore were discarded in
theories. this initial stage of the study.
The institutional conditions in which the The quantitative information was garnered
supply of these services takes place are highly from various sources, such as the Brazilian Insti-
varied. In this context, one must keep in mind tute of Geography and Statistics (IBGE), Ministry
that the environment of technological research in of Labor and Employment (MTE), Secretariat of
developing countries has always been linked, one Foreign Trade (SECEX), Council for Scientific
way or another, to government institutions. One and Technological Development (CNPq), and
of the consequences of this institutional design, Brazilian Technology Network of the Ministry
which is particularly true in the case of Brazil, of Science and Technology (MCT).
is that few centers and institutes have achieved
479
The second multicriteria analysis, which n n

V (q) = px ax (q) , p = 1 and 0px1
provided the final guidance for the best loca- x =i x =i
x
tions for TISCs, required gathering qualitative (1)

information in the cities and states selected in
the initial analysis. In each city, interviews were where:
held with industrial federations, research foun- V(q): global valuation of the alternative
dations, universities, and research centers. The px: weight of criterion x
characteristics of the method used here and the ax: level of preference of the alternatives ana-
procedure for selecting the most suitable states lyzed in the criterion
for the creation of Materials Technology Centers Thus, the aforementioned model was applied to
(MTC) are explained below. identify the optimal location of technology centers,
considering that the criteria would be the factors
The Method of Multicriteria Analysis most closely related to the demand and supply for
technological services and that would determine
The use of methods of multicriteria analysis al- the attractiveness of the various regions.
lows for the inclusion of criteria of individual
values designated by specialists in order to solve The Process of Location Choice
a number of problems simultaneously. These
methods include the Analytic Hierarchy Process First Multicriteria Analysis
(AHP), which aims to associate the list of pref-
erences (subjective) with the various criteria in The purpose of this section is the selection,
the decision-making process, considering both among the 19 states in the Central West, North,
quantitative and qualitative variables (Saaty, and Northeast regions of Brazil, of the ones with
1990; Granemann, Tedesco & Candal, 2008). the best conditions for the creation of Materials
The determining factor for the choice of the AHP Technology Centers. The projects goal was to
method was the possibility of treating qualitative reduce technological disparities between Brazilian
variables based on intangible criteria, which are states. In general, Brazils Central West, North, and
therefore more difficult to evaluate. Northeast regions have less advanced technology
The method is structured on a sequence of steps centers than the South and Southeast regions.
that encompass the delimitation of the objective Table 2 identifies the criteria selected for the
and the relevant criteria for problem-solving and first multicriteria analysis and described their
decision-making, the determination of alterna- characteristics and importance for this type of
tives, evaluation of the relative importance of decision making.
each criterion and of the alternatives in relation Eight critical variables were used here to ex-
to the criteria, and determination of the global plain the demand and supply of innovation-relat-
valuation of each alternative. ed technological services, three of them related
After considering the relative importance of to supply and five to demand. Note that the human
the criteria, an entirely analogous process is used resources indicator (HRI) and the publication
to establish the level of preference of the alterna- indicator (PI) are composite indicators obtained
tives. Lastly, the global valuation is considered by combining two or more variables. Table 3 lists
according to the weighted sum method, using the the values of these indicators for all the states
following equation: considered in the analysis.
480
Table 2. Variables used in the first multicriteria analysis
Criteria (vari-
Analysis Indicator source and creation Importance
ables)
HRI (Human re- Assignment of weights to the sum of research- Indicator of the level of training of human resourc-
sources indicator) ers with a masters degree (weight 1), with es qualified to work for a technology center
a doctoral degree in the field of materials
or related area (weight 2). Indicator created
based on the Tabular Plan of the Council for
Scientific and Technological Development
(CNPq) (2004).
PI (Publication Assignment of weights to the sum of the num- Indicator of the presence of knowledge and intellec-
indicator) ber of national (weight 4) and international tual qualifications that can favor the sustainability
Supply
(weight 8) publications, published book chap- of the TISC
ters (weight 4), and complete works published
in the proceedings of events in materials or
correlated areas (weight 2). Indicator created
based on the Tabular Plan of CNPq (2004).
Research institutes Research Institutes and universities acting in Indicator of the number of institutes (supply).
and universities materials or correlated areas* registered with The creation of technology centers in states that
CNPq (2004) and in the Brazilian Network of already have research institutes and universities
Technology - MCT (2007) may favor joint collaborations.
Exports Secretariat of Foreign Trade (2006) In addition to indicating the potential demand for
a technology center resulting from stimuli from
foreign markets, it demonstrates the technological
content of the exports of the states.
Number of em- Annual Record of Social Information - Minis- Quantifies the workforce formally employed
ployees try of Labor and Employment of Brazil (2004).
Number of em- Annual Record of Social Information - Minis- Quantifies the workforce with higher education.
ployees with higher try of Labor and Employment of Brazil (2004). The demand of technologically dynamic companies
Demand
education represents potential clients to be served
Number of local Annual Industrial Survey - Brazilian Institute Industrial companies with 5 or more employees.
units of Geography and Statistics (2005) Allows for quantification of the potential market to
be served by the TISC
Industrial transfor- Annual Industrial Survey - Brazilian Institute Difference between the gross value of industrial
mation value of Geography and Statistics (2005). production and industrial operating costs. Indicator
of productivity that shows the added value of each
segment to the states production.
Source: Developed by the authors.
* The fields refer to materials-related activities such as chemistry, chemical engineering, mechanics and physics.
The research team prioritized the criteria in the Human Resources Indicator (HRI), since it
decreasing order of importance, which resulted is understood that TISCs need researchers with
in the following hierarchy: research institutes and expertise in the areas of materials.
universities, Human Resources Indicator (HRI), A relatively lower degree of importance was
Publication Indicator (PI), number of employees, given to the publication indicator (PI), which re-
exports, number of local units, and industrial fers to studies published in the area of materials
transformation value. and/or related fields and indicates the presence
Greater importance was given to the presence of knowledge and intellectual capability that
of research institutes and universities acting in can favor the operations of a TISC. The lesser
materials and/or related fields, since their presence importance of HRI and PI compared to the pres-
indicates initiatives and efforts already made in ence of research institutes and universities is due
this area. The second most important factor was to the fact that human resources and knowledge
481
Table 3. Brazilian states selected for the first multicriteria analysis
Num-
Human ber of
Publi- Research Num- Industrial
re- employ-
cation institutes Number of ber of transforma-
Alternatives sources Exports ees with
Indica- and uni- employees local tion value
(States) indica- US$ (2006) higher
tor versities (2004) units in R$
tor educa-
(2004) (2004) (2005) (2005)
(2004) tion
(2004)
Central West
Federal District 1,723 47,984 9 65,749,524 18,588 1,352 919 1,140,079
Gois 1,031 26,144 8 2,092,027,930 135,717 4,119 4,513 8,501,887
Mato Grosso 493 6,094 3 4,333,376,419 72,248 1,385 2,403 6,295,994
Mato Grosso Sul 743 15,716 5 1,004,204,248 48,391 1,408 1,314 2,766,885
North
Acre 77 1,266 3 17,795,969 3,644 50 184 95,688
Amap 20 82 2 127,980,007 2,779 67 107 259,972
Amazonas 1,033 18,740 11 1,522,851,015 86,236 5,093 918 19,769,522
Par 1,088 24,046 10 6,707,603,218 90,479 2,323 2,019 8,165,561
Rondnia 40 638 1 308,018,812 25,945 217 1,073 1,126,990
Roraima 161 2,608 2 15,358,447 1,523 21 96 30,665
Tocantins 243 4,888 4 203,886,580 8,702 119 392 276,118
Northeast
Alagoas 419 8,422 3 692,543,376 94,916 1,435 667 2,075,454
Bahia 1,973 43,474 13 6,771,981,469 148,102 6,576 4,160 24,184,645
Cear 1,559 43,512 12 957,045,076 176,854 3,826 3,805 5,392,342
Maranho 354 10,636 3 1,712,701,103 23,190 560 764 2,235,720
Paraba 1,510 48,312 8 208,589,087 51,153 1,447 1,302 1,852,656
Pernambuco 2,237 62,774 11 780,340,072 147,209 5,573 3,786 5,675,220
Piau 249 3,416 3 47,127,095 20,777 555 819 702,169
Rio Grande Norte 880 24,110 7 371,503,239 55,095 1,753 1,349 2,904,517
Sergipe 435 9,002 3 78,939,173 29,116 1,121 825 2,638,893
Total 16,268 401,864 121 28,019,621,859 1,240,664 39,000 31,415 96,090,977
Source: Brazilian Institute of Geography and Statistics (IBGE), Ministry of Labor and Employment (MTE), Secretariat of Foreign Trade
(SECEX), National Council for Scientific and Technological Development (CNPq), and Brazilian Network of Technology of the Ministry of
Science and Technology (MCT)
can be transferred to nearby regions to meet the tion indicates the qualifications of the companies
requirements of the TISC. human resources. For a TISC, the demand of
Ranking fourth and fifth in terms of priority technologically dynamic companies represents
are, respectively, the number of people with a potential clients to be served. Precisely because
higher education working in the states industrial the technological dynamism of these companies
companies and the overall number of employees. is relevant to a center, a lower priority was given
The number of employees with a higher educa- to the overall number of employees.
482
The two lowest priority levels were assigned parison to each other based on each criterion. The
to exports and to the number of local units. An global value indicates the attractiveness of the 19
export analysis can indicate the degree of insertion states of the CW, N, and NE regions, considering
of companies in the export market. However, this that 7 states would be strong candidates to receive
insertion may occur mainly through goods with a technology support center. Note that the in CW
low added value, as is typically the case of com- region, the Federal District (Braslia) and Gois
modity exporter states. Hence, even if the export are competitors, since they present attractiveness
rate may serve to indicate the size of the market to indices of 0.537 and 0.282, respectively.
be served by a TISC, the technologically dynamic On the other hand, the highest scoring states
export markets in the Central West, North, and in the North are Par (0.362) and Amazonas
Northeast regions to be served by this TISC would (0.352), In the Northeast, Pernambuco, Bahia,
be relatively small, since these Brazilian regions Cear and Paraba presented the highest scores,
are known historically as exporters of low added i.e., 0.246, 0.241, 0.146 and 0.141, respectively.
value goods. Similarly, although the number of
local companies allows for quantification of the Second Multicriteria Analysis
potential market to be served by a TISC, it does
not guarantee that these industrial companies The objective of this analysis is the choice, among
actually require technological services. Therefore, the seven states and the Federal District selected
less importance was given to these criteria than in the first analysis, of the three states that would
to the previous ones. receive technology centers, one in each region of
Lastly, an even lower priority was assigned the country. In this stage, qualitative information
to the industrial transformation value, which is garnered in the field research was combined with
defined as the difference between gross indus- previously available quantitative data. Thus, seven
trial production and industrial operating costs variables were selected for a second multicriteria
(intermediate consumption). This is a productivity analysis, three of them related to supply and four
indicator that indicates each sectors added value to demand for technological services.
to the production of the state under analysis. The variables of exports and industrial trans-
The lower priority given to the industrial formation value had already served as the basis
transformation value compared to exports is due for the first analysis. Five new variables that had
to the fact that the intermediate consumption of been the objects of the field research were now
the sectors that require technology in these states included, namely, institutional environment, exist-
depends, to a large extent, on imports, which ing infrastructure, technology service demanding
contributed to diminish the role to be played by sectors, private projects in the area of action of
the TISC. the TISC, and expanded human resources indi-
Therefore, the parity comparisons resulted in cator. The following priorities were assigned to
the following weights for the criteria: research in- the criteria in decreasing order: demanding sec-
stitutes and universities (34.3%), human resources tors, private projects, institutional environment,
indicator (HRI) (24.4%), publication indicator (PI) expanded HRI, industrial transformation value,
(17.3%), number of employees with higher educa- existing infrastructure, and exports.
tion (8.9%), overall number of employees (6.1%), The first level of priority or importance was
exports (4.1%), number of local units (2.9%), and assigned to the existence of sectors that demand
industrial transformation value (2.1%). the TISCs services, which would indicate the
Table 4 presents the global valuation of the current demand for materials-related technological
alternatives, which was obtained from their com- services in the regions under analysis. The second
483
Table 4. Attractiveness of the alternatives

man resources, as well as the research efforts that
Alternatives (States) Level of attractiveness have been published in materials-related areas. The
Central West
latter is a combination (average) of the HRI and PI
Federal District 0.537
indicators used in the first multicriteria analysis.
Gois 0.282
The presence of a favorable institutional environ-
ment was considered a more important requisite
Mato Grosso 0.081
for the creation of a TISC than the presence of
Mato Grosso Sul 0.100
human resources, since people can be transferred
North
to and from the regions near the TISC.
Par 0.362
The fifth level of priority was assigned to the
Amazonas 0.352
industrial transformation value of the states. In
Tocantins 0.109
the first multicriteria analysis, a higher priority
Rondnia 0.054
was assigned to exports than to the industrial
Acre 0.051
transformation value, due to the characteristics
Amap 0.037
of intermediate goods consumption in the CW,
Roraima 0.035 N, and NE regions, based, to a large extent, on
Northeast imported technology. However, the interviews
Pernambuco 0.246 were conducted with the main representatives
Bahia 0.241 of the states investigated, such as presidents and
Cear 0.146 directors of industry associations and unions,
Paraba 0.141 presidents of universities and professors of uni-
Rio Grande Norte 0.084 versity departments. The interviews revealed that
Sergipe 0.050 this priority could be inverted because the inter-
Maranho 0.036 mediate consumption of the sectors that require
Alagoas 0.030 technological services depends little on imports
Piau 0.026 and the demand can be supplied partially by local
Source: Developed by the authors. technology centers.
The sixth level of priority was assigned to the
existence of infrastructure in the states, such as
level of priority was assigned to the existence of laboratories and equipment that could support the
large investment projects. This variable, which TISC structure. The lowest level of priority was
would indicate the existence of current and future assigned to exports, since exports in the regions
demand for technological services on the part of under analysis consist of low added value goods,
large industrial projects, was assigned a lower limiting the action of the TISC.
priority than the existence of demanding sectors Thus, the resulting weights for the different
due to the uncertain nature of many projects, criteria were: demanding sectors (36.8%), pri-
which could render them unviable. vate projects (22.7%), institutional environment
The third and fourth levels of priority were (17.1%), human resources indicator (9.9%), indus-
assigned to the presence of an institutional environ- trial transformation value (6.4%), infrastructure
ment and the expanded human resources indicator. (4.5%), and exports (2.6%). Table 5 describes
The presence of a favorable institutional environ- the evaluation of the alternatives according to
ment indicates the commitment of institutional different criteria.
support agencies to the creation of the TISC. The In the Central West region, the state of Gois
expanded human resources indicator denotes the presented the highest scores in all the criteria with
level of materials-related qualifications of the hu- the exception of human resources, for which the
484
Table 5. Attractiveness of the alternatives according to different criteria
Alternatives Criteria (variables)

Total
(States) DEMSEC PRIPROJ INSTENV HRI EXP ITV INFRA EXP
Central West
Gois 0.315 0.114 0.086 0.017 0.057 0.038 0.023 0.650
Federal District 0.053 0.113 0.085 0.082 0.007 0.007 0.003 0.350
North
Amazonas 0.307 0.057 0.137 0.025 0.053 0.034 0.006 0.619
Par 0.061 0.170 0.034 0.075 0.011 0.011 0.020 0.382
Northeast
Pernambuco 0.099 0.145 0.095 0.057 0.010 0.018 0.003 0.427
Bahia 0.215 0.023 0.022 0.012 0.042 0.018 0.017 0.349
Cear 0.038 0.048 0.046 0.012 0.009 0.003 0.005 0.161
Paraba 0.016 0.011 0.008 0.018 0.003 0.006 0.001 0.063
Legend: DEMSEC: Demanding sectors; PRIPROJ: Private projects; INSTENV: Institutional environment; HRI EXP: Expanded human
resources indicator; ITV: Industrial transformation value; INFRA: Available infrastructure; EXP: Exports
Federal District showed a better classification. In only in the exports criterion, and received the sec-
2004, the number of publications by researchers ond highest score in the institutional environment
with masters and doctoral degrees, as well as the criterion (0.046). The state of Paraba presented
number of theses and dissertations concluded in the second best performance in human resources
the Federal District, was relatively higher than in (0.018), Bahia scored higher than the other states
the state of Gois. Nevertheless, the total sum of in the following criteria: demanding sectors, indus-
the variables (0.650 for Gois and 0.350 for the trial transformation value, and exports. However,
Federal District) indicated that Gois would be the final sum of the variables favored the choice
the most suitable location for a materials technol- of Pernambuco as the most suitable state for a
ogy center in the Central Western region. technology center in the Northeast.
In the North, the state of Amazonas reached The global valuation of the multicriteria analy-
higher scores than the state of Par for the following sis for the state of Pernambuco was 0.427, while
criteria: demanding sectors (0.307), institutional the other states showed the following scores: Bahia
environment (0.137), industrial transformation 0.349, Cear 0.161, and Paraba 0.063.
value (0.053), and infrastructure (0.034), while
Par showed a better performance in human re-
sources, exports, and private projects. The sum of RESULTS AND DISCUSSION
all the variables was 0.619 for the state of Ama-
zonas and 0.382 for Par, which would justify the The evaluation of the process of location based
choice of the former state over the latter. on multicriteria analysis using the AHP method
The state of Pernambuco showed the best demonstrated that Pernambuco (NE), Amazonas
performance in the Northeast region, with higher (N), and Gois (CW) are the states with the best
scores than the other states in three criteria: private conditions for the creation of Materials Technology
projects, institutional environment, and human Centers (MTC). The two multicriteria analyses
resources, Cear scored higher than Pernambuco showed an inconsistency index of 0.07, indicating
485
that the results fall within standards acceptable to The analysis corroborated the relevance of
the AHP (maximum inconsistency of 0.1). many aspects of contemporary location theory.
The use of the AHP model allowed for a better On the one hand, the presence of demand sectors,
understanding of the different factors that affect the private projects, research institutes, institutional
location of technology support centers. Analyses environments, and qualified labor constitute a set
of the relative importance of all the factors used of complex and specialized factors that are
in the two multicriteria approaches led to the poorly explained by the market rationality which
conclusion that there is a good proportionality in theoreticians use as the basis for this approach.
terms of the impact of demand and supply on the On the other hand, it should be kept in mind that
location of technology centers. some factors considered important in classical
Considering jointly the weights obtained for theory, such as the industrial transformation
the criteria in the first and second analyses, and value and the number of local units in a region,
determining an average value for the criteria that also appear to justify and influence the standards
are common to both of them, it was possible to of technology center location.
obtain the respective sums for demand and supply. An in-depth analysis of Figure 1 leads to the
Figure 1 illustrates the different attributes used in conclusion that the high weight of research insti-
the first and second multicriteria analyses. The tutes and universities denotes not only the presence
total sum of supply-related factors was 0.83, while of institutes that favor joint collaborations with
that of demand was 0.85, indicating that factors of technology centers but also reflects the historical
technology demand and supply exerted the same connection of these centers to local public uni-
influence on decision-making about the most versities. Most technology centers in Brazil are
suitable choice for the implementation of TISCs. located on universities campuses proper, and
cases of academic spin-offs that are technically
Figure 1. Relative importance of the factors that influence the choice of locations for technology support
centers. (Source: Developed by the authors)
486
and financially self-sustainable are rare. The high of the State in innovation stimulates the creation
risks of acting in the market and the relatively of environments that are more favorable for the
low demand for technology services appear to be development of innovations, inducing the elabora-
some of the obstacles that technology centers in tion of innovation-related business strategies and
Brazil face. Notwithstanding the high correlation decisions (Salerno & Kubota, 2008). However,
that Wren and Storey (2002) identified between although the public sector can act as an articula-
technology services and the number of employees tor of the outcomes of technological innovation,
in a company, demand appears to depend less on the technical inconsistency of its decisions may
company size and more on the innovative char- sometimes conceal particular orientations not
acteristics and competitive conditions to which aligned with the productive characteristics of a
the sectors requiring these services are exposed. given region. Reality shows a plethora of situations
This fact would also support the high weight of in which regions and technology projects were the
this criterion in the TISC location process. recipients of ventures that were justified more by
political will than by an adequate technical basis.
To a large extent, this fact is also the result of im-
CONCLUSION porting models that are firmly established in well
industrialized countries but that contribute little to
The existence of technology centers is an important the development of the local industrial structure,
source of motivation for regions and countries to since the competitive conditions of this structure
overcome technology and innovation disadvan- differ from those of the regions from which these
tages. The location of these centers is a relevant development models were imported.
theme within the sphere of Strategic Innovation Therefore, this location model can be very
Management. This field of research contributes to useful for decision makers seeking to dissociate
the innovation of companies and countries through the allocation of technological services from
technology management and decision-making any less technical classification criterion. This
support. The mobilization of technological knowl- model could undoubtedly represent an advance in
edge and competencies in order to favor the best reducing the technological imbalances to which
location choice is not a simple task and should be industrialized regions are subject. Many imbal-
managed and planned strategically so as to encour- ances in these regions have long been known;
age the creation of innovative environments. In however, despite the mechanisms that have been
this context, the design of robust methodologies applied to reverse them, further efforts to mitigate
that augment the chances of success of enterprises them are still required.
is entirely justifiable. The analysis presented here Studies involving the location of technology
attempted to advance in this direction by allowing centers are strongly dependent on the identification
for the identification and combined weighting of of the determining factors of supply and demand
the elements pertinent to the location choice of for technology. Future research should focus on
such centers. In countries where the choice of a the identification of cause and effect relationships
site for the implementation of enterprises of this between the various factors that affect the sup-
type is strongly influenced by political criteria alien ply and demand for technological services. This
to technical and scientific logic, the application type of research would undoubtedly contribute
of research multicriteria methods of this nature to improve analyses concerning the location of
offers unquestionable advantages. technology centers.
Government incentives can be vital when it
comes to establishing a TISC. Moreover, the role
487
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489
Section 6
Marketing and Innovation
491
Chapter 26
Taxonomy of Marketing Core
Competencies for Innovation
Eric Viardot
EADA Business School, Spain
ABSTRACT
This chapter argues there is a lack of taxonomy of the various marketing capabilities that are necessary
to achieve the market success of innovation. It tries to fill this gap by proposing a model that subsumes
two classes of Marketing Core Competencies (MCC) for successful innovative companies. The first cat-
egory of core competencies is related to a superior ability of the firm to identify and to connect the actual
market needs with the innovation during the preparation of the new product launching phase. Once the
innovation is on the market, a second group of core competencies is associated with the capacity of the
firm to ease the customers tensions in order to facilitate the acceptance of the innovation and turn it
into a market success through adoption and diffusion. In conclusion, the chapter underlines the impor-
tance of the place of these two categories of Marketing Core Competencies (MCC) in innovative firms.
INTRODUCTION need in a new and cost-effective way so that it

generates customer value and a positive business
Large is the number of firms that have introduced impact (Viardot, 2004).
an innovation with an original concept or a su- Innovations can be incremental or disruptive
perior technology but failed to establish it on the (Bower & Christensen, 1995). Incremental inno-
markets. This is because innovation is more than vations improve the performance of established
invention. It is taking a new idea and developing goods and services along the dimension that
it into a solution which satisfies a specific human mainstream customers in major markets have
already valued. Examples include continual
DOI: 10.4018/978-1-61350-165-8.ch026 development of faster microprocessors, flatter
Taxonomy of Marketing Core Competencies for Innovation
screen for computers or higher -resolution medi- true for organizations. Many managers fret about
cal scanning devices or Short Message Service innovative solutions and use various strategies to
(SMS) for cellular phones. Disruptive innovations reduce risks in purchasing an innovative product.
offer a different, original and often untested solu- They try to assess the balance on the risk/return
tion to a larger category of needs (Christensen & relationship of such investment much more than
Raynor, 2003).They are diffused throughout the considering the novelty of a technology (Meldrum
economy like electricity, transistors, or machine & Millman, 1991).
tools in the past and computers, networks, and In line with the resource-based theory, market-
robots nowadays. They often provide the basis ing can be defined as a continuous set of skills and
for the emergence of new industries that create competencies of a firm that constitutes a better
major new markets. For instance, once comput- value than its competitors (Vargo & Lusch, 2004).
ers were introduced and accepted, it made sense Consequently, the specificities of product innova-
to expand their power, offer new application tion are driving the building of new capabilities
software, and connect them. Once they were con- for innovative companies. Although some papers
nected, online services and electronic commerce are discussing the role of some specific Marketing
naturally made their way into the economy and Core Competencies (MCC) for innovations (Story
consumers behavior. Similarly, today some very & alii, 2009, Reid & de Brentani, 2010), there is
promising technologies could open new markets not a taxonomy of the various marketing skills
such as 3D mobile phones, engineered stem cells, that are necessary to achieve the market success of
solar fuel, green concrete, cloud programming innovation. This chapter tries to fill this gap with
as identified by MIT in its 2009 special report on a descriptive research based on literature review.
emergent technology (www.technologyreview. As illustrated in Figure 1, the chapter proposes
com/specialreports). a model for successful innovative companies by
Many studies have been carried out on the new subsuming two sets of specific MCC that are tak-
product adoption process, following the leading ing place at two different phases in the innovation
research by Rogers (1983) which defines the diffu- process; this one is considered as a complex set
sion of innovation as a process that communicates of communication paths over which knowledge is
innovation through certain channels over time transferred internally and externally between the
among the members of a social system. These organization, the science base and the marketplace
studies show that not all customers, individuals (Trott, 2008).
or organizations, react to innovations in identical The first category of core competencies is
ways, mostly because of their degree of involve- related to a superior ability of the firm to connect
ment with technology (Latour & Alii, 2002). Some the actual markets needs with the innovation dur-
consumers will buy new products immediately, ing the preparation of the launching phase of the
while others will buy them much later as they are new product. This group is composed of three
uncomfortable with innovations, especially radi- different Marketing Core Competencies (MCC).
cal ones because they are difficult to understand, Once the innovation is on the market, a second
untested, or perceived as one-off which will pass group of three other MCC is associated with the
quickly. The consumers are going to wait for the capacity of the marketing organization to ease
next generation that may provide them with a solid customers tensions in order to facilitate the
benefit. But the next generation of products will innovations acceptance and to turn it into a mar-
never happen if the current generation is discon- ket success. In that chapter we define a marketing
tinued. It comes down to marketing to explain organization as one organization which is special-
this innovation, so that the people can make an ized in marketing, and/or as a unit of an organiza-
educated choice. What is true for consumers is also tion/firm, and/or as an Organization Creative Area.
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Figure 1. Marketing core competencies (MCC) in the innovation process
THE MARKETING CORE identify the opportunities and threats in the market
COMPETENCIES BEFORE as well as to evaluate the possible market demand.
THE INTRODUCTION PHASE The situation analysis starts with an evaluation
OF AN INNOVATION of the various elements of the firms environ-
ment (Technological, Economic, Sociological,
In the groundwork of the introduction phase of Ecological, Ethical, Political and Legal forces)
an innovation, three specific competencies are which may represent some threats or opportunities
developed by the marketing organization. The vis--vis the innovation considered. Regarding
first one is the capacity to help the firms top innovations the technological forces are obvi-
management to assess the market potential of an ously always important as many innovations are
innovation. The second one is the particular skill technology-driven. This is even more important
to segment the potential markets for the innova- in the case of radical innovation and radical new
tion, either with a comprehensive study of the products where companies can be blindsided
potential customers or with a proactive vision of when they tend to underestimate the potential of
the future market. The third core competence is a breakthrough innovation or when they listen too
the ability to define the innovations positioning loosely to their best customers and invest only in
for its introduction on the market. incremental innovation to lose ground ultimately
(Christensen, 1997).
Marketing Core Competence However, it would be an error not to take into
1: Assessing the Market consideration the other forces (Talke & Salom,
Potential of an Innovation 2009). Most specifically, many firms tend to
misjudge the sociological constraints which may
Before considering the introduction of an innova- slow the adoption process of an innovation. The
tion to the market, the primary step is to evaluate political and legal dimensions are also extremely
its business potential (Easingwood & Koustelos, important as some innovations may not be accepted
2000). This requires a situation analysis in order to by a local government, such as in China when
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Google had to agree that all search results with order to assess its market potential. For example,
contents viewed as objectionable by the govern- disruptive innovations tend to create new markets
ment should be censored (ORourke & Alii, 2007) and usually take root on the weakest segments of
In the case of innovations, government often large companies which are already in the markets.
acts as a market raiser, through governmental While incumbents tend to stick with sustaining
research programs such as Eureka in Europe innovations for their traditional customers, chal-
or HPCCI (High Performance Computing and lenging companies will take on competitors with
Communications Initiative) in the United States. disruptive innovations.
Those programs are funded and managed by vari- For instance, the Chinese HTC has long been
ous governmental agencies which can introduce the manufacturer of unbranded devices bearing the
much competitive bias by championing national logos of wireless giants such as Verizon, T-Mobile,
suppliers. Through IP and patents regulations, Sprint Nextel, or NTT DoCoMo. But HTC was the
local government can also impede or reduce first to adopt the open-platform of Googles An-
the adoption of an innovation. For example, in droid operating system for smartphones. Android
China the government is willing to promote more lowers the entry barrier for newcomers because
eco-friendly cars and energies in order to reduce it takes a lot of the innovation burden off of the
the massive air pollution in large cities. This has hardware companies. HTC built the first phone
provided a boost for BYD one of Chinas biggest powered by Googles Android operating system,
producers of batteries for cell phones which is for T-Mobile, in 2008 and has launched its own
now a fast-growing maker of green cars and solar line of smartphones with great success.
panels. (Arndt & Einhorn, 2010). Regarding the competitive analysis for an
Governmental constraints can especially be incoming innovation, the traditional five forces
felt by the importance of standards in international framework created at Harvard University and
contracts. For example, the European Unions popularized by Michael E. Porter (1985), need
taxation on the broadcasting of television programs to be adapted slightly. Indeed, besides the ri-
by the D2 Mac satellite killed the market of D-Mac valry among existing competitors, the threat of
decoders. On the other side, when the French, Ital- both substitute products and new entrants, the
ian and German governments signed an agreement bargaining power of suppliers and of buyers, it
for the development of GSM (Global System for is important to consider the relative influence of
Mobile communication) as a common standard the complementors. They can be defined as
for the development of an effective pan-European the firms that provide complementary product
solution to mobile communications, they paved or services which are adding value to the product
the way for the meteoric growth of the mobile innovation (Adner & Kapoor, 2010) For example,
telecommunication industry in the 90s in Europe the functioning of ERP or CRM softwarea radi-
(Seo & Hashem Sherif, 2009). If the government cal innovation for many organizations trying to
has an influence on the competitive environment, implement and to adapt itrequires the help of
one should note that its force varies according to specialized consulting firms such as Accenture,
the size and the characteristics of the firms. The Cap Gemini Ernst &Young and hundreds of
power of any governmental organization can also smaller ones. Similarly the value of an innova-
be affected by the political lobbying of large firms tive operating system depends on the number of
or the alliance of small ones. application software available on it. Similarly
Marketers must also provide an analysis of software developers are complementors of
the potential competition for an innovation in Windows, Linux, Symbian or Android. Comple-
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mentors can have some significant influence in Marketing Core Competence

expanding the market. For instance, a recent work 2: Segmenting the Potential
has shown that offering greater levels of access to Markets for the Innovation
independent hardware developer firms produces
up to a fivefold acceleration in the rate of new If the conclusion of the situation analysis indicates
handheld device development (Boudreau, 2010). a potential demand for an innovation, the next
Finally to complete the environmental and step is to segment the market because, in todays
competitive analysis, Marketers have to provide environment, an innovation cannot reach every-
an estimate level of market demand. Demands one everywhere at every time. The time when
are desires that can materialize thanks to money one product sufficed to satisfy demand is over.
and some purchasing power. For instance, many Customers have become more demanding and
consumers want broadband with unlimited Internet more informed, and competition drives companies
access connected to a sophisticated home cinema to differentiate themselves. Groups (segments)
system. Only a few are able and willing to buy that. of customers with similar wants desires, buying
In the case of incremental innovations, market- behavior, or some other significant characteristic
ers can always go and interview customers who are needs must be identified. Consequently, successful
already using this category of product. They can innovative firms are very much aware that they
rely on several tools such as, ethnographic surveys, have to determine the most important customers
concept tests and prototype tests, expert opinions, and what they value (Thomke & Von Hippel, 2002)
sample groups, test markets, etc. For instance, in a given innovation. Those are the necessary
Nokia combined some fundamental ethnographic conditions to ensure that the innovation corre-
with long-term user research in China, India, and sponds well to customer wants and expectations.
Nepal to analyze how illiterate people live in a To successfully market an innovation, there
world full of numbers and letters (Katz, 2003). exist two approaches: demand-driven marketing
As a consequence, Nokia created an innovative for incremental innovations that customers are
iconic menu that can be navigated only by im- awaiting and vision-driven marketing for radical
ages. Furthermore, the growing percentage of the innovations. The former approach is based upon
population having online access in western and market knowledge, whereas the latter is based
emergent countries, coupled with the unlimited upon the views of the innovator and requires some
capacity of the Internet to influence lifestyles, kind of market pro-activeness (Sandberg, 2002).
has turned the Web into a tool for understanding The dichotomy between market-driven marketing
and anticipating consumer needs and to gauge and vision-driven marketing leads to two differ-
consumer thinking and behavior (Hardey, 2009). ent segmentation methods. The market-demand
But a precise evaluation of demand is not easy approach breaks down the market into different
to accomplish when the innovation is radical and segments, the needs of which are analyzed before
markets are exploding. Thus, estimating the overall defining a product. The market-vision (or market-
demand of an innovation is never straightforward supply) approach identifies a certain number of
because markets are in a constant state of flux future customers who will then serve to construct
and because the goal is to create markets rather the segments by extrapolation.
than battle for market share on existing markets. A large number of incremental innovations
happened because of customer demand in response
to an expressed or latent need. Many of these
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innovations only show variations of an original well as the products that will materialize them.
product with simply some improvements that They have to figure out, through brainstorming
were requested by the customers. For instance, and creativity techniques, the potential custom-
microcomputers are becoming more and more ers who may find some value in an innovation
compact, portable, and powerful; but they have whose existence they do not even suspect today.
not really changed since 1981. For these demand- A very effective approach is to target lead users,
driven innovations, segmentation methods that are companies, organizations or consumers (Pitta &
developed and frequently used in marketing can Alii, 1996) that have needs that go far ahead of
generally be used. They are based on the selection the average users and who may even have started
of segmentation criteria to break down the total to develop a prototype (Von Hippel & Alii, 2000).
market according to the characteristics and the It is hard for would-be customers to identify
behavior of consumers or industrial customers, the needs that a disruptive innovation may fulfill,
in order to regroup them in different segments especially if this innovation is presented under the
that are as heterogeneous as possible in terms of form of a concept (Mullins & Sutherland, 1998).
needs and expectations. Thus the marketing organization should select
Nevertheless many innovations are not pulled key potential customers who are interested in the
by the market but they are pushed by the ideas of product innovation and give them the opportunity
companies or individuals, as more than 80% of all to test various prototypes (Beta testing) (Dolan &
researchers of all time are still alive and working Matthews,1993).The best way to recognize their
today. The market for a new radical innovation needs is to partner with the customers (Dunn &
is more difficult to understand as it is coming Thomas, 1994) and have them test a prototype
from a research laboratory or a creative genius. (Leonard & Rayport, 1997). Actually, it has
Nevertheless, the intrinsic value of an invention been shown that when individuals play a part in
does not necessary lead to a business because the the design of the technology their involvement
evaluation of the innovation by customers is often increases (Barki & Hartwick,1989) and becomes
a big question mark (Veryzer, 1998). The reason more positive adding to the need and value of the
is that radical innovation frequently brings new technology (Guimaraes & Alii, 1999).
level of functionality that the customers may not The ultimate goal of a Beta-testing is to evalu-
figure out immediately; also such innovation often ate how well the prototype fits the customers
implies drastic changes in consumption patterns needs (Lilien & Alii, 2002). Accordingly and in
(OConnor, 1998). parallel with R& D, the marketing organization
Anticipating the changes that a radical inno- monitors the beta tests. Furthermore, by work-
vation will bring to the market requires foresight ing closely with test customers, the marketers
(Hamel & Prahalad, 1994) and vision. Sonys may gain not only a better knowledge of their
founder, Akio Morita, always contended that needs but also some insights into the price the
the public does not know what is possible, but market will be ready to accept, as well as some
we do (Rosenbloom & Cusumano, 1987). ideas about the most efficient way to advertise
Consequently, the traditional methods that are and distribute the future product. Companies like
used to identify particular market segments must 3M or Google have developed an unparalleled
be adjusted. To determine the potential custom- core competence in continually testing new ideas
ers to whom these radical innovations may be with their current and prospective customers. The
directed, marketers must anticipate and under- Post-it Picture Paperthat let people stick their
stand the needs that these innovations satisfy as photos to a wall on displayor the mash-ups
496
which combines Googles map with interesting only one or a very few number segments. Smaller
location websites are some of the recent fruits of companies often prefer having a smaller number
their ability to openly interact with their customers of niches rather than having a small market share
and stakeholders. of a large market. Differentiated marketing selects
several segments with marketing methods adapted
Marketing Core Competence to each segment. Large high-tech companies such
3: Positioning the Offer for as HP, SAP or Orange, for instance, address a large,
the Target Segment diverse group of users in different sectors (bank-
ing, insurance, industrial) with varied financial
Among all the skills which have a strong competi- resources, ranging from small companies to large
tive advantage, innovation positioning is probably multinationals. Each segment has its own type of
the most difficult to achieve. It starts with the product, price, place, and promotion that definitely
marketing organizations capacity to select, among require the involvement of more resources.
the various market segments identified, the best A concentrated marketing is less expensive
customers target to aim at when introducing the but riskier than marketing that is divided over
innovation on the market (Guiltinan, 1999). This several segments. The choice also depends upon
is crucial because all customers segments do not technical possibilities and the companys capac-
share the same importance. ity to quickly put a quality product with a truly
The first element of selection is the level of competitive advantage on the market. The choice
acceptance of the innovation by the customers depends as well upon the companys overall
belonging to the segment (Easingwood & Lunn, strategy. For instance, some companies wish to
1992). But marketers have to also take into con- postpone entering a market segment until the
sideration other strategic elements such as pioneers have shown their existence.
Finally, on each selected market segment,
the evaluation of the segments potential comes the positioning of the innovation in order
in terms of attainable volume and profit, to ensure that it is well perceived, identified, and
the segments accessibility according to recognized by the customers of the key selected
the companys resources, their strategic segments. Positioning is the creation of the in-
significance for the companys mission, novations perceived image in customers minds.
the position of competitors, and the level Positioning is the ultimate step in differentiating
entry barriers, in particular, administrative between existing and would-be competitors.
and governmental stumbling blocks. The positioning reflects the innovations value
for the customer and its main competitive advan-
Sometimes, the high introductory price of an tage. Usually, the innovation provides a very high
innovation, due to the need to optimize R&D value due to its novelty (differentiation) or a value
costs and to the lack of an economy of scale at equal to more traditional solutions but at lower
the beginning of the manufacturing process, im- cost (cost advantage). Novelty is very obvious in
mediately determines the choice of segments with the case of an innovation. In consumer electronics,
a high purchasing power. Samsung has successfully applied the fresh fish
Within the selected segments, marketers define sashimi approach: it markets the most sophis-
the most significant customers who will be tar- ticated products ahead of the competition and
geted first. They have two choices: either making charges premium prices before the product is no
a concentrated marketing or making a differenti- longer fresh and the competition is there (Xuefeng,
ated marketing. Concentrated marketing selects 2009). But the rise of developing economies has
497
seen the coming of low cost innovations because ing the most effective use of the latest innovations
of the lower purchasing power of their customers in the marketing tools and techniques to engage
(Prahalad, 2002). Today, innovative Chinese or with the largest number of potential customers in
Indian companies are coming up with new products order to enlarge the market.
and services that are dramatically cheaper than
their Western equivalents such as $300 computers, Marketing Core Competence
and $30 mobile phones that provide nationwide 4: Moving Beyond the Initial
service for less than 2 cents a minute. Category of Customers
A good positioning statement should be able to
change or even reverse the mindset of customers Once the innovation has reached the initial cat-
(Jaworski & Alii, 2000). However, the position- egory of customers, marketing has to shift the
ing of an innovation, especially a radical one is attention to other segments that are getting more
always difficult. This is because customers often attracted by an innovation which is no longer
have difficulties understanding how a new radi- ground-breaking (Moore & McKenna, 1999).
cal product can be an improvement, especially as Building on different adoption and diffusion
long as they have not experienced the product nor models, one can distinguish between six classes
figured out how the product or service will meet of customers: the Innovators, the Forerunners, the
their need. This makes the communication of the Mainstream users, the Followers, the Traditional-
benefits even more indispensable. Additionally, ists, and the Rebels.
customers often have difficulties distinguishing
between the best and the rest within the large Innovators usually have an enduring in-
number of frequent new product announcements volvement based on an interest or arousal
Once the positioning is defined, it is translated for a given product on a day to day basis
into the marketing mix of the innovation (i.e., the (Richens & Block, 1986). Actually some
design and the associated services of the product, researcher argue that over time techno-
the distribution channels, the communication logical innovation can encourage a psy-
campaign, and the price). Then the innovation is chological addiction to high technology
ready to be launched. for some category of users, either at home
or in the work environment (LaTour &
Roberts,1992).
THE MARKETING CORE Forerunners often are respected opinion
COMPETENCIES AFTER THE leaders who are more careful than innova-
LAUCH OF AN INNOVATION tors. They consider the ownership of a high
tech product mostly as a status symbol to
When the innovation has been launched on the assert their difference with the rest of the
market, the role of Marketing is to facilitate its society.
adoption rate in order to accelerate the growth of Mainstream users will purchase a prod-
its market share. This requires the activation of a uct not because it is innovative or different
new set of skills and competencies. The first skill but because it fulfills a need, such as sav-
is the capacity to reach new customers beyond the ing time or money, being more practical,
original target market. The second competence or more reliable than the existing solution.
is the ability to leverage the brand equity of an They crave for references and testimonials
innovation to accelerate its market penetration. from actual customers. They try to mini-
Finally, the third capability is the talent for mak- mize the risk and usually go for the lead-
498
er, boosting the external network effects As a consequence, the market penetration of
(Shapiro &Varian, 1999). an innovative new product can be accelerated by
Followers go along with the Mainstream informing and educating Mainstream users and
users but much later. They are under the Followers so that they will know the product, be
influence of the incapacitating FUD (Fear, able to measure its superiority over other exist-
Uncertainty, and Doubt) factors. Like Saint ing products, and describe its benefits to other
Thomas, they need to touch and see the people. But studies show that the more complex
solution functioning elsewhere either at an innovation is, the more time it will take for the
relatives or friends houses for consumers innovative product to be accepted (Easingwood
and customers or competitors locations & Beard, 1989). For any new product, the more
for businesses- before thinking to purchase important the extensive retraining required, the
it. Innovations often make those customers higher the risk to be rejected because of the high
nervous and they normally look for fully switching costs (Pae & Hyun, 2002). Mainstream
packaged and easy-to-use products. users and Followers usually want their product/
Traditionalists are skeptics who do not buy usage skills that they have developed with one
a product until it has become part of tradi- product, to be transferable across to another origi-
tion. They are technology averse and will nal product. If it is not the case, they may decide
buy this category of product only when not to learn how to use the new product (Alba
they do not have any other choices. & Hutchinson, 1987). A classic example is the
Finally, the Rebels will always reject a QWERTY typewriter keyboard that has persisted
product because of its very nature. Such as a standard for years, despite the availability of
an allergy to innovation may be driven by superior alternatives.
cultural or religious reasons like in the case
of the well-known Amish in the US. In that Marketing Core Competence 5:
case, the numbers are not important. But Leveraging the Brand Equity
sometimes, the rejection of an innovation
maybe based on security or ethical reasons Some innovation-driven companies have managed
which may create a significant number of to develop a specific competence in leveraging
rebels such as in the case of genetically their brand equity in order to increase the penetra-
modified organisms protested by a large tion of their new products or services (Halliday
number of European consumers. & Trott, 2010). A commonly accepted definition
of brand equity, an off balance-sheet resource, is
Less than one innovation out of ten is making the value added by the brand name to a product
it on the market (Clancy & Stone, 2005) because (Farquhar, 1999). This added value can be defined
usually companies cannot expand beyond those as an increase in awareness, positive associations,
the two first categories of customers, namely the perceived quality and loyalty from the customers
Innovators and the Forerunners, who are always (Aaker, 1991).
enticed by an innovation. Many firms have dif- Leveraging the various components of the
ficulties to cross the rift between forerunners and brand equity provides an effective way to defer
mainstream users. The real marketing challenge some of the restraints which inhibit customers to
is there. Innovators and Forerunners need to be adopt a new product or service (Temporal & Lee,
acquired; therefore they are a necessary condition 2000; Corkindale & Belder, 2009). First, when an
to succeed on the market, but not a sufficient one. innovation is unknown, some would-be customers
are not even aware that such a product is available
499
on the market. Additionally, innovation tends to as a partner with its clients. And the Apple brand
worry many customers or external parties (Boyd personality is about lifestyle, imagination, innova-
and Mason, 1999) for different reasons. Some tion, passion, and aspirations. It also suggests also
others are afraid that the innovation will be dif- power-to-the-people through innovation thanks
ficult to learn or will not work. Others consider to simplicity and the removal of complexity from
that the quality is an issued since the innovation peoples lives (www.marketingminds, 2010).
has not been tested long enough on the market. More specifically, significant product innovations
Others believe that the innovation will become may be particularly useful for attaining drastic
obsolete quickly. All are always postponing their improvements in brand equity over a shorter
decision to adopt it. period when they are meaningful to consumers
Many consumers view radical product innova- (Sriram & Alii, 2007). Ultimately, brands have
tions as risky purchases (Gregan-Paxton & Roed- to innovate to maintain their relevance and their
der, 1997), but this is also true for organizations. customer base.
They choose a company they can trust and that Figure 2 illustrates this dual relationship which
they know will be around for a sufficient length may generate a very positive feedback loop as
of time to guarantee the solutions durability. brand equity increases market penetration of
A qualitative survey of 50 marketing directors the innovation which in turn enhances the brand
of innovative high tech firms has shown that, equity. The process starts with the triggering of
when considering the relative importance of the brand equity through advertising as the marketing
purchasing factors for an innovative product, the literature suggests that advertising can affect brand
confidence in the vendor is more important than equity (Keller 1998). But the building of a strong
the technology used and has the same weight as brand image for an innovation does not always
the price of the product (Viardot, 2004). require big advertising budgets. Some highly
Consequently, managing efficiently the brand successful companies have managed to achieve
equity of an innovation helps to reassure individu- recognition through creativity and publicity like
als or industrial buyers. A strong brand facilitates Facebook or Google, which have achieved this
the identification of the innovation while attach- position mostly through word-of-mouth and qual-
ing a quality image and a personality that bonds ity. E-bay, Amazon, or Yahoo have also received
with the customers and facilitates their loyalty top-of-mind recognition on a low advertising
(Urde, 1999). This was the strength of IBM in budget. Those web based firms have been able
the computer industry of the 1970s, DEC in the to generate buzz among influencers instead
80s, Microsoft in the 90s, and Dell during the of relying solely on traditional advertising. The
first half of this decade. excitement and passion they have generated has
While brand equity can increase the value of translated into sales afterwards. In that matter, they
an innovation, researches have shown that product just follow the previous generation of successful
innovation can inversely have a significant, posi- innovators such as Intel, Microsoft, Compaq,
tive effect on brand equity (Aaker, 1996) because Cisco, and others; these firms were first talked
it can create differentiation, expand usage contexts, about in the pages of the Wall Street Journal,
prevent competitors and enlarge the personality the Financial Times, Business Week, Forbes and
of the brand. For instance, Google is perceived Fortune magazines. Once their brand image was
as a clean, friendly but credible path to accessing made, they started to spend money in advertising
the tremendous wealth of the Internet. Ciscos to maintain their image and notoriety.
image is associated with being a visionary and When promoting an innovation, brand equity
an expert in Internet telecommunication as well management is not exclusive to private companies.
500
It has been used very effectively by some alli- from 60% in 2004, to 85% in 2009. Such a high
ances to promote an innovation in order to make level of recognition has pushed many companies
it a standard. Consider the case of Bluetooth, a to adopt Bluetooth as the standard wireless con-
short-range networking protocol for connecting nection. In 2004, the Bluetooth SIG had 3400
all types of digital devices (mobile phone, com- members; today it has more than 10,000 member
puter, GPS, etc) or accessing the Internet by companies in the telecommunications, computing,
wireless signals at short range. In 1998, five automotive, music, apparel, industrial automation
companies founded the Bluetooth Special Interest and network industries (www.bluetooth.com).
Group (SIG): Ericsson, IBM Corporation, Intel
Corporation, Nokia and Toshiba Corporation. Its Marketing Core Competence
goal was to promote the development of the new 6: Mastering the Latest
protocol as the standard solution for wireless Innovative Marketing Tools to
connections. Very early the decision was made to Connect with the Markets
develop a strong brand so as to communicate with
endconsumers in order to accelerate its recogni- Finally, in order to enlarge the market for an in-
tion and to step up its adoption by other indus- novation, the marketing organization has to be able
trial companies. From the beginning, Bluetooth to use the latest innovations in the marketing tools
has been actively promoted by members of the and techniques to engage with the largest number
SIG among the end users. The average brand of potential customers. In the very recent years,
awareness level in the United States, United the most striking innovations are in the Internet
Kingdom, Germany, Japan and Taiwan has risen and the social networks. Internet has changed
Figure 2. The dual relationship between brand equity and innovation
501
the marketing platforms of companies (Chaffey CONCLUSION: THE PLACE

& Alii, 2009). It is a powerful communication OF THE MARKETING WITHIN
tool which allows an instant, interactive and INNOVATION ORIENTED FIRMS
personalized exchange with the customer; it is
also a virtual distribution channel; it contributes As the marketing is one of the Organizations
to create new services around an existing hard Creative Areas which contributes to develop core
product, it permits to receive customers feedback competencies, it is important to consider its place
very quickly so that they can co-create a product within innovation oriented firms. This is made
with the company. It plays also a leading role in even more important because numerous innova-
CRM programs as it establishes a vital link with tion failures are the result of a disastrous lack of
customers cooperation between the marketing and R&D
But in the last two years, the Internet has paved areas. Indeed, the rivalry between those two areas
the way to an even more important innovation for can derail the most promising future of innovations
marketers: the raise of the social networks, most as R&Ds people tend to underuse or even ignore
notably MySpace, Facebook, and Twitter (Trusov the information from the Marketing department
& Alii, 2009). Building on the needs and desires (Maltz & Alii, 2001). One of the first basic recipes
for intense and constant communications, those for success is to foster the collaboration between
networks have managed to aggregate millions of R&D and marketing, but this is easier said than
users while altering their daily lives. They now done (DeLuca & Atuahene-Gima, 2007).
offer a credible, less expensive alternative to One of the main reasons is because of the
massive advertising expenditure when marketers multiple walls between marketing and R&D,
envisage enlarging the market of an innovation. especially cultural that make them two different
Indeed, the viral campaigns are just traditional and separate worlds (Griffin & Hauser, 1996).
word of mouth campaigns but amplified by Marketing professionals usually have a business
the scope and the speed of the Internet and the background, even if it is also good to have a
dynamics of the network structure (Stephen & technical background as well. They are trained
Toubia, 2010). Twitter, which allows users to to combine data and intuition in order to answer
tweet about anything they wish via posting a general problems and to make profit-oriented
message, not exceeding 140 characters, on their business decisions, generally within a short time
account on-line is revolutionizing the way people frame. They talk of markets, product benefits, and
communicate. It is now incorporated in nearly all perceptual positioning for customers. Conversely,
cellular phones and some businesses have already research and development professionals generally
used it as a platform to reach its current 190 mil- have an engineering or sciences background. They
lion users worldwide and still growing very fast. are trained to generate and then test hypotheses in
With Tweets and SMS combined with the latest order to resolve technical problems and to pro mote
advanced in geo-marketing, marketers are able to scientific development on a long-term basis. They
leverage the vast potential of the Smartphone as talk in product specifications and performance.
the new vessel for offering product information, All these differences may be frequently in-
updates, special offers, or even specific discounts. tensified by structure (Leonard-Barton, 1992)
As the field of innovation in marketing tools is and by geography when R&D departments are
shifting from the personal computer to the mobile located on an outside campus, while marketers are
phone (Ratten, 2009), this provides marketers close to markets or at headquarters. This leads to
with cheaper and more effective ways to engage less interpersonal activity and hardens disparate
with new prospects. worlds of thought. However the integration of
502
Figure 3. The core competencies for the successful marketing of product innovations
R&D and marketing is excessively important a sequential and logical continuum of indepen-
especially to enforce the effectiveness of new dent stages while in reality they are continually
product development (Souder & Sherman, 1998). interacting with each other. For example, the use
On one hand, R&D needs marketings market of social networks may drive a new segmentation
vision and guidance for the general direction of process which then may impact the positioning of
research. On the other hand, marketing needs the offer and consequently the brand management.
R&D to invent products that correspond to the This categorization of Marketing Core Com-
customer needs it has identified. Some companies petencies (MCC) can be considered as the foun-
have managed to integrate the Marketing and dation for constructing an expanded typology
R&D departments to work together in developing where each of the six main core competencies
and marketing innovative products. Each time it could be broken down into more precise sub-
starts the development of a new car, the 200 to competencies. It could be useful for companies,
300 project teams members are relocated from and educators, who would like to build or to
their various location to the Forschungs und strengthen marketing competencies (Wellman,
Innovationszentrum (Research and Innovation 2010) in order to increase the market acceptance
Center) in Munich, Germany, for up to three years. of their innovative products and to amplify their
This unique capability allows BMW to facilitate competitive advantage for achieving superior
communication and prevent last minute conflicts profitability. Additionally, as this CCM model is
between R&D and Marketing. It has contributed theoretically informative but practically untested,
to BMW the success of its most recent models this would open a new avenue for future research.
(Riege, 2007).
To conclude this chapter, Figure 3 summarizes
the specific marketing core competencies that have REFERENCES
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507
508
Chapter 27
Self Regulation on Innovative
Products Choice
Paulo Henrique Muller Prado
Danielle Mantovani Lucena da Silva

Jose Carlos Korelo

ABSTRACT
This chapter explores how choice goals influence consumers innovativeness in a product category
domain. The intentions to adopt new products are guided by promotion and prevention self-regulation
systems. Thus, two of the choice goals were classified as promotion goalsjustifiability and choice
confidenceand two were classified as prevention goals anticipated regret and evaluation costs. Two
groups emerged from the analysis: one named most innovative and another called less innovative.
When comparing the groups, the results show that the most innovative cluster demonstrated higher
choice confidence, higher justifiability and was more capable of avoiding a possible choice regret.
The differences found in the group analysis highlight the need of understanding in further detail how
consumers behave during the choice process of innovative products. Therefore, the Regulatory Focus
Theory has been shown to be very important for understanding the choice process, especially for the
innovation adoption.
INTRODUCTION such as his contacts, calls, e-mails and any other

thing that may be important to him. On the other
Consider two individuals. One is Peter, who is hand, John always approaches positive results in
worried about avoiding negative consequences. his daily life, and he uses his cell phone to try to
Thus, when he uses his cell phone he is probably achieve these positive results, such as be in con-
more concerned about losing any information, tact with his friends, be able to check his e-mail
wherever he is and register some good moments
DOI: 10.4018/978-1-61350-165-8.ch027 by using his cell phone to take pictures. Peter and
Self Regulation on Innovative Products Choice
John use their cell phones with the same goals 2006; Thompson; Hamilton; Rust, 2005) and
(e.g. make calls, surf the internet, check e-mails, specifically, some studies (Herzenstein; Posavac;
send messages to their contacts). However, they Brakus, 2007; Alexander; Lynch Jr; Wang, 2008)
are very different in the way they try to achive emphasize that it is important to understand con-
a goal. Peter is more concerned about avoiding sumers behavior that are more interested in trying
negative consequences whereas John probably new products and services. Bettman (Bettman,
seeks to achieve positive ones. 1979; Bettman, Luce, & Payne, 1998) proposed
One day, Peter and John decide to upgrade their that consumers usually have a set of goals which
equipments to a better one, with new attributes are pursued during most of the choice situations.
and services. In this situation, these consumers Furthermore, studies of the choice process must
will be faced with a lot of options and alterna- consider the choice goals in order to understand the
tives that will make their choice more difficult. heuristict strategies that consumers use to decide
Their choice process will probably be very dif- which product to buy (e.g. Bettman; Johnson;
ferent as well. Peter will prefer attributes that fit Payne, 1991; 2000; Heitmann; Lehmann; Her-
his prevention-focused orientation and John will rmann, 2007).
prefer attributes that fit his promotion-focused These goals may influence consumers in a
orientation. Peter and John might end up buying different way, depending on the individual dif-
different cell phones or maybe one of them may ferences or on the characteristics of the choice
abdicate upgrading, just because he could not find context (Kahn, Luce, & Nowlis, 2006). Thus, the
any option that fits his self-regulation orientation. impact of the choice goals on the innovativeness
When people pursue a goal, they begin with process has not been studied yet. Therefore, it has
some motivational orientation, some concerns or become relevant to understand how choice goals
interests that direct the goal pursuit, and the self- influence consumers innovativeness, and how this
regulation orientation is one of these concerns relationship applies to the organizational strategy.
(Freitas & Higgins, 2002). The two scenarios In order to achieve this goal, an extension of part
above illustrate two distinct goals highlighted in of the model proposed by Heitmann, Lehmann
regulatory focus theory (Higgins, 1997), which and Hermann (2007) is suggested in this study,
builds on the general hedonic notion that people relating the innovativeness in a product category
approach pleasure and avoid pain. The theory domain to the choice goals. The choice goals are
distinguishes between two major categories of analyzed from the self-regulation perspective
desired goals: those that relate to attaining posi- (Higgins, 1997). The self-regulation approach to
tive outcomes such as advancement, achievement, studying the innovation and decision processes
and aspirations (termed promotion goals), and highlights the possibility of exploring how these
those that relate to avoiding negative outcomes, two variables relate to each other in the consumer
such as responsabilities, obligations and security behavior context.
(termed prevention goals). According to the regu- The importance of Heitmann, Lehmann and
latory focus theory, individuals with a promotion Herrmann (2007)s study to understand the choice
focus will regulate their behavior toward positive goals is that they have classified these goals ac-
outcomes, and those with a prevention focus cording to the regulatory focus theory, which
will regulate their behavior away from negative was proposed by Higgins (1997). Thus, there are
outcomes (Liberman et al., 2001). goals that are pursued in order to avoid negative
There are some studies that have explored consequences of the choice, and goals that are
the choice process topic of research (Coupey, pursued so as to achieve positive results of the
1994; Dhar; Nowlis; Sherman, 1999; Chernev, choice process.
509
The use of the regulatory focus theory to study innovation than other members of this system.
the innovation adoption process highlights the In an earlier study, Hirschman (1980) had stated
possibility to explore how the two regulatory foci that this author conceptualized innovativeness as
(promotion and prevention) are related to consum- a variable that all individuals have, in a greater or
ers behavior. For instance, Herzenstein, Posavac lower degree. Thus, it is a construct that can be
and Brakus (2007) found that when risks associated generalized to all product categories. Roehrich
with a new product are not specified to consum- (2004) explains that the novelty seeking is mea-
ers, promotion-focused consumers state higher sured in a series of activities, which leads to three
purchase intentions than prevention-focused different types of innovativeness behavior: (1) in-
consumers. Nevertheless, when the judgmental novativeness information, that is the information
context makes the risks salient, prevention and acquisition of a new product; (2) innovativeness
promotion-focused participants are equally un- adoption, that is the adoption of the new product;
likely to purchase the product. Therefore, Peter, and (3) the innovativeness use, that expresses the
who is more prevention-focused and John, who product use in a different way or all the ways of
is more promotion-focused, will have different using the product. This categorization increases the
decisions regarding an innovation. However, we interest consumers will have toward new products.
do not know yet how Peter and John achieve their Another important innovation characteristic
goals in order to become more innovative. That is is that it has two dimensions: symbolic and tech-
what we are going to understand in this chapter. nological (Hirschman, 1980). The symbolic in-
novation communicates a different social meaning
than it previously did. Its physical form remains
THEORETICAL DEVELOPMENT predominantly unchanged but the meaning as-
signed to that form is novel. The technological
Innovativeness innovation possesses some tangible features never
previously found in that product category and can
Rogers (2003) explains that an innovation is an be adopted because of the features performance
idea, practice or object that is perceived as new by and new functionalities (Hirschman, 1980).
the individual. Thus, a product will be considered As individuals do not adopt an innovation all at
an innovation only if it adds new attributes and/ the same time, they can be classified in an adoption
or benefits, and consumers are more likely to categorization (see Figure 1). These categories
adopt an innovation if it is perceived as useful and are: (1) innovators; (2) early adopters; (3) early
important to the individual. In a series of studies, majority; (4) late majority; (5) laggards. Rogers
Okada (2006) demonstrates that consumers with (2003) proposed this categorization to facilitate
existing products are more likely to upgrade when group comparisons.
the enhanced product is generally dissimilar to the Rogers (2003) explains that the innovators are
existing product. For instance, a new cell phone adventurous. The innovators can deal with the
will be considered an innovation and thus more uncertainty about an innovation and are experts
likely to be adopted if it is perceived as dissimilar in the innovation adopted. They represent only
to the existing version of the product. 2.5% of the population. The early adopters, which
However, when we analyse individuals represent 13.5% of the population, are more in-
innovation adoption, we need to consider the tegrated to the social system than the innovators
innovativeness behavior. Rogers (2003, p.22) because they act locally. This group is closer to
defined innovativeness as the degree to which other members of the social system and work as
an individual is relatively earlier in adopting an an example to the other groups. The early major-
510
Figure 1. Innovativeness categorization (Source: Adapted from Rogers [2003, p. 281])
ity (34% of the population) adopt a new idea may not be innovative in another. The authors
before the average of the members of the social proposed the Domain Specific Innovativeness
system. They interact with the early adopters and (DSI) scale, with six items that measure the in-
among their group, but they are not opinion lead- novativeness in a product category. In our study,
ers. The late majority adopt new ideas after the we follow the perspective of the innovativeness
majority of the members of the social system. The in a product category because we are analysing
adoption, for this group, is a result of an eco- techonological product, which is a specific product
nomic need or due to a pressure of their group. category.
They are not used to adopting an innovation,
until the majority of their group has adopted it. Self-Regulation
The laggards are the last group in a social system
to adopt an innovation and do not have any lead- The value given to pursue a certain goal varies
ership opinion. They are very isolated inside the due to its importance to the individual (Higgins
social system and their reference point is the past. et al., 2003). As a result, people pursue goals that
They usually interact with people with tradi- fit their values. This prediction is based on the
tional values and their decision process to adopt Regulatory Focus Theory (RFT) (e.g., Higgins,
an innovation is slower than the other groups. In 1997; Freitas; Higgins, 2002). Higgins (1997)
addition, their resources are limited and they need proposed this theory, which introduces the concept
to be certain that the new idea is going to work of regulatory focus, a principle that underlies the
to be adopted (Rogers, 2003). hedonic principle that people seek pleasure and
During the 90s, some researchers began to avoid pain. The RFT demonstrates that there
consider the innovativeness in a product category are different ways of approaching pleasure and
as different construct of the innate innovativeness, avoiding pain. The differences in performance,
which is an individual characteristic (Goldsmith; emotions and in decision making may occur as a
Hofacker, 1991; Goldsmith; Freiden; Eastman, result of the individuals self-regulation.
1995). Goldsmith and Hofacker (1991) state that This theory has two foci: promotion and pre-
the innovativeness construct is very specific, and a vention, which are different in their strategies to
consumer that is innovative in a product category, achieve a final end state. The promotion-focused
511
individuals favour approach strategies, so they 2002; Lee; Keller; Sternthal, 2010). This predic-
frame goal pursuit in terms of gains and non- tion comes from the RFT, which suggests that the
gains; prevention-focused individuals do so with regulatory fit that people experience when the
respect to losses and nonlosses because of their manner of their engagement in an activity sus-
preference for avoidance strategic means. Under tains their goal orientation or interests regarding
a promotion focus, the individuals strategic in- that activity, their motivation to pursue that goal
clination is to approach matches to end states he increases. This prediction is also based on the self-
or she would like to achieve (Freitas & Higgins, regulation. More promotion-focused individuals
2002). Such individuals are more eager to avoid will be more engaged to achieve promotion goals
errors of omission (i.e., missing an emerging whereas prevention-focused individuals will be
opportunity to accomplish something), resulting more engaged to achieve prevention goals.
in an initial inclination to act (Liberman et al, When we analyse the promotion goals (choice
2001). In contrast, a prevention focus fosters a confidence and justifiability), we find that they are
tendency to avoid mismatches to end states he related to each other and also impact the preven-
or she would like to attain, with an orientation tion goals (evaluation costs and anticipated regret)
toward maintaining the status quo and shielding (Heitmann; Lehmann; Hermann, 2007). Bettman,
oneself from losses. Such individuals therefore Luce and Payne (1998) state that the confidence
prefer cognitive or behavioral courses that avoid during the choice process is a consequence of
errors of commission (i.e., making mistakes). the use of more compensatory choice strategies.
Thus, the justifiability also increases the choice
Self-Regulation and the Role of the confidence.
Choice Goals in Innovativeness
H1: Consumerschoice confidence is a positive
Bettman (1979) proposed that consumers have function of the higher justifiability during
a hierarchy of goals, which they seek to achieve the choice process.
during the choice process. Bettman, Luce and
Payne (1998) argue that these goals are the most When analyzing the impact of the choice
important motivational aspects to the decision confidence on the other choice goals, we must
making process. The authors explain that these bear in mind that the negative emotions that
goals are inherent to most of the choice contexts result from a bad choice is a consequence of the
and determine the main aspects of the choice lack of confidence in the decision process (Bet-
process analysis. In order to understand how con- tman; Johnson; Payne, 1991; Landman, 1993;
sumers assess their choices, Heitmann, Lehmann Tsiros; Mittal, 2000). After the decision is made,
and Herrmann (2007) related the choice goals pro- individuals that are not confident about the right
posed by Bettman (e.g., Bettman, 1979; Bettman, choice, often ask themselves if they should have
Luce, & Payne, 1998) to the Regulatory Focus looked for a better option.
Theory (RFT). Two of the goals were classified In addition, the application of the anticipated
as promotion goalsjustifiability and choice regret goal in the innovation context, Bettman,
confidenceand two were classified as prevention Luce and Payne (1998) and Heitmann, Lehmann
goalsanticipated regret and evaluation costs. and Herrmann (2007) state that decision makers
Consumers will value a goal if it is important feel that they are being evaluated by others (e.g.,
for them (Higgins et al., 2003). Therefore, people family and friends) and by themselves about their
pursue goals and get more engaged in the choice decisions. As a consequence, consumers try to
process that fit their values (Freitas; Higgins, anticipate regret and do this by searching for more
512
information, in order to maximize the accuracy of they are more confident in the choice process.
their decision. Some studies (e.g., Stone, 1994; When the promotion goals are achieved, it is
Chernev, 2006; Heitmann; Lehmann; Herrmann, easier to achieve the prevention goals (Higgins,
2007) also demonstrate that uncertainty about 2003). Therefore, for consumers that have higher
the choice leads to a lack of confidence, which decision difficulty, the choice confidence becomes
increases the probability of regretting the choice. more important and will have a stronger impact
Studies (e.g., Stone, 1994; Chernev, 2006; on the evaluation costs.
Heitmann; Lehmann; Herrmann, 2007) also dem-
onstrate that consumers that are more uncertain H3: The lower the choice confidence, the higher
about a choice are also less confident, which the perception of the evaluation costs during
increases the probability of regretting the choice the choice process.
after the decision is made. Hence, we propose our
second hypothesis. Individuals that feel more insecure about the
choice often have more difficulty in anticipating
H2: The higher the choice confidence, the higher regret. Even after the decision is made, these
the anticipated regret. individuals are not sure about the best alternative
or option for that moment. As a consequence,
The evaluation cost of the choice process they question themselves about the possibility
can be defined as the cost associated with the of searching more information and invest more
information search and analysis of a decision time to get a better option (Heitmann; Lehmann;
process of a product or service (Burnham; Frels; Herrmann, 2007).
Mahajan, 2003). This cost is not just about the These consumers are also less confident and
economic aspects, but also about the time spent believe that a longer decision process might be
searching information, analysing the alternatives better (Bettman; Luce; Payne, 1998). Consumers
and learning how to use the new product. Thus, that are more worried about avoiding regret are
time and effort are associated with collecting more motivated to get engaged in order to reduce
the information needed to evaluate potential al- the possibility of a negative consequence of a
ternative providers. Mental effort is required to decision (Zeelenberg, 1999).
restructure and analyse available information in
order to arrive at an informed decision (Burnham; H4: The perception of the evaluation costs is a
Frels; Mahajan, 2003). negative function of the anticipated regret
Consumers are also likely to perceive higher during the choice
evaluation costs when products are complex, be-
cause the difficulty in understanding the product Choice Goals Influence on
leads to uncertainty, and increases the percep- the Innovativeness
tion that a negative outcome may occur (Holak;
Lehmann, 1990; Luce; Bettman; Payne, 1997). The literature demonstrates that the adoption
Similarly, the large number of attributes associated intentions for new products are guided by pro-
with complex products makes both information motion and prevention self-regulation systems
collection and direct comparison attributes more (e.g., Herzenstein, Posavac, & Brakus, 2007).
costly (Shugan, 1980) Concerning the promotion goals, the confidence
Herzenstein, Posavac and Brakus (2007) state during the choice process is a consequence of
that those consumers guided by the promotion- the use of more complete and compensatory
focused self-regulation are more innovative, once choice strategies (Bettman; Luce; Payne, 1998).
513
Promotion-focused consumers are more likely to more likely to justify his decision, for instance, by
purchase new products than prevention-focused the preference that he already has for a particular
consumers because they demonstrate higher brand. This decision behavior demonstrates that
choice confidence (Chernev, 2006; Herzenstein, individuals try to find reasons that are consistent
Posavac, & Brakus, 2007). and acceptable both for themselves and for others.
The choice confidence is related to the thought Thus, choice confidence is a positive function of
that positive results may arise from the choice pro- the justifiability (see H1).
cess. Therefore, the choice process is constructive Murray and Hubl (2007) analysed this be-
(Bettman; Johnson; Payne, 1991; Bettman; Luce; havior and demonstrated that consumers tend to
Payne, 1998), and when consumers are faced with keep a product or a brand to try to avoid switch
the possibility of upgrading to a better product, and search costs for a possible better alternative.
they will probably remember the rules that were In addition, as consumers already know the cur-
applied to choose the last product. Cowley (2001) rent product they have been using, it is easier to
states that individuals use only one piece of this justify their decision when they keep this product.
information. However, this recovered informa- The upgrade decision may be more difficult to
tion is more reliable and influences the current justify if the consumer is not innovative in this
choice process. product category.
Concerning this process, there are situations In addition, the comparison within the options
where the assortment of options and features is is more difficult to be evaluated if there are a
high, such as in the case of technological prod- lot of different alternatives or if the differences
ucts, which decreases consumers confidence in among the options are not easy to be distinguished
the decision process. In spite of this situation, by the consumer (Thompson; Hamilton; Rust,
those consumers with a promotion-focused self- 2005). In the case of technological products, it is
regulation are more confident, because they expect possible that consumers will have more difficulty
positive results (Chernev, 2006). As a result, they to compare the options, because the new features
become more innovative. We summarize this may be difficult to use. Thus, if the consumer is
discussion with the following hypothesis: able to justify the decision and explain why he is
buying these new features, he will probably be
H5: The innovativeness in a product category is more innovative. This prediction is summarized
a positive function of the choice confidence. in the following hypothesis:
It is possible that the justifications that con- H6: The innovativeness in a product category is
sumers use during the choice process are above a positive function of the justifiability.
certain aspects, such as the trade-off between
cost and benefits. In some situations, the lack of Concerning the prevention-focused goals, Her-
justifiability may lead the consumer to stop the zenstein, Posavac and Brakus (2007) demonstrated
choice process and abdicate the idea of buying the that prevention-focused consumers are less likely
product (Hsee et al., 2003; Okada, 2005; Amir; to adopt a new product. This effect is due to the
Ariely, 2007). way these consumers deal with the prevention
Chernev (2001) also proposed that consum- goals (evaluation costs and anticipated regret).
ers evaluate common features in a manner that These consumers are more worried about possible
confirms their already established preferences. negative outcomes and try to protect themselves.
When the consumer is in a choice situation, he is The result is that they abdicate adopting a prod-
514
uct or decide to adopt it later in a social system. Hirschman (1980) characterized the novelty
Therefore, if the consumer is not able to achieve seeking individuals as those that are always search-
the prevention goals, he will be less likely to adopt ing information, and they are really interested in
an innovation. searching this information. Although the innova-
The prevention goal related to anticipate re- tors spend more time on this activity, they do not
gret predicts that consumers feel they are being perceive the evaluation cost to be high. On the
evaluated by others all the time (Bettman; Luce; other hand, for non-innovators these costs will
Payne, 1998; Heitmann; Lehmann; Herrmann, seem much higher.
2007). If we analyse this goal in an innovation The influence of the evaluation costs in a deci-
adoption decision, this prediction may be even sion to upgrade and adopt a new product may take
more evident. Innovative consumers are opinion into consideration some specific characteristics.
leaders (Gatignon, Robertson, 1991; Foxall, The innovativeness in a product category may
1994; Rogers, 2003) and they feel required to be evaluated by the consumers interest to adopt
show they are able to make good choices based the enhancements proposed in the new version
on cognitive aspects. of the product. However, the consumer already
When the decison context, as an innovation has a product and is used to it. The switch to an
for instance, requires a previous knowledge about enhanced product increases the evaluation costs
the product category, the anticipated regret will to find the best new alternative (Okada, 2006).
be more difficult to be executed or it will take a In this situation, if the consumers perception of
longer time if the consumer does not know too the evaluation costs is not high, the probability
much about the product category. In this situation, of innovating will be higher.
it will be more difficult to achieve this goal and it The literature (e.g., Midgley; Dowling, 1978;
will explain, partly at least, why consumers may 1993; Goldsmith; Hofacker, 1991; Roehrich, 2004;
not adopt an innovation. This behavior leads to a Alexander; Lynch Jr; Wang, 2008) shows that the
lower innovativeness in a product category. Thus, innovativeness is a consequence of a series of
our seventh hypothesis is: activities performed during the decision making
process. Hence, the lower the perception about the
H7: The innovativeness in a product category is evaluation costs, the higher the innovativeness.
a positive function of the anticipated regret.
H8: The innovativeness in a product category is
An extensive choice process probably will a negative function of the evaluation cost
have higher evaluation costs (Burnham; Frels; perception.
Mahajan, 2003). For innovative consumers, the
evaluation about the product category in which We represent the specific hypotheses described
they are innovators is not done at the moment they above in Figure 2.
are going to make a new purchase. The evaluation
of new alternatives, information search and other
activities related with the choice process is con- EMPIRICAL ANALYSIS
stantly made by this group (Gatignon, Robertson,
1991; Christia, 2000; Rogers, 2003); it is part of Method and Scale Measurement
its behavior. As a consequence, the evaluation
costs are not perceived as high by the group of The participants in this study were 366 undergradu-
innovators, but for the laggards it may be. ate students from a Federal University in the south
of Brazil (59% female), who had purchased an
515
Figure 2. Framework of choice goals and innovativeness
electronic device in the last three months. The most goals. Thus, the choice confidence was measured
frequently reported purchases were cell phones with the scale proposed in the study of Urbany
and digital cameras, but others were also reported, et al (1997). The justifiability followed the work
such as MP3 players. Data were collected using of Simonson (1989) and Heitmann, Lehmann,
a self-administered paper survey. and Herrmann (2007). The measurement of the
The scale purification and measurement fol- anticipated regret followed the work of Schwartz
lowed the work of Churchill (1979) and Anderson et al (2002) and Tsiros and Mittal (2000). The
and Gerbing (1988). Existing measures were measurement of the evaluation costs followed
adapted for the model constructs. The innova- the work of Burnham, Frels and Mahajan (2003).
tiveness in the product category was measured As in other surveys on purchase decisions and
based on the Goldmith and Hofacker (1991) search behavior, we rely on the recall of prior
and Goldsmith and Flynn (1992) scales. We also experiences (e.g., Srinivasan; Ratchford, 1991;
applied Midgley and Dowlings (1978) innova- Ratchford, Lee, and Talukdar, 2003; Heitmann;
tiveness measurement, asking respondents how Lehmann; Herrmann, 2007). Following the work
many and which were the electronic equipments of Srinivasan and Ratchford (1991), we tested
they already had. This question was used later whether forgetting had a significant impact on
to classify the respondents according to the in- the data by splitting the sample into three groups:
novativeness profile. those who reported purchasing a product within the
The choice goals were measured in accordance month, between one and two months before this
with the work of Bettman, Luce and Payne (1998), participation, and between two and three months
which argues that this construct is essential to the before this participation. None of the comparisons
choice process. As in other studies on choice goals, showed significant differences.
we also followed other authors to measure choice
516
Furthermore, the cluster based on the innova- An independent-sample t-test was conducted
tiveness profile was run using the Multiple Com- to compare the variables for the two groups. The
ponents Analysis, following the work of Bagozzi results are presented in Table 1.
(1995). This analysis generated two groups: one There were significant different scores for most
named Most Innovative and another called and less innovative groups. The most innovative
Less Innovative. respondents reported higher scores of Innovative-
The internal consistency analysis presented ness, Choice Confidence, Justifiability and An-
good results, following the recommendation of ticipated Regret. This group also reported a
Hair et al (2005): Justifiability ( = 0.72), Choice lower score of Evaluation Costs. For instance, the
Confidence ( = 0.76), Anticipated Regret ( = most innovative group seems to be more promo-
0.79), Evaluation Costs ( = 0.75) and Innovative- tion-focused and the less innovative one is more
ness ( = 0.73). Most of the data were analyzed prevention-focused. These results show that the
using Structural Equation Modeling (Hair et al, Most Innovative group has equipments with more
2005), with the Amos 6.0 (SPSS, 1993). Before innovative features. They are also more confident
the model verification, we run the Confirmatory about their choice, which increases their justifi-
Factorial Analysis (CFA), which presented acceptability. In addition, they perceive that the evalu-
able reliability values: Choice Confidence (0.72); ation costs are not as high as the Less Innovative
Justifiability (0.75); Evaluation Costs (0.81); An- group thinks.
ticipated Regret (0.89) and Innovativeness (0.89).
The Average Variance Stracted (AVE) was also Model Evaluation
accepted: Choice Confidence (0.52); Justifiabil-
ity (0.52); Evaluation Costs (0.58); Anticipated The structural model presented in Figure 2 was
Regret (0.63); Innovativeness (0.63). tested for the two groups, using the Amos 6.0. The
The analysis demonstrated that there was no results and the tested hypotheses are presented
significant correlation between the constructs. in Table 2.
The results denote a CFA model that includes The first hypothesis predicts that there is a
the multi-item measures selected after scale pu- positive relationship between justifiability and
rification: = 264.069; d.f = 137; p<.001; /d.f choice confidence. This relationship was empiri-
= 1.928; NFI =.921; RFI=.901; CFI =.960 and cally demonstrated in the work of Heitmann,
RMSEA =.045. Lehmann and Herrmann (2007), and had been
proposed by Bettman (e.g., Bettman, Luce, Payne,
Innovative Profile Evaluation 1998). In our study, this hypothesis was statisti-
cally significant for both groups (=.621, p<.001
In order to evaluate the differences concerning for the Most Innovative and =.549, p<.001 for
the innovative behavior, an innovative score the Less Innovative). The Most Innovative group
was created, based on the number of equipments reported a higher standardized score (), which
the respondents owned (e.g., cell phones, digital demonstrate that this group is better able to jus-
cameras, players; etc) and the features that each tify its choices as a consequence of the choice
product had (basic, intermediary and advanced fea- confidence.
tures). The results showed two different groups. As The second hypothesis proposes that the higher
mentioned before, those respondents with higher the choice confidence, the higher the anticipated
scores were named Most innovative (G1 186 regret is. This prediction was confirmed for the
respondents) and those with lower scores were Most Innovative ( =.176; p<.05) and was more
the Less Innovative (G2 180 respondents). significant for the Less Innovative ( =.326;
517
Table 1. Innovator cluster means
Variables G1 (186) G2 (180) t p

Innovativeness 7.14 4.28 18.27 .000*
Choice Confidence 7.45 6.26 4.92 .000*
Justifiability 7.98 6.83 2.26 .000*
Anticipated Regret 7.32 6.58 4.10 .001*
Evaluation Costs 4.13 4.81 -3.42 .001*
G1 (group 1) = most innovative; G2 (group 2) = less innovative
*p <.01
Table 2. Framework variable standardized coeficients (Paths)
Dependet Variables with G1 (186) G2 (180)

Predictors Standardized t Standardized t (d.f.)
Choice Confidence
Justifiability 0.621 6.227* 0.549 4.602* 1.42 (1); p = n.s.
Anticipated Regret
Choice Confidence 0.176 2.313** 0.326 2.971* 4.54 (1); p<.05
Evaluation Costs
Choice Confidence -0.217 -2.958** -0.103 -1.316 0.20 (1); p= n.s.
Anticipated Regret -0.216 -2.815* -0.277 -4.008* 6.17 (1); p<.01
Inovativeness
Choice Confidence 0.218 1.950** 0.162 1.386 0.89 (1); p = n.s.
Justifiability 0.214 2.792* -0,080 -0.698 1.87 (1); p= n.s.
Anticipated Regret 0.214 2.792* 0.125 1.754 1.35 (1); p= n.s.
Evaluation Costs -0.286 -2.565* -0.291 -2.291** 0.25(1); p = n.s.
G1 (most innovative): = 106.559, d.f = 92; / d.f = 1.158; NFI =.862; CFI =.978; RMSEA =.036
G2 (less innovative): = 118.339 d.f = 92; / d.f = 1.286; NFI =.904; CFI =.976; RMSEA =.036
* p<.01
**p<.05
n.s. = not significant.
p>.01). The Less Innovative group is more con- The results reported a significant relationship
cerned about having choice confidence in order only for the Most Innovative group ( = -.217;
to avoid regretting the decision. As the Most p<.05). This relationship did not reach statistical
Innovative group is more confident in the choice significance for the Less Innovative group ( =
process (see Table 1), they are not so worried -.103; p=n.s). These results highlight the effect
about anticipating regret. In fact, this group seems of the promotion goals over the prevention goals.
to be more interested in the positive outcomes of Promotion-focused consumers tend to be more
the choice process. innovative, because they are more confident
The third hypothesis suggests that the lower during the choice process (Herzenstein, Posavac,
the choice confidence, the higher the perception of Brakus, 2007). In addition, when the promotion
the evaluation costs is during the choice process. goals are achieved, the consumer can also achieve
518
the prevention goals easily (Higgins et al., 2003), confirmed only in the Most Innovative respon-
which explains why the H3 was not significant dents (G1: =.214, p<.01G2: =.125, p=n.s). As
for the Less Innovative. predicted, consumers that are less worried about
The fourth hypothesis is about the relationship the possible negative outcomes are more likely
within the prevention goals. Thus, it predicts that to be innovative. These consumers are more con-
the perception of the evaluation costs is a nega- cerned about achieving positive results, instead
tive function of the anticipated regret during the of avoiding negative ones.
choice. This hypothesis was also found in the work The eighth hypothesis, which suggests that the
of Heitmann, Lehmann and Herrmann (2007). It innovativeness in a product category is a negative
was confirmed for both groups (= -.216, p<.01 function of the evaluation cost perception was
for the Most Innovative and =-.277, p<.01 for statistically significant for both groups (G1: =
the Less Innovative). Although this hypothesis -.286, p<.01; G2: = -.291, p<.05). For extensive
was confirmed in both groups, we may note choice processes, such as in the case of innovative
that the Less Innovative group reported a higher products, the evaluation costs are higher. In this
standardized score (). The literature have shown situation, consumers need to get more engaged
the relationship among the prevention goals (e.g., in the choice process in order to compare the dif-
Bettman; Luce; Payne, 1998; Zeelenberg, 1999), ferences between the products (Burnham; Frels;
because consumers try to protect themselves Mahajan, 2003). The results described above
against negative outcomes. Therefore, they get confirm that the choice goals are antecedents of
more engaged in information search, especially the innovativeness in a product category.
for products with new features, large assortment As the groups presented statistically different
size and that are always being upgraded. This means in all variables (see Table 1), an analysis
behavior seems to be consistent for both groups. of which variables could contrast the groups in
The fifth hypothesis predicts that the inno- the framework was run. Thus, each path of the
vativeness in a product category is a positive proposed model was analysed separately, fol-
function of the choice confidence. This prediction lowing the recommendations of Byrne (2001).
was supported only by the Most Innovative group The results are presented in the right column (
(=.218, p<.01). The Less Innovative did not show [d.f.]), Table 2.
statistical significance concerning this relation- The relationship between the choice confidence
ship (=.162, p= n.s). These results demonstrate and the anticipated regret indicates that there is
that the Most Innovative respondents are more a significant difference between the groups. The
confident in the choice process because they are difference between the value of the free model and
more promotion-focused (Herzenstein; Posavac; the restricted model suggests a = 4.54 (d.f.
Brakus, 2007). = 1; p <.05). In addition, the impact of the goal
The sixth hypothesis is about the justifiability to anticipate regret on the evaluation costs was
and its impact on the innovativeness behavior. also significant between the groups ( = 6.17
Only the Most Innovative group showed signifi- (d.f. = 1; p <.01). These results suggest that the
cant results for this relationship (=.214, p<.01). less innovative group needs to feel confident in
The Less Innovative did not show statistical the choice process to not regret the choice. The
significance (=-.080, p=n.s). For innovative prevention goals (anticipate regret and evaluation
products, consumers that can justify their choice costs) seem to be more important for the less inno-
are more likely to innovate. The seventh hypoth- vative group in relation to the most innovative one.
esis, which predicts that the innovativeness is a Any of the other paths were statistically sig-
positive function of the anticipated regret, was nificant, which means that expect for the two
519
significant paths described above, the groups are fact that H3, which relates confidence to evalua-
not very much different for the paths presented tion cost, was not statistically significant for the
in the framework. Particularly, the impact of the Less Innovative group. This finding indicates
choice goals on the innovativeness did not dif- that these consumers still need to achieve their
ferentiate the groups. However, the Independent prevention goals and then have any impact on
Samples T-test performed to verify the mean dif- choice confidence.
ferences between the groups suggests that there The H5 and H6, which demonstrated the impact
is a difference for all the variables and that the of the promotion goals on the innovativeness, were
innovativeness is a construct that distinguishes confirmed only for the Most Innovative group. This
the groups. Besides that, the behavior pattern of result relies on the constructive choice process
the paths was not different. (Bettman, Luce, Payne, 1998; Payne; Bettman,
2007). The confidence during the choice process
is a consequence of the use of compensatory
DISCUSSION decision strategies. Thus, confident consumers
are also more innovative in the product category.
Although recent studies (e.g. Herzenstein, Posavac Concerning the impact of the prevention goals
and Brakus, 2007) have shown that promotion- on the innovativeness (H7 and H8), the fact that
focused consumers are more innovative than only the goal of evaluation costs had a significant
prevention-focused consumers, we have not found impact on the innovativeness for the Less Innova-
yet any study that has identified which goals are tive group is probably due to the choice context.
more relevant in this process. Studies that work For technological based product, consumers
with the RFT (Higgins, 1997; Freitas; Higgins, need to be more engaged in the evaluation of the
2002; Higgins et al, 2003) assume the prediction alternatives in order to make comparisons among
that individuals seek pleasure and satisfaction, the options. According to the constructive choice
and avoid losses and pain. In fact, this prediction process theory, the negative emotions that may
is also applied to the innovativeness behavior in arise from a regreted choice are a consequence
the product category, because the less innova- of the lack of confidence about the choice. In this
tive consumers are more interested in avoiding situation, the Most Innovative group seemed to
negative outcomes whereas the most innovative be better able to anticipate regret. This ability
consumers seek positive outcomes. is probably because they have more expertise
The results indicate that the respondents show a about the product category, which makes them
similar pattern of behavior regarding the proposed more confident. This may be the reason why
model. If we analyse the hypotheses that relate anticipated regret was not significant for the Less
the choice goals (H1-H4), we note that the less Innovative group.
innovative group has lower standardized score ()
for most of the hypothesis. On the other hand, the
most innovative group showed higher standardized CONCLUSION AND FUTURE
score () for most of the paths. An exception is RESEARCH DIRECTIONS
the predicted relationship between the anticipated
regret and the evaluation costs (H4), which had a The results demonstrate that the choice goals
higher loading for the Less Innovative group. This achievement is a positive function of Innova-
result reinforces the idea that for this group, the tiveness in a product category. Therefore, the
relationship between prevention goals still need RFT has proved to be very important for better
to be better established. Another example is the
520
understanding the choice process and specifically choice was showed in a study conducted by Pham
the innovation adoption. (1998). The author demonstrates the significant
The differences found in the groups highlight role of emotions in the decision making process.
that the marketing managers need to consider the When consumers try to predict possible emotions,
consumer behavior during the choice process of they may overstimate the negative emotions of a
electronic devices that are constantly being up- choice. Further analysis concerning how consum-
graded. The results reported here suggest that the ers predict and deal with these emotions requires
self-regulation could be used as a marketing and future studies.
segmentation variable. As the self-regulation can Another suggestion is to constrast the frame-
be a context variable, a marketing communication work proposed including samples not only from
can be elaborated with a promotion-focused idea students. In this situation, a field study would
to target promotion-focused consumers. On the be interesting to demonstrate that the results are
other hand, a prevention-focused communication consistent with the predictions made in this study.
could be elaborated in order to fit with the pre-
vention-focused individuals. It seems reasonable
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524
Choice Confidence: Choice confidence is new attributes and/or benefits, and consumers are
defined as the self-rated confidence in the cor- more likely to adopt an innovation if it is perceived
rectness of the decision (Xia, 1999). as useful and important to the individual.
Choice Goals: Choice goals are the ones that Justifiability: The justifiability is the ability
people try to attain during a product selection and to justify the choice (Simonson, 1989).
the attainment of these choice goals determines Self-Regulation: Self-regulation introduces
the satisfaction with the decision-making process the concept of regulatory focus, which underlies
(Heitmann, Lehmann & Herrmann, 2007). the hedonic principle that people seek pleasure
Evaluation Costs: Evaluation costs are the and avoid pain (Higgins, 1997). This theory has
time and effort costs associated with the search and two foci: promotion and prevention, which are
analysis during the choice process. Time and ef- different in their strategies to achieve a final end
fort are associated with collecting the information state. The promotion-focused individuals favour
needed to evaluate potential alternative options approach strategies, so they frame goal pursuit in
(Burnham, Frels & Mahajan, 2003). terms of gains and nongains; prevention-focused
Innovation: Rogers (2003) explains that an individuals do so with respect to losses and non-
innovation is an idea, practice or object that is losses because of their preference for avoidance
perceived as new by the individual. Thus, a product strategic means. (Higgins, 1997).
will be considered an innovation only if it adds
525
526
Chapter 28
The New Product
Development Process as a
Communication Web, Part I:
Introduction, Concepts,
and Spanish Context
Pilar Fernndez Ferrn

Universidad del Pas Vasco, Spain
Jos Antonio Varela Gonzlez

University of Santiago de Compostela, Spain
Beln Bande Vilela

Oihana Valmaseda Andia

ABSTRACT
This chapter contributes towards existing literature by analysing the innovation activities of Spanish
companies and by proposing New Product Development (NPD) as a communication web. We propose a
model, based on literature reviews, that relates the external communication of cross-functional teams to
the performance of NPD programmes. The composition of NPD teams and the external communication
activities thereof are a core competency for companies and can provide them with major competitive
advantages.
DOI: 10.4018/978-1-61350-165-8.ch028
The New Product Development Process as a Communication Web, Part I
INTRODUCTION enthusiastically push each stage of the innovation

process forward and contribute decisively to the
Technological advances, competitive pressures companys success (Lichtenthaler & Ernst, 2009;
and changes in consumer preferences mean that Schn, 1963; Tushman & Nadler, 1986). The
achieving good new product performance is of aforementioned roles have both been positively
vital importance to the survival of businesses. In linked to the performance of development projects
a study regarding successful factors in new prod- (Allen, 1970; Katz & Tushman, 1981; Markham
uct development (NPD), Brown and Eisenhardt & Griffin, 1998).
(1995) identified a line of research characterised Although some studies (Allen 1970, 1984;
by considering NPD as a communication web. Markham & Griffin, 1998; Roberts & Fusfeld,
This trend emphasises the importance of variables 1981) have shown the importance of communica-
relating to the external communication of NPD tion beyond the boundaries of the NPD team and
teams and the use of information from various have identified various roles in this process, the
areas of the firm1. As indicated by Ancona and external communication of NPD teams has not
Caldwell (1997), achieving adequate performance received enough attention, nor has its impact on
requires a high degree of coordination between new product performance been sufficiently tested
the different operating units participating in the (Ancona, 1990).
process and an optimal sharing of information Another aspect that is associated with NPD
within the organisation. success and that is directly related to the external
Firms usually respond to the above require- communication of NPD teams is the consideration
ments by entrusting the NPD process to cross- of lead users in the NPD process. Lead users are
functional teams, believing that they present defined as users that already possess the character-
considerable advantages over single-function istics that the majority of consumers will present
groups when it comes to the development of suc- in the future. For businesses, these individuals are
cessful products. great predictors of the trends and needs that will
In order to achieve their goals, NPD teams sooner or later emerge in the market (Droge et
must also gather information from several sources, al., 2010; Spann et al., 2009; von Hippel, 1986).
from both inside and outside the organisation The aim of this study is therefore to examine
(Kleinschmidt et al., 2010). Thus, Allen (1970, the impact of the cross-functional composition of
1984) verified that in successful R&D projects NPD teams, and of their external communication
some individuals acted as technological gatekeep- activities, on new product performance. In order to
ers, establishing links between the team and the do so, we propose a model in which new product
technological environment and gathering techni- programme performance is influenced by: (1) the
cal information from outside and incorporating it cross-functional character of the team responsible
into the group. for NPD; (2) the presence of product champions in
A broader framework of roles was developed the NPD process; (3) the presence of gatekeepers
by Roberts and Fusfeld (1981), who believe that in the NPD process; and (4) the consideration of
the successful finalisation of a development project lead users in NPD.
required five different roles2. The two roles most When the composition of NPD teams and the
closely related to the interaction between the external communication activities thereof posi-
team and the outside are that of the previously tively influence new product performance and the
mentioned gatekeepers, and that of product success of innovation activities, the company is
champions: individuals who emerge spontane- provided with a core competency, which competi-
ously from within an organisation, actively and tors find difficult to emulate.
527
The chapter is structured as follows: firstly, we carried out innovation activities and 44% of them
collected the most recent data on the innovation (18,493 companies) performed product innovation
activities of European and Spanish companies activities. The number of companies (15,500) that
(EUROSTAT, 2010; INE, 2010). Secondly, we launched products that were new to their company
examined the main contributions towards research onto the market exceeded the number of companies
on NPD measures. Thirdly, we outlined the prin- (8,125) that launched products that were new to
cipal characteristics of the three main lines of their respective markets.
research on NPD success factors and explained If we use the percentage of revenue expenditure
why we selected the communication web stream. on innovation activities as an indicator of a com-
Fourthly, we analysed the primary evidence sup- panys degree of innovation, the manufacturing
porting the influence of the four selected variables industry is the most innovative (1.2%), and, within
on new product performance and put forward this industry, aeronautical companies (8.2%), phar-
our hypotheses (which will be tested in the next maceutical companies (5.6%) and manufacturers
chapter). Lastly, we provided a summary of the of other transport equipment (5.1%) all stand out.
chapter under the Conclusion heading. More than half of the companies included in
the survey (57%) considered product innovation
objectives to be extremely important. These Span-
THE IMPORTANCE OF ish companies particularly wanted to improve the
PRODUCT INNOVATION FOR quality of their goods and services, offer a wider
SPANISH ENTERPRISES range of products, launch their products on to new
markets, replace outdated products and processes
The Community Innovation Survey (CIS) 2008 and increase their market share.
evaluated European Union (EU) goods and ser- It should be noted that 16% of the sales of
vices companies with ten or more employees and Spanish companies investing in product innova-
found that more than half of these companies car- tion relate to products that are new to their market,
ried out innovation activities between 2006 and 19% relate to products that are only new to the
2008. The countries in which a higher percentage company and the remaining 65% relate to products
of companies performed innovation activities that are already available on the market.
were as follows: Germany (80% of companies), Innovation activities entail significant risks
Luxembourg (65%), Belgium and Portugal (58%), for companies and a large number of companies
Ireland, Estonia, Austria, Cyprus and Czech Re- involved in the survey (7,442 companies) admitted
public (56%). In Spain the percentage of compa- to having to abandon their innovation activities
nies carrying out innovation activities was lower either at the initial phase or after the project had
(43%). The aforementioned data includes various started. Many companies (4,599) also confessed
types of innovation activities such as product, to having to suspend their innovation activities3
process, organisation and marketing activities. (Table 1).
The Company Innovation Survey 2008, by
the Spanish National Institute of Statistics (INE),
assessed Spanish companies with ten or more NEW PRODUCT DEVELOPMENT:
employees, belonging to four different sectors: THE THEORETICAL FRAMEWORK
agriculture, industry, services and construction.
The survey provided further information on the New product development (NPD) is defined as
innovation activities of Spanish companies. Be- the process through which products are developed
tween 2006 and 2008 a total of 42,206 companies within an enterprise4. However, this term is not
528
Table 1. Innovation activities of Spanish companies
Number of Agriculture Industry Services Construction

companies
Number of innovative companies 42,206 1,341 14,249 19,207 7,410
% of innovative companies/Total 20.81 19.10 31.13 18.66 15.74
Degree of innovation (% of revenue expendi- 0.95 0.71 1.24 0.93 0.34
ture on innovation activities)
Number of companies investing in product 18,493 630 7,730 8,401 1,732
innovation
Number of companies that introduced prod- 15,500 541 6,226 7,083 1,650
ucts that were new to the company
Number of companies that introduced prod- 8,125 198 3.708 3,752 497
ucts that were new to their market
% of companies that consider product innova- 56.98 60.15 60.95 58.98 41.18
tion objectives as important
% of revenue expenditure on new or improved 12.69 4.58 20.49 9.87 6.48
products (all companies)
% of revenue expenditure of innovative
companies on:
1. products that are new to the company 19.23 34.32 18.87 19.84 16.57
2. products that are new to their market 15.69 8.63 16.74 13.71 23.19
3. products that are already available 65.08 57.06 64.32 66.45 60.25
Number of companies that abandoned their 7,442 199 3,090 3,224 924
innovation activities
Number of companies that suspended their 4,559 237 2,068 1,925 369
innovation activities
Source: INE. Company innovation survey 2008
employed throughout all expert areas. Although Moorman and Miner, 1997); a collective process
the fields of marketing and management use the involving the generation of innovative ideas
aforementioned NPD term, research and develop- (Nonaka, 1991); or as a means of organisational
ment (R&D) prefers to use the term innovation, restructuring (Dougherty, 1992).
engineering opts for the word design and, finally, The development of new products is essential
the field of design refers to NPD as the design of to companies if they wish to secure a sustainable
new products. However, it is now increasingly competitive edge in the market, as it contributes
common for expert areas to adopt terms that ini- to process and product innovation. Bruce and Bie-
tially arose in other areas. mans (1995) consider that NPD can be classified
NPD is generally considered as an invention into two organisational levels: (1) project level,
when the resulting product (good or service) does involving a project for a specific new product
not make it onto the market and as an innova- and (2) strategic level, involving the analysis of
tion when the product is successfully launched a companys general NPD. However, for NPD to
onto the market. provide companies with a competitive edge the
Within a theoretical framework, NPD is viewed products must be successful, with good perfor-
as an ability of the enterprise (Day, 1994); an or- mance. Existing literature suggests various suc-
ganisational learning process (Hughes and Chafin, cess or performance measures that can be used.
1996; Kleinschmidt et al., 2010; McKee, 1992;
529
Various NPD Performance Measures g. Success rate of launched/developed products

(28%)
Griffin and Page (1993) investigated which per-
formance measures are most commonly used by The most commonly used NPD performance/
researchers and companies. After conducting a success measures at a project level were as follows:
literature review and a managerial survey they
found 75 different performance measures, 16 of a. Profitability (70%).
which are commonly used by both groups (core b. Revenue vs. forecasted revenue (70%).
success/failure measures). These measures can be c. Customer satisfaction (65%).
classified into five categories and measure differ- d. Profitability vs. forecasted profits (49%).
ent aspects of NPD success and failure: e. Market share (46%).
f. Performance to schedule (on time launch).
a. Measures of firm benefits. (41%).
b. Programme-level measures. g. Time to market (40%).
c. Product-level measures. h. Performance to budget (36%).
d. Measures of financial performance. i. Development cost vs. revenue (27%).
e. Measures of customer acceptance. j. Time to profit /BE time (26%).
k. Percentage of repeat customers (19%).
Companies tend to prefer to use project level
NPD measures (groups c, d and e), while research- NPD AS A COMMUNICATION
ers are more interested in the success of the NPD NETWORK: AN EMPIRICAL
programme and its effect on the company (groups RESEARCH
a and b), but both agree that measuring NPD
success or failure is a multidimensional process. In their extensive review of studies relating to
Cooper et al. (2004) collected results from a factors of success in NPD, Brown and Eisenhardt
study on NPD performance and procedures by the (1995) distinguish three currents of research,
American Productivity and Quality Centre. This which consider NPD as: (1) a rational plan; (2) a
study analysed 105 business units from different communication web and (3) a disciplined problem
industries and their respective performance mea- solving mechanism. Although these three streams
sures, classified into two groups: (1) measures at share methodologies, the authors highlight factors
a business unit level; and (2) measures at a NPD of differing characteristics as variables that explain
project level. new product performance. Thus, the rational plan
The most commonly used NPD performance stream focuses on a very broad set of determinants
measures at a business unit level were as follows: of the products financial performance; the com-
munication web approach highlights the effects
a. Percent of businesss revenue from NPs of communication in the development of the
(69% of business units). project; and the problem solving approach deals
b. Percent of growth in sales from NPS (50%). with the adequate development and conception of
c. Overall profits generated by NPs (40%). the product as a foundation for its success.
d. Number of major launches per year (34%). For Brown and Eisenhardt (1995), each stream
e. Percent of businesss profits from NPs (32%). presents limitations. The rational plan approach
f. Return of investment on R&D spending deals with an excessive number of factors, relies
(28%). on a single source of information and is based on
insufficiently defined constructs. The second cur-
530
rent (the communication web) ignores important Eisenhardt, 1995; Ernst et al., 2010; Hirunyawi-
variables by focussing on communication aspects, pada et al., 2010; Nakata and Im, 2010).
uses subjective measures of performance and Following this line of thought, we hypoth-
does not take the radical or incremental nature of esize a positive relationship between the cross-
products into account. The problem solving cur- functional character of the team and new product
rent also ignores important variables, is based on performance:
poorly defined constructs and is markedly geared
towards Japanese companies. H1: The cross-functional nature of NPD teams,
Our study falls into the second current, NPD as which is measured by the number of depart-
a communication web, as we believe that despite ments participating in the NPD process, will
the importance attributed to the communication positively influence new product programme
of the NPD team in various studies, there are still performance.
only a small number of international studies on this
subject, especially when it comes to external com- Information or Technological
munication. In this study, we examine the effect Gatekeepers
that four success factors (identified individually
in previous studies) have on new product perfor- Effective communication between NPD team
mance: the cross-functional character of the NPD members and external groups has been another
team, the presence of information gatekeepers, the factor associated with NPD performance. A sub-
presence of product champions and, finally, the stantial part of the information needed for NPD
consideration of lead users in the NPD process. comes from outside a company (Allen, 1970) and
it seems obvious that such outside information has
Cross-Functional Teams to enter the organisation, as without it no research
and development unit would be able to survive in
Clark and Fujimoto (1990, 1991) developed a the long run. According to Tushman (1977), the
series of structures that could be adopted by NPD survival of a firm is dependent upon its members
teams. In their analysis of the automobile industry being aware of the key technological developments
in the USA, Japan and Europe, they found that the company intends to undergo.
firms with better performance (in productivity, Teams have two ways of keeping themselves up
development time and product quality) tended to date with outside developments (Katz & Tush-
to structure their NPD through cross-functional man, 1981): through (1) direct contact between
teams led by a project manager with expertise in all project members and (2) indirect contact via
the products and in translating consumer needs certain individuals (i.e. gatekeepers).
into technical specifications. Technology gatekeepers is the name given by
On the whole, studies suggest that cross-func- Allen and Cohen (1969) to NPD team members
tional teams (i.e. project groups whose members who are closely linked to areas of external in-
are from different functional areas) are vital in formation, but who, at the same time, maintain
achieving good performance. It is believed that close contact with their colleagues within the
the greater the functional diversity of the team, organisation and translate external develop-
the greater the quantity and variety of information ments and ideas into codes familiar to NPD team
available for the design of the product and the faster members. Lievens and Moenaert (2000, p. 1097)
the response to problems such as manufacturing define information gatekeepers as employees in
difficulties or market mismatches (Brown and contact with the public who undertake boundary
spanning activities.
531
The role of the gatekeeper is an informal one munication by gatekeepers of information was
(Katz & Tushman, 1981).The organisation can- positively correlated to the reduction of consumer
not formalise it but can promote the presence and uncertainty (r = 0.42, p < 0.001), which, in turn,
participation of gatekeepers in projects and try to was positively linked to the financial performance
find them a suitable position within the company. of the new service (r = 0.34, p < 0.05).
According to Katz and Tushman (1981), gatekeep- Based on the evidence available concerning
ers fulfil two basic functions: (1) they represent the beneficial role of gatekeepers when they
a primary link with external sources of informa- collect information from the environment and
tion; (2) they assume an active role with regards incorporate it into the group, we posit that the
to training, development and social matters in presence of information gatekeepers will be more
their working groups (i.e. they not only gather, beneficial for the results of the NPD process than
interpret and translate external information into the gathering of information by all members of
a code understood by the organisation, but also NPD teams. Thus, we expect the influence on
make it easier for other members of the organisa- performance to be significantly greater with the
tion to interact with external contacts). presence of gatekeepers than if information were
The beneficial role of the gatekeeper was also gathered by all members of the team.
(although indirectly) analysed by Allen (1970),
who compared pairs of individuals that worked on H2a:The presence of information gatekeepers will
solving identical problems, by dividing them into positively influence new product programme
high and low performers according to their perfor- performance.
mance. The members of the organisation with a H2b:The impact on new product programme
high performance rating: (1) consulted colleagues performance will be greater with the pres-
more frequently; (2) had longer discussions with ence of information gatekeepers than when
colleagues; (3) confided in a greater number of all members of the NPD project team are in
people, both in their own technical line of work charge of gathering external information.
and in other areas; and (4) were more aware of
developments in their field. Innovation or Product Champions
The above appears to be the characteristics of
gatekeepers. Regarding the services field, empiri- The presence of a champion is one of the variables
cal research highlights that active commitment most frequently associated with NPD success.
and participation from personnel in contact with However, Markham and Griffin (1998) state that
the public is crucial with regards to successful this figure has attained mythical dimensions and
innovations in the banking industry (Rogers & that its direct connection to performance has not
Agarwala-Rogers, 1976; Lievens & Moenaert, yet obtained sufficient empirical support.
2000). These employees possess valuable A product champion is defined as an individual
commercial information, particularly about the who emerges spontaneously from within an organi-
needs of the targeted customers. They can act as sation and who, by actively and enthusiastically
gatekeepers of information and pass on crucial pushing forward each stage of the innovation pro-
market information to their colleagues inside cess, contributes decisively to its success (Schn,
the banks project team (Lievens & Moenaert, 1963; Tushman and Nadler, 1986).
2000, p. 1086). In a first description of this figure, Schn
The aforementioned authors analysed the suc- (1963) identified a series of functions performed
cesses and failures of new services provided by by product champions: (1) they select an idea,
Belgian banks and found that extra-project com- (2) they defend it informally but actively and (3)
532
they risk their position and prestige in order to process at company level, but does so indirectly
guarantee the innovations success. One of the through its impact on the new product programme
main characteristics of product champions is their performance.
ability to identify with an idea and defend it as if In accordance with this last result, we support
it were their own, going beyond the job require- the role of innovation champions and their posi-
ments in order to promote the idea. tive influence on NPD programme performance.
Research on product champions highlights Thus, we posit that the presence of champions
their capacity to transmit and share their vision will positively affect this measure of performance.
regarding an innovations potential, to persevere
in the face of strong opposition, to show great H3: The presence of innovation champions will
self-confidence and to gather the support of their positively influence new product programme
colleagues in relation to a particular idea (Howell performance.
and Boies, 2004; Howell et al., 2005; Shane, 2002).
Howell and Higgins (1990) find that champions Lead Users
of technological innovation show, to a greater
extent than non-champions, characteristics of Lead users of a novel or improved product, process
achievement, persistence, innovation, persuasion or service have been defined by von Hippel (1986)
and risk taking.5 as those that display two characteristics: (1) they
Markham (2002) described a series of skills handle common market needs, even months or
that champions require in order to get through what years before the majority of the market has become
he calls the valley of death (the gap between aware of such needs and (2) they significantly
the technical invention or market recognition of benefit from obtaining a solution to these needs.
an idea and the efforts to commercialise it). He Franke et al. (2006) explain that these two charac-
developed a template of nine stages that champions teristics are conceptually separate since they both
must overcome, though not linearly, in order to originate from different lines of research and have
successfully promote projects. Some of the skills different functions in the lead-user theory: High
required by champions are to communicate a benefits expected are associated with innovation
projects potential through a persuasive business likelihood, and a position ahead of the trend is
strategy; obtain the necessary resources; persist associated with innovation attractiveness (p. 311).
in the face of adversity; get the right people in- According to von Hippel (1986), the more a
volved and seek the necessary support (Howell lead user will benefit from a product or process
et al., 2005; Markham, 2002). that they need, the more effort they will make in
Kessler (2000), in a study on the development order to find a solution (i.e. the more resources
of new multi-industry products, found that when they will dedicate to the search for this solution).
there were more champions, product development A lead user has a double-value in the NPD
costs were lower. Markham and Griffin (1998) process: not only can they provide information
analysed the relation between the presence of on unfulfilled needs, but they can also offer their
champions and the following variables: (1) the own opinions on how to suitably meet such needs.
performance of the NPD process at programme, This active role of lead users in the development
firm and project levels; (2) the characteristics of of product concepts was corroborated in different
the industry; and (3) the characteristics of NPD case studies.
in relation to the project and to the firm. They Herstatt and von Hippel (1997) found that
concluded that the presence of champions does Swiss machinery firms considered the develop-
not directly affect the performance of the NPD ment of products in cooperation with their users
533
to be the most effective way of understanding ideas for new products but they were also quicker
consumer needs. However, they also verified that and keener to embrace new products.
this method was rarely used, the main limitation However, we believe that there is no empirical
being that it was very complex, costly and dif- sample study that proves the possible influence
ficult to apply. of the lead users method proposed by von Hippel
In markets characterised by rapid change, lead (1986), or of any other alternative method, on
users can act as an important element in achieving new product performance. A central problem in
successful NPD. Lead user involvement clearly these types of studies is that they do not include
helps to acquire important need and solution infor- a measurement scale, or if they do, it is always
mation. This information prevents delays in later very simple6. Morrison et al. (2004) analysed the
stages of the NPD process and ensures that the nature of the lead users construct. They proposed
new product provides an advantage to customers a similar construct: LES (leading edge status)
(Langerak & Hultink, 2008, p.165). Von Hippel and a scale formed by four dimensions and seven
(1986) proposed a four-stage process in order indicators. This continuous measure was found
to incorporate lead users into market research. to be both reliable and valid when tested on a
Further studies have demonstrated the suitability sample of information search programme users
of this method for different industries (Herstatt & from Australian libraries.
von Hippel, 1997; Urban & von Hippel, 1998). This scale was designed to identify lead us-
Most studies have focussed on a particular ers of a product, but not to measure the extent to
industry and a particular product. Lthje and which suppliers or manufacturers of a product use
Herstatt (2004) gathered the results of eight lead users and incorporate their ideas into NPD.
previous studies, centred on different products This, on the other hand, is precisely what we aim
such as open-air sports equipment and surgical to do in this study.
equipment, and verified that the percentage of Following von Hippel (1986) as regards the
users that developed improvements or new ap- relation between lead users and success in NPD,
plications for their own use varied from 10 to 38 we hypothesize that a firms consideration of
per cent. Morrison et al. (2000) found that, for two these users in the process of NPD will favour
providers of information search programmes for NPD performance.
libraries, at least 20 per cent of the improvements
made by users were new to them and interesting H4: The participation of lead users in NPD will
from a commercial point of view. positively influence new product programme
Studies have analysed the possible reasons performance.
why lead users tend to develop their own product
improvements (Lthje & Herstatt, 2004; Morrison Figure 1 shows the four relationships hypoth-
et al., 2000; von Hippel et al., 2000) and even esized.
share their results with other users (Morrison et
al., 2000). Schreier & Prgl (2008) studied the
antecedents and consequences of consumer lead CONCLUSION
userness in the context of extreme sports. The
antecedents included consumer knowledge, user By analysing the most recent data available on the
experience and two personality variables: locus innovation activities of Spanish companies, this
of control and innovativeness. The lead users in chapter has been able to confirm the importance
the study not only showed innovation by offering of general innovation and particularly of product
innovation for these companies. Although Spain
534
Figure 1. Cross-functional teams, external communication and new product performance
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compared to other European countries, the find- flow in two R&D laboratories. Administrative Sci-
ings show that Spanish companies regard prod- ence Quarterly, 14, 1219. doi:10.2307/2391357
uct innovation objectives as very important and
Ancona, D. G. (1990). Outward bound: Strate-
recognise that a significant portion of their sales
gies for team survival in an organisation. Acad-
are thanks to new products.
emy of Management Journal, 33(2), 334365.
In the second half of this chapter we suggest
doi:10.2307/256328
considering NPD as a communication web. We
hypothesise that there will be increased new Ancona, D. G., & Caldwell, D. F. (1997). Mak-
product programme performance in firms that ing teamwork work: Boundary management in
use cross-functional teams, rely on the presence product development teams. In Tushman, M. L.,
of product champions and information gatekeep- & Anderson, P. (Eds.), Managing strategic inno-
ers and take into account the opinions of more vation and change: A collection of readings (pp.
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Brown, S. L., & Eisenhardt, K. M. (1995). Prod-
uct development past research, present findings
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doi:10.1111/j.1540-5885.2008.00305.x Gatekeepers: In successful R&D projects
some individuals acted as technological gatekeep-
Shane, S. A. (2002). Are champions differ- ers, establishing links between the team and the
ent from non-champions? Journal of Business technological environment and gathering technical
Venturing, 9(5), 397421. doi:10.1016/0883- information from outside and incorporating it into
9026(94)90014-0 the group (Allen 1970, 1984).
Smith, D. J. (2007). The politics of innovation: Lead Users: Are defined as users that already
Why innovations need a godfather. Technova- possess the characteristics that the majority of con-
tion, 27(3), 95104. doi:10.1016/j.technova- sumers will present in the future. For businesses,
tion.2006.05.001 these individuals are great predictors of the trends
and needs that will sooner or later emerge in the
Song, M., van der Bij, H., & Weggeman, M. market (Droge et al., 2010; Spann et al., 2009;
(2006). Factors for improving the level of knowl- von Hippel, 1986).
edge generation in new product development. R Product Champions: Individuals who emerge
& D Management, 36(2), 173187. doi:10.1111/ spontaneously from within an organisation,
j.1467-9310.2006.00424.x actively and enthusiastically push each stage of
Spann, M., Ernst, H., Skiera, B., & Soll, H. the innovation process forward and contribute
(2009). Identification of lead users for consumer decisively to the companys success (Lichten-
products via virtual stock markets. Journal of thaler and Ernst, 2009; Schn, 1963; Tushman
Product Innovation Management, 26(3), 322335. and Nadler, 1986).
doi:10.1111/j.1540-5885.2009.00661.x
Tushman, M. (1977). Special boundary roles in ENDNOTES
the innovation process. Administrative Science
Quarterly, 22, 587605. doi:10.2307/2392402 1
Chesbrough (2003) states that the innovation
Tushman, M., & Nadler, D. (1986). Organizing strategies of companies can be classified
for innovation. California Management Review, into two extremes: closed innovation
28(3), 7492. and open innovation. Open innovation is
where companies value and take advantage
Urban, G. L., & von Hippel, E. (1988). Lead user of knowledge and experience from outside
analysis for the development of new industrial the company and closed innovation is where
products. Management Science, 34(5), 562582. the company itself is the source of innovative
doi:10.1287/mnsc.34.5.569 ideas.
538
2
(1) generation of ideas for new products or 5
Some of these characteristics are present
processes; (2) championing, or gaining in the figure of the champion of exter-
the support of top management for the new nal knowledge exploitation, defined by
idea; (3) project leadership, or the coordina- Lichtenthaler and Ernst (2009, p. 373) as
tion of people and activities to transform the an individual who informally emerges
idea into a product; (4) gatekeeping, or in an organisation and makes a decisive
gathering external information and introduc- contribution to the spreading of knowledge
ing it into the team; and (5) sponsoring by actively and enthusiastically promoting
(i.e. providing support and resources for the external knowledge within the organisation.
project). Similarly, Smith (2007) suggests For these researchers, this type of champion
that a series of organisational roles would represents an essential success factor since
help to minimize the risk of failure of new he/she contributes greatly to increasing the
products. He mentions the organisational communication of external knowledge.
roles of the technological gatekeeper, the 6
Song et al. (2006, p.186) use the item Com-
product champion and the sponsor/coach, pared to our major competitors, our company
all of which have been previously consid- has a stronger network of lead users and
ered in prior studies, but he also introduces Langerak y Hultink (2008) use a Likert scale
a new role, that of the goodfather: a senior, of three items to measure the participation of
highly respected figure who offers support lead users in the development of new prod-
in overcoming the obstacles encountered in ucts, in which companies are asked about the
major new product development projects. various techniques they use throughout the
3
Data retrieved November 22, 2010 NPD process. Specifically, they were asked
from http://www.ine.es/jaxi/ menu. to indicate the level of lead user involve-
do?type=pcaxis&path=% 2Ft14/ ment in their NPD processes and the extent
p061&file=inebase&L=0 to which they employed market simulation
4
Nakata & Sivakumar (1996) define the de- techniques and simulated prototype testing.
velopment of new products, not only as the
process by which products are developed,
but also as the results of the aforementioned
process.
539
540
Chapter 29
The New Product
Development Process as a
Communication Web, Part II:
Analysis of Spanish Firms
Pilar Fernndez Ferrn

Jos Antonio Varela Gonzlez

Beln Bande Vilela

Oihana Valmaseda Andia

ABSTRACT
In the previous chapter (Part I), we proposed a model relating the composition and external communica-
tion activities of NPD teams to the performance of NPD programmes. In this chapter (Part II), through
the use of structural equations analysis, we compare the model to a sample of 136 managers from differ-
ent functional areas at 121 innovative Spanish firms. The results indicate that the impact of explanatory
variables on new product programme performance differs according to the measure of performance
considered. The cross-functional nature of NPD teams, the presence of product champions in NPD teams
and the gathering of information by all NPD team members were all shown to positively influence new
product performance. Firms should be aware of the importance of the aforementioned variables.
DOI: 10.4018/978-1-61350-165-8.ch029
The New Product Development Process as a Communication Web, Part II
INTRODUCTION HYPOTHESES
In Part I of this chapter we suggested considering Based on previous evidence (Clark & Fujimoto,
New Product Development (NPD) as a communi- 1990, 1991; Katz & Tushman, 1981; Markham
cation web, contributing towards the innovation & Griffin, 1998; Von Hippel, 1986), we propose
activities of companies and providing them with that new product programme performance will be
a sustainable competitive advantage. The external influenced by the cross-functional nature of NPD
communication activities and cross-functional teams and their external communication activi-
nature of NPD teams positively influences new ties. Specifically, we hypothesise the following:
product programme performance and provides
companies with attributes that competitors find H1: The cross-functional nature of NPD teams,
difficult to emulate. which is measured by the number of depart-
The aim of this chapter is to compare the ments participating in the NPD process, will
proposed model and examine whether or not new positively influence new product programme
product programme performance is influenced by: performance.
(1) the cross-functional nature of NPD teams; (2) H2a:The presence of information gatekeepers will
the presence of product champions in the NPD positively influence new product programme
process; (3) the presence of gatekeepers in the performance.
NPD process; and (4) NPD lead users. H2b:The impact on new product programme
We tested the aforementioned model using a performance will be greater with the pres-
sample of 136 managers from different functional ence of information gatekeepers than when
areas at innovative Spanish firms. The results all members of the NPD project team are in
obtained from a structural equations analysis in- charge of gathering external information.
dicated that the impact of explanatory variables on H3: The presence of innovation champions will
new product programme performance differs ac- positively influence new product programme
cording to the measure of performance considered. performance.
Our study contributes towards existing NPD H4: The participation of lead users in NPD will
literature as, unlike other studies on the commu- positively influence new product programme
nication web approach, it takes a development performance.
programme of three years as its unit of analysis
and examines explanatory variables whose effects
on performance have not yet been studied together, RESEARCH METHODOLOGY
in firms that belong to different sectors and can
provide data from cross-functional sources. Sample
The chapter is structured as follows: firstly, we
recapitulated the hypotheses proposed in Part I. The sample was selected from the innovative firms
Secondly, we described the method used, tested database of the Centre for Technological Devel-
the model and commented on the main findings. opment of Industries (CDTI): an organisation
We subsequently identified the implications of the that promotes the innovation and technological
findings for NPD managers and, finally, discussed development of Spanish firms. In order to form
the chapters limitations, as well as possible future part of the sample firms had to meet two require-
lines of research. ments: belong to one of the industries shown in
Table 11 and have two or more people dedicated
to R&D tasks. These conditions were met by 600
of the firms.
541
Two questionnaires were posted to each of the the programme on the firm (two items) and the new
600 firms, one addressed to the R&D manager products overall success rating (one item). The
and the other to his/her co-worker in the com- measurement scales for the variables (presence
mercial or marketing department. A total of 121 of gatekeepers, presence of product champions,
firms (20.2 per cent of those contacted) respond- consideration of lead users, physical proximity and
ed to the questionnaires. Although the letters were cross-functionality) were developed for the study
addressed to the R&D and marketing managers, on the basis of the definitions of previous studies.
in some cases the responses came from managers The measurement scale used for the presence
in other areas2. A total of 136 questionnaires were of gatekeepers was based on the evidence pre-
received from 121 companies. sented in previous research papers regarding the
benefits of using a limited number of key people
Measures within the development project in order to ob-
tain external information, as opposed to all team
All the measurement scales are subjective and members being equally responsible for keeping
reflect the perceptions of managers from different up with changes in the environment (Allen and
areas (above all from R&D and marketing depart- Cohen, 1969; Allen, 1970). For this reason, rather
ments) on new product programme performance in opposing suggestions were made (see Appendix):
the last three years, the average number of depart-
ments participating, the presence of information In my firm there are one or more people who
gatekeepers and product champions and, finally, gather and interpret external information on
the consideration of lead users. changes in the environment and make it more
To measure new product programme perfor- accessible for us (V9).
mance we used the scale designed by Cooper
(1984), consisting of six items or indicators cor- All members of the NPD project teams are
responding to three dimensions: the overall pro- expected to keep up with changes in the environ-
gramme performance (three items), the impact of ment (V10).
The one-item measure used for the presence

Table 1. Industries in the sample of product champions was based on the principal
characteristics of this figure as highlighted in pre-
Industry Number of vious research papers. Therefore, the managers of
companies
different departments were asked to express how
Food and Beverage industry 5
much they agreed or disagreed with the following
Chemical industry 50
statement:
Rubber and plastic material manufacture 21
industry
In each of our project teams there is at least one
Glazed tile and ceramics floor tile manufacture 4
industry person who actively and enthusiastically drives
Machinery and mechanical equipment industry 24 forward each NPD stage, takes risks and does not
Electrical, electronic and optical material 26 give up when faced with obstacles (V8).
industry
Motor vehicles, trailers and semi-trailers manu- 3 Consideration of lead users in NPD is sum-
facture industry
marised by the variable V11: To seek out market
Telecommunications industry. 2
opportunities the firm pays special attention to
Metallurgy industry 1
pioneering consumers (i.e. those who identify
542
general market needs, but identify them months or Validation of the

years before the majority of the market). For this Measurement Scales
measure we took into account the definition by
von Hippel (1986), but opted to replace the term We removed four items from the new product
lead users with that of pioneering consumers, performance measurement scale (the only one
in case managers were unfamiliar with the former. with various indicators). The items corrected
The gatekeeper, product champion and lead item-total correlation was below the recommended
user scales were reviewed by 14 managers, who 0.3. The alpha value rose substantially when only
did not observe any inconsistencies in the mea- V1 and V2 were considered (alpha = 0.82). The
sures proposed. These variables were measured percentage of variance extracted on carrying out
by Likert type scales of seven points (1= totally a principal components factor analysis with these
disagree; 7= totally agree) two indicators was very high (84.72%).
Finally, the cross-functional nature of NPD Therefore, from the NPD programme perfor-
teams was measured using managerial estimates of mance scale initially proposed (i.e. one with six
roughly how many departments would participate indicators), a two-indicator scale was developed:
in the NPD teams in the following three years (V7). (1) from an overall profitability standpoint, our
new product development programme has been
successful; and (2) the overall performance of our
ANALYSIS AND RESULTS new product programme has met our objectives.
The proportion of new, commercially successful
The industry with most cases in the sample is that products in the last three years and the proportion
of the chemical sector (50 cases), followed by the of sales as a result of new products were only
electronics sector (26 cases), the machinery con- slightly related to the other indicators on the scale.
struction sector (24 cases) and finally the plastic In order to somehow capture the three dimen-
manufacturing sector (21 cases). sions of the performance of new products scale
The means and standard deviations of the proposed by Cooper (1984), we considered three
indicators of the study enable us to verify that, different measures. Performance 1 corresponds to
in general, managers strongly agree that: (1) the the overall programme performance and has the
NPD programme greatly influences company sales two indicators that passed the reliability analy-
and profits; (2) the objectives of the programme sis; Performance 2 measures the impact of the
have been achieved; (3) costs have been covered programme on the firm; and Performance 3 is an
by generated profits; and (4) the programme has overall success rating of new products.
been a success with regards to overall profitability Convergent validity of the only scale with
(see Appendix). more than one indicator was examined using ex-
In mean values, approximately one third of ploratory factor analysis. The items substantially
the firms sales come from products launched load onto their respective factors. The loads of the
onto the market in the last three years and more two indicators of the first measure of new product
than half (59 per cent) of the new products have performance (Performance 1: overall programme
been a commercial success in the last three years. performance) are equal to 0.92, which indicates
convergent validity.
543
Testing of the Hypotheses The presence of champions positively and

substantially influenced performance (b = 0.52),
To test the hypotheses we proposed a structural while consideration of lead users when develop-
model that considered the influence of four inde- ing a new product (contrary to what we presumed)
pendent variables: cross-functional nature of the is negatively related to performance (b = -0.22).
team, presence of product champions, presence This is paradoxical and contradicts evidence
of gatekeepers and consideration of lead users on presented in former studies (Von Hippel, 1986;
new product performance. Herstatt and Von Hippel, 1997).
Firstly, an estimate of the model (using the In view of the above results, and considering
AMOS 4.0 programme) had to be made, consider- the first measure of new product performance
ing the first measure of new product performance (Performance 1) (see Table 2 and Figure 1),
(Performance 1), and as a measure of the presence we can accept H3 (the presence of champions
of gatekeepers a single indicator (V9). The cross- positively influences performance), but cannot
functional nature of the NPD team, measured by accept the three remaining hypotheses, as neither
the number of departments that usually partici- the cross-functional nature of the team (H1), the
pate in the NPD process, was excluded from the presence of information gatekeepers (H2a), nor
analysis after it was found that it did not affect the consideration of lead users (H4) favour the
performance. The gatekeeper variable was not programmes overall performance. We cannot
significantly related to performance, while the accept H2b either because the presence of infor-
gathering of external information by all members mation gatekeepers does not benefit performance
of the NPD project teams (V10) did positively more than the collection of external information
influence performance p < 0.1 (see Table 2). The by all team members. In fact, the opposite appears
relation of the other two independent variables to be true (i.e., the gathering of information by
(consideration of lead users and presence of prod- multiple parties favours the performance of the
uct champions) with new product performance NPD project) whereas the presence of information
was significant for p < 0.01. gatekeepers has no influence on performance.
Table 2. Structural equation model results: parameter estimates (Performance 1)
Effect of On Estimate S.E. C.R. Standardised Esti-

mate
H2b All members (V10) Performance 1 0.13 0.07 1.90 0.17
H3 Champions (V8) Performance 1 0.43 0.07 5.73 0.52
H4 Lead users (V11) Performance 1 -0.17 0.06 -2.61 -0.22
Performance 1 V1 1.00 - - 0.94
Performance 1 V2 0.70 0.12 6.06 0.70
Convariance S.E. C.R. Correlation
Champions-lead users 0.63 0.19 3.31 0.31
Champions-All members (V10) 0.93 0.20 4.65 0.46
Lead users-All members (V10) 0.67 0.21 3.28 0.31
Chi-squared Chi-squared/ R2 CFI GFI AFGI NFI TLI RMSEA
. d.f
1.44; d.f. = 2; p = 0.49 0.72 0.34 1.00 0.99 0.97 0.99 1.02 0.00
544
Figure 1. Structural model for the first measure of performance (Performance 1)
Table 3. Structural equation model results: Parameter estimates (Performance 2)
Effect On Estimate S.E. C.R. Standardized Esti-

Of mate
H1 Cross-functional teams Performance 2 2.06 1.18 1.75 0.16
H2b All members (V10) Performance 2 2.66 1.37 1.94 0.17
Performance 2 V5 1.00 - - 1.00
Chi-squared Chi-squared/ R2 CFI GFI AGFI NFI TLI RMSEA
d.f.
0.86; g.1 = 1; p = 0.35 0.86 0.05 1.00 0.99 0.97 0.89 1.08 0.00
Figure 2. Structural model for the second measure of performance (Performance 2)
When the measure of performance in question When considering the proportion of com-
is the proportion of total sales thanks to new mercially successful new products in the last three
products (Performance 2), only two out of the years as a measure of performance (Performance
initial four variables are statistically and signifi- 3: V6), two variables are distinctly connected to
cantly connected to new product performance (i.e. new product performance (V8 and V11), but the
p < 0.1) (see Table 3 and Figure 2). Given that R2 model is not identified (as there is not enough
is low, the input of development teams, as well scope in order to estimate it).
as of the gathering of information from the exter- With the aim of solving this problem, we rec-
nal environment, are fairly limited, but still sig- ommend a multiple regression with Performance 3
nificant. (V6) as a dependent variable and V8 (champions)
and V11 (lead users) as independent variables.
545
Table 4. Regression results (Performance 3)
Model R R squared Corrected R squared S.E.

1 0.29 0.08 0.07 30.31
a
Independent variables (Constant term), V8 (champions); V11 (lead users).
Table 5. Estimates
Estimates Standardized t Sig.

Estimates
Model B S.E Beta
1 (Constant term) 43.48 12.20 3.56 0.00
Champions (V8) 6.95 2.22 0.30 3.12 0.00
Lead users (V11) -4.24 1.96 -0.21 -2.16 0.03
a
Dependent variable: Performance 3.
The analysis carried out using the SPSS statisti- tion of two departments, and 97 (out of a total of
cal programme is shown in Table 4 and Table 5. 130 responses) use cross-functional teams from
Although R2 is not very high, the coefficients three to five different departments (the number
of the independent variables are significant and of managers that use cross-functional teams from
show: on the one hand, that the presence of product five departments is considerably low). Given that
champions positively influences the proportion virtually all contacted firms use cross-functional
of new products that have achieved commercial teams for NPD, we cannot verify the advantages
success in the last three years; and, on the other of this option over that of single-function teams.
hand, that consideration of the needs of lead us- The variable is therefore not proven to be signifi-
ers negatively affects new product performance. cant when it comes to explaining performance.
As a result, it can be concluded that innovative
Spanish firms have faith that teams formed by
DISCUSSION AND MANAGERIAL people from different functional areas can carry
IMPLICATIONS out the development of new products.
A direct and positive link between managers
The cross-functional nature of NPD teams (mea- views on the presence of product champions in
sured by estimating the average number of depart- NPD teams and the performance of the programme
ments participating in the NPD process) positively has also been found to exist, both when overall
influences one of the measures of new product programme performance was considered (b=0.52)
performance (i.e. the total percentage of sales and when success of new products was considered
represented by new products) (Performance 2), but (b=0.30) (see Table 6).
does not influence the other two measures (overall These results are consistent with previous
programme performance and new products overall studies (Markham, 1998; Markham and Aiman-
success rating). The frequency distribution of Smith, 2001; Markham and Griffin, 1998) and
this variable allows us to confirm that only three highlight the importance of product champions.
managers use single-function teams within their For some authors, cross-functional teams and the
firms, eight managers make use of the participa- formalisation of NPD processes do not eliminate
546
Table 6. Summary of the main results
Effect of On
Performance 1: Performance 2: Performance 3:
Overall programme Impact of the programme Index of success of new
performance on the firm products
1. Cross-functional teams NO YES (+) NO
2a. Gatekeepers NO NO NO
2b. All members YES(+) YES(+) NO
3. Champions YES(+) NO YES(+)
4. Lead users YES(-) NO YES(-)
the need for product champions, those passion- tion that ultimately led to a poorer performance.
ate individuals who believe in the stated innova- Perhaps they did so as they felt embarrassed about
tion strategy of the organisation and recognise the admitting to one of their colleagues that they
potential in an idea or opportunity (Markham needed help in solving a problem.
and Aiman-Smith, 2001, p.47). It may also be the case that gatekeepers are not
The gathering of information from the envi- as equally valuable in some situations as they are
ronment by all the members of NPD teams was in others. For Katz and Tushman (1981) the key
also shown to positively influence performance, can be found in the distinction between research
especially overall programme performance and projects or projects with a universal orientation,
sales of new products (b = 0.17 in both cases). and development projects or projects with a local
These results are supported by previous studies orientation.
(Ancona, 1990; Ancona and Caldwell, 1997). When technological activities have a local
However, the presence of information gate- perspective, individuals that take part in them
keepers was not significantly related to new share the same language, and communication
product performance, contrary to what previous is quick and easy. However, the acquisition and
studies have found (Allen, 1970; Katz and Allen, interpretation of information from external sources
1981; Lievens and Moenaert, 2000). This could that use another language, makes communication
be due to the measure used or to the characteris- more difficult. Projects with a local orientation
tics of the sample. However, we believe that, in require gatekeepers to establish a link with ex-
addition to the aforementioned reasons, there are ternal areas, meaning contact with the outside
also other reasons. environment is indirect.
Allen (1966) verified that, despite the apparent Projects with a universal orientation, on the
benefits associated with consulting colleagues, in other hand, use the same language that is used
the projects studied, more members resorted to externally. As there are no communication barriers
obtaining ideas from external sources than from there is also no need for gatekeepers. Commu-
within their own organisations by simply consult- nication with the outside occurs by all members
ing a member of technical staff. The performance of the group directly. Overall, research projects
achieved after acquiring information from outside without gatekeepers and development projects
was, however, rather poor. It is ironic that a high with gatekeepers were associated with higher
number of employees used sources of informa- performance.
547
In their recent study, Whelan et al. (2010) The lead users method is proposed as a solu-
questioned the individual role of gatekeepers. tion for those firms that wish to carry out radical
These researchers recommend that the gatekeeper improvements but that, single-handedly, are only
concept be re-examined in view of the latest able to develop line extensions and incremental
advances in Internet technology, which have innovations. Von Hippel et al. (2000) state that
significantly changed the way people acquire the lead user method is used in eight out of the
and share information. Although we may think 55 3M firm divisions and those cross-functional
that thanks to the Internet the circulation of and teams that take lead users opinions into account
access to information on technological advances are very satisfied with the result. However, these
is within reach for all members of new product de- researchers also posit that the use of this method
velopment teams, Whelan et al. (2010) found that, does not guarantee success. A lack of manage-
even though searching for information is a great ment support or a teams inability to carry out
deal easier due to the Internet, the verification, the process can cause project failure.
translation and internalization of such information We believe that this negative impact of the
requires skills held only by a select few. Whelan consideration of lead users on NPD could be due
et al.s case-study on a medical devices company to several reasons:
demonstrates how the role of gatekeeper can divide
a workforce into two: the external communication Firms may not be following an appropri-
stars, who are in charge of searching the Internet, ate method/process for studying company
informing the group of the latest technological needs and identifying users. The method
developments and verifying the reliability of the proposed by von Hippel (1986), developed
information before discussing it with the internal in later studies (Lthje and Herstatt, 2004;
communication stars, in turn, are in charge of von Hippel et al., 2000) discusses the need
finding a possible use for such information within for development projects with lead users to
the group and translating it into comprehensible go through four phases: (1) initiation and
terms for those that intend to use it. This kind of establishment of bases; (2) determination
work presents new and interesting opportunities of tendencies; (3) identification of lead us-
in relation to future research. ers and (4) development of product con-
Finally, our findings indicate that Spanish cept. Enkel et al. (2005) also put forward
firms employment of lead users in NPD nega- four phases to involve the customer in the
tively influences two of the three measures of NPD process. These researchers argue
performance considered, mainly the overall that companies need to understand how
programme performance and the new product and when to use a lead-user approach in
success. These results do not correspond to those order to reduce the risks involved in radi-
of previous studies, which draws attention to the cal innovations. In this respect, the Internet
incorporation of information from consumers into provides ways to incorporate potential
the project team (Hong et al., 2004; Lthje and customers into the NPD process. Active
Herstatt, 2004; Morrison et al., 2000; Von Hip- participation by NPD managers in virtual
pel, 1986; Von Hippel et al., 2000), but they are communities of bloggers and readers who
consistent with the research of Song et al. (2006), are interested in certain types of products
who found that the use of lead user networks is could also provide very valuable informa-
negatively associated with the acquisition of new tion in relation to the main marketing-mix
NPD knowledge. variables (product, price, channel and pro-
motion) and assist in the identification of
548
lead users and early adopters (Droge et al., the lead user method? These and other questions
2010). Additionally, the use of virtual stock need to be answered, particularly in relation to
markets or information markets could help Spanish firms.
to identify those lead users with a greater
ability to forecast the market success of
new products (Spann et al., 2009). CONCLUSION
One of the methods theories may not be ac-
curate. It may assume that the perceptions This chapter gathers the results of a study on a
and preferences of lead users are similar to sample of innovative Spanish companies. It forms
those held by non-lead users once the mar- part of a line of research that regards NPD as a
ket for a particular product has developed. communication web. It posits that new product
However, current users could decide that programme performance will be greater in firms
they do not like the product concept that that use cross-functional teams, rely on the pres-
lead users have helped to develop. In this ence of product champions and information gate-
case, one of two possibilities are likely to keepers and take the opinions of more advanced
arise (Urban and von Hippel, 1998): users into account.
a. The new concept will not be appreciated The results, obtained from a sample of 136
immediately, but will be in the future managers from different functional areas (princi-
when the needs of non-lead users have pally R&D, marketing and manufacturing) partly
evolved and come to resemble those support the hypotheses put forward, and allow us
presented earlier by lead users. to conclude that:
b. The concept will never be appreciated
by non-lead users. 1. The three dimensions proposed in the mea-
The involvement of lead users in the gen- sure of new product programme performance
eration of ideas for new products can be are perceived by managers as three distinct
very useful if a company is seeking radi- measures: (1) the overall programme perfor-
cal innovations. However, if a company mance; (2) the impact of the programme on
requires incremental changes, the use of the firm and (3) an index of the success of
ordinary users through the guided user ap- the new products.
proach (where information on the technol- 2. The use of cross-functional teams in NPD
ogy behind the new product is given) may is a general practice in innovative Spanish
be more effective (Magnusson, 2009). firms and positively influences the impact
of the programme on the firm.
We believe it is essential for future stud- 3. The presence of champions is important,
ies to analyse the link between lead users and both in achieving good overall programme
performance. Should firms study lead users and performance and in obtaining a high suc-
incorporate their needs and ideas into product cessful product rate.
improvements or new products? Do firms have 4. The collection of outside information by all
a long-term outlook? Are they willing to wait for members of cross-functional teams helps to
the market to appreciate the products designed on improve overall programme performance
the basis of lead user contributions? Is it easy to and its impact on a firms results.
identify lead users? Are firms capable of using
549
5. The presence of information gatekeepers is Allen, T. J. (1970). Communication networks

not associated with any of the three measures in R&D laboratories. R & D Management, 1(1),
of performance. 1421. doi:10.1111/j.1467-9310.1970.tb01193.x
6. The consideration of lead users in NPD has
Allen, T. J., & Cohen, S. I. (1969). Information
a negative influence on overall programme
flow in two R&D laboratories. Administrative Sci-
performance and on the index of success of
ence Quarterly, 14, 1219. doi:10.2307/2391357
new products.
Ancona, D. G. (1990). Otward bound: Strate-
gies for team survival in an organisation. Acad-
LIMITATIONS AND FUTURE emy of Management Journal, 33(2), 334365.
LINES OF RESEARCH doi:10.2307/256328
Ancona, D. G., & Caldwell, D. F. (1997). Mak-
In our opinion, this study presents various limita-
ing teamwork work: Boundary management in
tions. The first is that virtually all of the explanatory
product development teams. In Tushman, M. L., &
variables were measured using a single indicator,
Anderson, P. (Eds.), Managing Strategic Innova-
which obviously affects their reliability and valid-
tion and Change: A Collection of Readings (pp.
ity. However, studies available on new products
433442). Oxford, UK: Oxford University Press.
have yet to suggest ways in which concepts associ-
ated with teams external communication can be Buesa, M., & Molero, J. (1992). Patrones del
suitably measured. Multi-sector empirical studies cambio tecnolgico y poltica industrial. Un es-
have also yet to be carried out. tudio de las Empresas Innovadoras Madrileas.
Secondly, we believe that the possible moderat- Editorial Civitas.
ing effect of the degree of product innovation on
Crculo de Empresarios (1988). Actitud y Com-
the connection between some of the explanatory
portamiento de las Grandes Empresas Espaolas
variables and new product performance should
ante la Innovacin.
be measured. In our opinion, whether or not the
beneficial effect of gatekeepers (verified by previ- Clark, K. B., & Fujimoto, T. (1990). The power of
ous studies) is greater in incremental innovations product integrity. In Clark, K. B., & Wheelwright,
than in radical ones should also be calculated. S. C. (Eds.), The product development challenge:
Finally, we believe that qualitative studies Competing through speed, quality and creativity
should be performed in order to develop adequate (pp. 277296). Boston, MA: Harvard Business
measures for the constructs considered in this Review Book.
study, as well as better understand the traits of
Clark, K. B., & Fujimoto, T. (1991). Product devel-
innovative Spanish firms, which have not yet
opment performance: Strategy, organisation and
been properly identified.
management in the world auto industry. Boston,
MA: Harvard Business School Press.
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ENDNOTES
products. Management Science, 34(5), 562582.
doi:10.1287/mnsc.34.5.569 1
The following activity sectors were consid-
von Hippel, E. (1986). Lead users: A source of ered: (1) those highlighted as innovative in
novel product concepts. Management Science, earlier studies of innovative firms in Spain
32(7), 791805. doi:10.1287/mnsc.32.7.791 (Crculo de Empresarios. 1988), Madrid
(Buesa and Molero, 1992) and the Basque
von Hippel, E., Thomke, S., & Sonnack, M. country (Fundacin COTEC, 1997); or (2)
(2000). Creating breakthroughs at 3M. Health with a considerable number of firms receiv-
Forum Journal, 43(4), 2027. ing public aid for R&D projects (CDTIs
Whelan, E., Teigland, R., Donellan, B., & Golden, data base of innovative firms: www.cdti.es).
W. (2010). How Internet technologies impact in-
2
We believe that the questionnaires, initially
formation flows in R&D: Reconsidering the tech- addressed to R&D and marketing managers,
nological gatekeeper. R & D Management, 40(4), once within the firm, were subsequently
400413. doi:10.1111/j.1467-9310.2010.00610.x forwarded on to other managers with ad-
equate knowledge of the NPD process and its
performance. An ANOVA analysis showed
that there were no significant differences
KEY TERMS AND DEFINITIONS in the values of the study variables among
the following groups of areas: (1) R&D; (2)
Gatekeepers: In successful R&D projects
marketing; and (3) manufacturing and other
some individuals acted as technological gatekeep-
areas.
ers, establishing links between the team and the
technological environment and gathering technical
information from outside and incorporating it into
the group (Allen 1970, 1984).
552
APPENDIX
Figure 3. Measure scales, items and mean values
553
Section 7
Finance and Innovation
555
Chapter 30
Innovations and Financing
of SMEs, Part I:
SME Financing and Credit Rationing:
The Availability of Funds
David S. Walker
The University of Birmingham, UK
Horst-Hendrik Scholz
ABSTRACT
Small and Medium-sized Enterprises (SMEs), as a major sector of the economy, have unique charac-
teristics in terms of organisational and financial structures; reflecting the interest and strategy of the
owner and financiers. With regard to the recent global financial crisis, the terminology Credit Crunch
describes a shortage in financial funds and concerns most businesses as well as financiers. On the one
hand, financiers (lenders) complain about weak financial structures (especially lack of equity) and high
risks investments of innovations and on the other hand SMEs (borrowers) accuse financiers for a shortage
of financial funds or non-transparent and demanding credit conditions. This chapter describes various
financing options and gives rationales for the credit rating process and credit conditions building the
base for financing decisions. Furthermore, by discussing the topic of Credit Rationing, the authors
demonstrate the impact of credit conditions on management decisions in order to justify the rationing
of credits. This chapter also provides the necessary introduction and background to the understanding
of the next chapter Part II: Case Study of German SMEs in 2010.
DOI: 10.4018/978-1-61350-165-8.ch030
Innovations and Financing of SMEs, Part I
INTRODUCTION and bank financing only 20%--while in Europe

bank loans have an 80% share of debt financing
This chapter introduces definitions and financ- (Schinkel, 2010). Therefore banks play a very
ing alternatives of Small and Medium-Sized important role in financing in Europe and it is
Enterprise (SME). A comparison and valida- worth it to have a closer look to the credit market
tion of different SME definitions is presented and credit rationing. Due to the fact that most
to demonstrate the complex categorisation of a Small and Medium-Sized Enterprises (SMEs) are
heterogeneous set of firms. Finance as an Or- limited companies, rather than quoted companies,
ganisations Creative Area supports innovation the access to financial markets is limited. Looking
processes by overcoming barriers that exist es- at the current financial crisis with a focus on the
pecially for SMEs. These barriers are not just a interplay of financiers and SMEs, companies are
lack of resources (especially financial resources), complaining about the so called Credit Crunch
but also lack of expertise in fields outside the causing a shortage in funds. Financiers on the other
core competencies. For instance a manufacturer hand complain about weak financial structures in
may have a lack of distribution knowledge and terms of debt/equity ratios causing higher risks
contacts. Therefore, a non-traditional financier of losing loans. Non-traditional financing, with a
(e.g. Venture Capitalist) may solve some of these potential to fill traditional financing gaps, offers
problems and support innovation by delivering especially to entrepreneurs an improved business
Value-Added Services (e.g. contacts, experi- framework; even though there are concerns about
ence and managerial competencies). Depending the dependence on financiers.
on the long-run targets a firm may not need the
expertise of any Private Investor and may be able
to be innovative with traditional financing (e.g. SME FINANCING AND
Project-oriented bank loans). Therefore, choosing CREDIT RATIONING
the right financing options, not just to optimize a
firms financial structure, can have a synergetic A Literature Review on Small
effect on innovations. This chapter presents rather and Medium-Sized Enterprises
a theoretical background on financing SMEs,
while the next chapter presents a closer focus on Structural and economic performance character-
financing and its contribution to innovations in istics of Small and Medium-Sized Enterprises
SMEs. In order to obtain a holistic view of what (SMEs) differ not only within different nations,
a credit crunch is and how it is caused, this chap- but also within different industries. Therefore it
ter presents rationale of the credit market and a is important to identify differentiation criteria
general description of the credit rating process. (quantitative and qualitative) and to contrast
Additionally, non-traditional financing options definition approaches; addressing the question
are validated concerning the SME applicability. which type of firm is included in the term SME?
Sometimes the grouping structure of cooperating
enterprises makes it complicated to distinguish
BACKGROUND between legally independent entities. While
some organisations out-sourced departments and
In Europe, the degree of bank financing is high services appear to be independent, other business
in comparison to financing through financial units corporate to an extend that contradicts to a
marketsespecially compared to the USA. In the quantitative separated definition. Most literature
USA, bonds take an 80% share of debt financing about small firms was originated from America
556
before the Bolton Committee defined 1971 model The Quantitative Approach of
1 (Bolton Report) containing quantitative as well the UK Companies Act
as qualitative criteria to define a SME (Stanworth,
1981, p.3). This model is based on the UK market. A broadly accepted and quoted UK-based defini-
More recent, the Companies Act of 2006 (UK) tion of small companies is described in the Compa-
and the European Commission defined quan- nies Act of 2006 (chapter 46, part 15, sub-chapter
titative criteria. Other qualitative models have 1, section 382). According to this act, a company
been developed by the Committee for Economic qualifies as small when it meets at least two of
Development (US) and IfM Bonn1 (Germany). the following requirements (Table 2).
The turnover values refer to the companys
The Quantitative and Qualitative financial year and any occurring maximum figures
Approach of Bolton have to be adjusted proportionately. The balance
sheet total is the aggregated amount of assets from
Depending on the type of industry, Bolton et al. the companys balance sheet and the number of
(1971, p.3) defined quantitative threshold criteria employees is calculated by the average persons
which can be either the number of employees or employed under contracts of service per financial
the annual turnover. Further criteria (as shown in year. Furthermore, a company is excluded from
Table 1) are percentage of all firms in industry, the small companies regime if during the finan-
the ratio of total employment to small firms cial year the company is either a public company,
employment and the average employment per an authorised insurance company, a banking
small firm. company, an e-money issuer, an ISD2 investment
The Bolton Report model (1971, pp.1-2) de- firm, an UCITS3 management company, or a
fined besides quantitative criteria also qualitative member of a group that does not comply with
characteristics. For instance the company should required criteria (Companies Act 2006, chapter
have a relatively small market share of its market, 46, part 15, sub-chapter 1, section 384).
be managed in a personalised way (mostly by the
owner), have no formal management structure
and the principal decision-making-process shall
not directly be externally influenced (e.g. not part
of a large scale enterprise).
Table 1. Industry specific SME threshold criteria (Bolton, 1971, p.3)
Small firms as a Proportion of total Average

Statistical definition of small
Industry % of all firms in employment in small employment per
firms
the industry firms small firm
Manufacturing 200 employees 94% 20% 25
Retailing 50,000 annual turnover 96% 49% 3
Wholesale trades 200,000 annual turnover 77% 25% 7
Construction 25 employees 89% 33% 6
Mining/ Quarrying 25 employees 77% 20% 11
Motor trades 100,000 annual turnover 87% 32% 3
Miscellaneous services 50,000 annual turnover 90% 82% 4
Road transport 5 vehicles 85% 36% 4
557
Table 2. UK threshold criteria according to the

lion (Official Journal of the European Union, L
Companies Act 2006 (chapter 46, part 15, sub-
124/36, 2003, Annex, Title 1, Article 2.1). Table 3
chapter 1, section 382.3)
provides quantitative threshold criteria for a closer
Criterion Values differentiation of the three categories:
Turnover 5.6 million
The so called staff headcount criterion (em-
Balance sheet total 2.8 million
ployees) takes, as the main criterion, different
Number of employees 50
structures and characteristics of different branch-
es into consideration. For example manufacturing
firms usually have more employees with a certain
turnover compared to firms working in the dis-
The Qualitative Approach of the US
tribution or logistic sector (Official Journal of the
Committee for Economic Development
European Union, L 124/36, 2003, p. 1, paragraph
4). The turnover threshold values are being
According to the American Committee for Eco-
adapted to changes in price and productivity.
nomic Development (CED), a small business has
Furthermore, the so called turnover ceilings can
to meet at least two of the following for require-
be regarded as a statistical ratio between the bal-
ments (Recklies, 2001, p.2):
ance sheet total and staff headcount. (Official
Journal of the European Union, L 124/36, 2003,
a. Since the manager usually owns the business,
p.2, paragraph 6). According to the EU Commis-
the management has to be independent
sion, another criterion for an enterprise to be re-
b. The ownership is held by one individual or
garded as a SME is the relative share of external
a few individuals which supply the capital
shareholder; not more than 25% of shares should
c. The operating area is mainly (but not neces-
be owned by another external company.
sarily) local
d. The SME has to be smaller than large com-
SME Definition According to the IfM
petitors in its industry
Hauser5 (2005, p.3) points out that SMEs are
SME Definition According to
limited to a size in which owners can manage to
the European Commission
have a rather holistic control of the businessin
contrast to Large Scale Enterprises (LSE). Due
In accordance with the latest publication of
to the fact that the relative share and weight of
the European Commission4, micro, small and
decision of private investors (like share holders)
medium- sized enterprises include all together
usually decreases with the size of enterprise, the
firms that employ less than 250 employees, have
incentive to get detailed information and the com-
a annual turnover of less than 50 million and an
mitment decreases as well.
annual balance sheet total of less than 43 mil-
Table 3. SME threshold criteria of the EU Commission (c.f. Official Journal of the European Union,
L124/36, 2003, Annex, Title1, Article 2.1-2.3)
Size Employees Annual turnover Annual balance sheet total

Medium < 250 50 million 43 million
Small < 50 10 million 10 million
Micro < 10 2 million 2 million
558
Besides these limiting figures, the IfM and the the group may have different characteris-
OECD Statistics Directorate published a meeting tics than SMEs according to quantitative
document about a qualitative definition of SMEs definitions (e.g. annual turnover, number
(Hauser, 2005, p.2-3), in which three types of of employees).
enterprises are differentiated (Table 4):
Continuing Discussion and Critics on
Type 1 enterprise: An enterprise in which Presented Definition Approaches
short- and long term decision are made by
the manager who is the owner and a mem- A validation of the EU Commissions proposal of
ber of the family. The decisions are made SME classification has been conducted by the IfM
only for the benefits and interests of the en- to check the applicability to German SMEs -as a
terprise. The managers personal commit- key player of the European Union. The following
ment and identification with the enterprise table (Table 5) shows the average annual turnover
is very high. and average amount of employees in each size-
Type 2 enterprise: An enterprise in which group. The survey was conducted with German
the manager is only authorized to make Manufacturing enterprises; employing at least
short-term strategic decisions, but prepares 20 people. Hauser (2005, p.9) states that distor-
long-term decision for the board of own- tion of empirical data occurs by taking corporate
ers. The board of owners can also consist enterprises (being incorporated into a group) into
of private investors. Interests are to maxi- consideration. These enterprises act therefore in
mise their profits and profits of enterprise. the groups interests rather than own interests. To
Type 3 enterprise: An enterprise that is solve this issue, the IfM statistics look at legal
part of a group. Strategic decisions are units, which are clearly independent businesses,
made in favour of the group rather than the rather than incorporated group members.
enterprise. The decision making process Comparing Table 5 with Table 3 shows that
is influenced by the structure and interac- the threshold criteria of the EU Commission are
tion of group members. The affiliation can suitable for instance for SMEs (as legal units) in
have legal, financial and knowledge ad- the Manufacturing sector in Germany.
vantages. The enterprise as a member of The three types of enterprises described in the
section SME definition according to the IfM
Table 4. SME threshold criteria of the IfM Bonn (In- have all pros and cons depending on the resources
stitut fr Mittelstandsforschung (IfM), 17.07.2010) they require in operation. The most flexible enter-
prise category is type I due to the fact that decisions
Size Employees Annual turnover do not have to be co-ordinated to large extend and
Large 500 50 million can be quickly executed through the owner/man-
Medium 10 - 499 10 million ager. On the other hand the risk of wrong decisions
Small 9 2 million and prioritising can rise without the co-ordination
Table 5. Average annual turnover and employment of German enterprises as legal units
Size classes: 20-49 50-99 100-249 250-500 500-1000 1000+ Average

Turnover (million )/ enterprise: 3.3 7.9 20.3 53.6 121.0 1540.7 50.4
Employees/ enterprise: 32 69 150 333 662 6518 210
559
of decisions. Modularization and the principle SMEs as enterprises in which the owner has the
agent problem rise with the size of company and overall control of the business. When looking at
when grouping enterprises6 because one business companies with more than 100 employees it is
unit may act on behalf of its own interests rather very likely to find assistant managers in several
than the whole firms interests; furthermore this departments with certain competencies and room
problem is related to Asymmetric Information. for manoeuvre.
Concerning the availability and maximisation of
resource capacities, the type III enterprise has an The Difference between Small and
advantage over the other two types due to the fact Entrepreneurial Businesses
that group members can shift their resources to
each other. Therefore the assessment of financial The terminology SMEs is often wrongly associ-
and productivity performances is rather difficult ated with entrepreneurial businesses. Due to the
when looking at type III enterprises. Type I and fact that most businesses started out small, some
type II enterprises have less complex allocation can be in the position of an innovative-, entre-
of resources -which makes it easier to assess preneurial- or start-up business. While the aim
SMEs quantitative. Qualitative characteristics of most entrepreneurial businesses is to grow,
are very difficult to unify, categorize and access to gain market share and to maximise profits;
for externals. Therefore different definitions have some SMEs follow the strategy of staying in a
been developed applicable for different nations. niche market and maintain their size. Neverthe-
The more detailed contribution of the IfM less, Bridge (2003) describes a classification of
(Hauser, 2005) contrasts structural aspects of innovative businesses in relation to the growth of
organisations and demonstrates that enterprises, business. One class of business are the lifestyle
interacting in a group, are difficult to assess. businesses that have ...no-growth aspiration;
Furthermore, SME threshold criteria based on ...often home-based, sole trader operations em-
statistical data need to be adopted according to ploying no more than one additional person...
legal units rather than single companies; that ap- (Bridge, 2003. pp. 276-277). Furthermore, he
pear to be independent. An example related to the states that a remarkable number of entrepreneurs
work of Hauser (2005, p. 4-9) is a company that aim at moderate growth due to the fact that in a
has outsourced its Research and Development firm with an arithmetical growth, the occurring
(R&D) and dispatch department (for taxation- or problems grow geometrically. In addition, owner
cost saving reasons). Looking at the single per- of SMEs may prefer a smaller size because of a
formance of all three business units (production less aggressive competitive environment and more
department as a residual department and the two stable economic development following personal
new independent business units) will show that management goals.
one will generate most likely a profit and the other Concerning technological innovations, small
will reveal a very low operating profit. These enterprises have most likely an increased flex-
three independent enterprises would contribute ibility to adopt the product or service faster than
equally to a statistical result of a SME survey LSE due to their key account management and
looking at each of them as a single entity; because dependence on their customer. Furthermore the
interrelations are difficult to detect for externals. management structure and decision making
Therefore the relation between employment, process as well as customer relationship manage-
machine capacities and financial ratios of differ- ment differ significantly from LSE that started
ent entities can be misleading regarding unifying out as an entrepreneurial business. While an
definitions. Furthermore, it is difficult to define entrepreneurial business is expected to have an
560
early return, covering research and development -even though a group of SMEs together are more
cost and serve share holders, an aim of a small resistant to economic recession and provide more
business might rather be a stable business basis stable jobs and tax payments than a single LSE. To
that is capable to be managed by a single person cover own costs and finance innovations, SMEs
or in a partnership. A major advantage that small often form collective group agreements to profit
firms have is the ability to be innovative and to for instance from large-orders discounts. Smaller
take up new technologies within a short time scale organisations often offer the opportunity to
(further details in the next chapter). As there is the management to resolve employment related
now need to wait for the decision making process problems on an individual base rather than being
involving several people within the management confronted with a strong labour union and are less
structure. Due to the fact that a SME is able to likely be confronted with labour strikes. On the
react flexible to changes and opportunities, the one hand LSEs are more likely confronted by the
customer relationship can be defined as much monopolies and mergers commission, but on
closer, personal and supporting. the other hand they can deal easier with environ-
mental and social and governmental requirements
The Economic Role of SMEs due to their organizational structure. In order to
survive in a general competitive environment,
Alambritis (2010) who is a member of Britains SMEs marketing strategies are often focused on
Federation of Small Businesses states that Small an innovative, customer oriented and high quality
businesses are the lifeblood of the economy.... product rather than low price products.
General speaking SMEs can be regarded as a
key player in each nations economy; especially Financial Interests and
in terms of GDP- and employment contribution. Characteristics of SMEs
According to the European Commission, SMEs
represent 99% of all enterprises and provide 75 Financing of SMEs is major challenge due to
million jobs in Europe. The support for SMEs limited financial-, personnel- and production
is one of the European Commissions priorities resources. Due to the fact that most small firms
for economic growth, job creation and economic exist in the legal form as limited companies
and social cohesion (European Commission, (rather than public companies) access to new
2003, p.5). The global financial crisis has proved capital is limited. Furthermore owner/ manager
that SMEs can absorb economic shocks better of SMEs prefer to keep the overall control of
than LSE and have a stabilising function in the their firms and therefore equity capital is not the
economy (Borger, Kiener-Stuck, 2010, 1-27). most favourable financing option. According to
Cutting off their credit poses a very real threat Hauser (2000), small firms have more difficulties
to the economic recovery (Alambritis, 2010). to cover temporary losses than larger firms even
Due to their management structure with a high though their turnover yield is larger. In addition
grade of personal commitment and responsibil- small companies have a lower non-operational
ity as well as flexibility in the decision making income and lower equity capitalization. Therefore
process, SMEs generally have the ability to pro- it is particularly difficult to finance R&D as well
vide stable employment conditions and stable as capacity related investments. Due to the fact
tax payments. Besides assistance programmes that SMEs often employ temporary labour as well
of governments and private investors, a group of as leased equipment (sometimes even provided
SMEs is less likely to get as much governmental by the customer) and use single machines rather
help as a LSE being in the centre of public attention than complex production lines, the variable cost
561
are compared to the fix costs relatively high. As years and tried to gain market share by employ-
a consequence the operation leverage tends to be ing competitive bidding strategies. This led for
lower which reduces the risk to pay back debts instance in Germany to relatively low interest
making SMEs more reliant and attractive to short rates. While the industry was used to relatively
term loans and overdrafts than to equity finance favourable loan conditions, the banks struggle to
(Harrison, 1994). Investment loans are required justify higher cost for similar services. Due to the
by SMEs to renew work equipment and to expand fact that the latest economic crisis and recession
the business. According to a study of SMEs in affected the whole world, financiers had to raise
the financial crisis, the demand for investment the risk premium and formal requirements, which
loans decreased within an economic recession due make the money cost rise as well; impaired by a
to spare production capacities and a slow order low equity ratio of SMEs. In a financial crisis,
situation (DSGV, 2010, p. 28). While the demand equity equals safety. In Germany the average eq-
for investment loans decreases, the demand for uity ratio of SMEs in the trading sector was 2008
working capital loans rises in a recession. This 12.6% and in the producing sector 19.7% (DSGV,
is due to the fact that SMEs need to cover raw 2010, appendix p. 8-9). Medium-size enterprises8
material costs and some overheads by advance are known to have higher equity ratios and higher
payments. Due to a low cash flow, the need for inflexible overheads.
working capital loans rises. SMEs are often incorporated into a network
Concerning the interests of SMEs, it can be with other SMEs and LSE causing not only depen-
stated that an owner who manages an enterprise dencies, but also profits (e.g. higher purchasing
identifies himself to a wide extend with the power). The higher the dependency on one major
business and does not like to disclose business customer, the more similar is their economic de-
information. Therefore a confidential so-called velopment and the higher the necessity to adopt
house-bank7 with one assigned account manager capacity utilisation. Especially in manufactur-
is more favourable than different banks all having firms, the need for flexible and capable
ing the whole set of information. Especially in a technology (often CNC-machines, measuring
financial crisis, it can be important to build on a equipment) can cause the necessity not only to
long term relationship with a bank to soften monitor costs, but also financial reorganisation.
budget constraints (Revest, 2010, p.6). In general, Older technology with lower fix costs (e.g. costs
managers of SMEs have a good knowledge and for maintenance, electricity and tools) and higher
experience about their new investments poten- variable costs/ unit costs need to be replaced by
tial, whereas bankers might not be specialist in costly new technology with higher fix costs and
this particular field; making it more difficult for lower unit costs. To comply with capacity and
bankers to assess an investments risk. flexibility requirements the firm has not only to
There is a trade-off between the tax payment invest into new technology but also cover higher
and credit rating. While taxes might be reduced fix costs/ overheadsrequiring a sufficient cash
through the transformation of profit into so called flow. In times of an economic recession solutions
inventory provisions and accruals, the bank/ like credit factoring, diversified investments and
financier cannot assess the value of these posi- additional private capital can be very useful.
tions and therefore the credit rating downgrades According to Schneider (2004, p.8), most SMEs
as well. According to the opinion of an executive have low company capital [which] influences
of a leading German bank, foreign banks entered the credibility towards banks and investors. In
loan markets of other countries during the last case of Entrepreneurs the uncertainty about future
562
development of innovations makes the financing Central Bank Authorities are responsible for
unattractive to private investors According to macroeconomic services (monetary policy) as well
Moore (1993), financial constraints are the most as microeconomic services (support and control
significant barrier to growth. of financial market). Examples of Central Bank
Authorities are European Central Bank (EU),
Traditional Financiers Federal Reserve System (USA), Bank of China
(China), Bank of Japan (Japan) and Bank of Eng-
Traditional Financiers may vary within different land (UK). Not all Central Bank Authorities are
nations. In Scandinavian countries, Germany, dependent on governmental decision.
France and Japan especially bank financing repre- The banking system needs regulation due to
sents traditional financing. Especially innovation- many different reasons. One important reason is
financing dependents on the financial system the existing systemic risk (c.f. Thompson, 2004,
in a certain country (further reading in Revest, p. 339) which can arise when a bank has liquidity
2010, Financing technology-based small firms problems (like it happened to many banks in dif-
in Europe: what do we know? Pp.2). In order to ferent nations in the financial crisis in 2009). A
focus on Europe, banks are regarded as traditional structural key problem of banks is their balance
financiers. Banks are often defined as institutions between liabilities and assets. Banks liabilities
that have the permission to carry out regulated are liquid and their assets are not liquid due to
and controlled activities of accepting deposits problematic repayments at short notice. In case a
and executing loan transactions. They play an depositor get informed about an economic crisis
essential role in the economic cycle: Collecting of the bank institution or market, it is likely that
and administer money (deposit business) to in- he will withdraw his deposit at short notice, as-
vest it in other businesses (lending business); for suming it is safer not keeping it in the bank. This
the original purpose of a macroeconomic profit applies not only to one particular bank which
maximisation as well as an achievement of own is in trouble, but also to other banksas most
profit (depending on the purpose and type of depositors cannot differentiate between bank
bank institution). In addition, they provide pay- institutions and their economic wealth. This can
ment services like money changing and support lead to liquidity problems of banks and a sys-
of monetary transactions. Another service banks temic collapse, because even banks will refuse
provide is transforming assets in corporation with to lend money to each other. Therefore national
firms and investors acting as financial intermedi- laws define the bank legislation and policies for
ary (FI). General speaking, this works through the banking operations in each constitutional state.
aggregation and change on the asset side to create To mention some of them: Banking Act (UK)
a new product on the liability side9. Other key func- and Kreditwesengesetz (Germany). These laws
tions are managing risks (e.g. loan-, liquidity- and are being continuously revised by governmental
interest rate risks) and associated monitoring of institutions. A major aspect of banking regulations
borrowers; as well as the information processing. is the ratio of which loans are backed-up with
There are different types of financiers competing equity (e.g. Basel I-III10).
with each other. One example are the so called
invoice finance and asset based lenders, which Credit Rationing
provide services like factoring to firms in order
to support their maintenance of cash flow. These Since a credit is a non-uniform product, the demand
institutions, working as non-traditional financiers, and supply relationship is very complex- and so is
take over gradually market share from the banks. the relationship of lender and borrower. According
563
to Freixas (1997), instead of a graphical analysis can buy as many products as he wants as long as
looking at demand and supply, a new equilibrium he is willing to pay the price. Clower (1995, p.
concept is required to describe the output of a 311) describes this as the thick market hypothesis
competitive credit market; since the demand of the banking market. Depending on the pricing
and supply curve simple will not intersect with strategy of a company in the consumer market,
high-level interest rates. Furthermore, the level the product price rises usually when the demand
of interest rate is limited according to a banks is high. In order to pursuit profit maximisation,
interests (see section Types and phenomena of chronic excess demand should be avoided (Gow-
Credit Rationing). Assuming a borrower is of- land, 2010, p.1). To put it in Keynesian terminol-
fered a loan to a given interest rate, he cannot just ogy, which have nowadays perhaps even more
extent the amount of the loan in order to optimize general validity:
his marginal costbecause the lenders risk of
losing money rises with the amount lent. Therefore If we assume that the lending of money takes place
the equilibrium interest rate may be a nonlinear according to the principles of a perfect market,
function of the loan size. (Freixas, 1997, p. it is evident that, given the demand schedule of
138). The discussed influence of the interest rate borrowers, the effective bank rate and bond rate
on the demand of loans is called price factor. must uniquely determine the production of capital
In addition, there are non-price factors, like col- goods and hence, generally speaking, the volume
lateral requirements, influencing the likelihood of investment. So far, however, as bank loans are
of getting a loan granted. Credit rationing (CR) concerned, lending does notin Great Britain at
is a phenomenon that occurs ...if in equilibrium leasttake place according to the principles of
the demand for loans exceeds the supply at the a perfect market. There is apt to be an unsatis-
ruling price (interest rate). (Voordeckers and fied fringe of borrowers, the size of which can
Steijvers, 2005, p.2). In the literature the term CR be expanded or contracted, so that banks can
is not used in a consistent way. CR is referred to influence the volume of investment by expanding
describe the rationing of loans when looking at or contracting the volume of their loans, without
the inter-banking-relationship as well as bank- there being necessarily any change in the level of
customer relationship. Nevertheless, it has been the bank rate, in the demand schedule of borrow-
proven that CR has an impact on SMEs financing ers, or in the volume of lending otherwise than
opportunities (Voordeckers and Steijvers, 2005, through the banks. This phenomenon is capable,
p.2). In general it can be stated that the reduction when it exists, of having great practical impor-
of available loans reduces the availability of funds tance. (Keynes, 1930, vol.1, p.190)
for potential projects of SMEs due to the fact that
bank loan financing is still an important financing In contrast to a perfect market, the credit
source (especially in Europe). market is called thin market, where the bank
The characteristics of the credit market differ offers a price-quantity-package on a leave-it or
significantly from consumer market character- take-it basis... (Gowland, 2010, p.1). There are
istics covered in microeconomics. In the usual several reasons that justify why loans for business
consumer market (or perfect market), a monopo- customer are being rationed by a bank (three main
list seller can (simplified) sell as much products reasons are described in paragraphs 6.2.3).
as required as long as he is willing to lower the
product price. Simultaneously, a monopolist buyer
564
Types and Phenomena that carry out standardised test (e.g. Stress Test
of Credit Rationing of European Banks in 2010) and define rules for
banks to achieve transparency for the customers.
As Pawlowska (1997, p. 1-8) points out, there The Bank for International Settlements (BIS) and
are different types of influences shaping the loan the Committee of European Banking Supervision
contract: Interest price terms, non-interest price (CEBS) have achieved indicators for a banks
terms and non-price terms. Interest price terms financial health. One example is the rules on
are defined by the interest rate. Non-interest price the minimum value of a banks capital (Canals,
terms contain collateral, compensation balances, 2002, p.307).
equity requirements and commitment fees. The Another problem related to AI is the so called
third type of influence on the loan contract deals Moral Hazard (MH) problem. It can be explained
with standards of creditworthiness, long-term cus- as the consequential choice of a higher risk project
tomer relationship, borrowers intended loan use with higher expected payoffs. Most textbooks
and restrictive covenants. Varying the interplay of (e.g. Mullineux, 1992, p. 71-72) explain the MH
influencing aspects leads to two different catego- problem with the underlying assumption that a
ries of CR: The so called weak- or non-interest- borrower can go bankrupt in case of project fail-
price CR appears when the interest rate is kept ure. Thus the borrower will at most pay back a
constant but the non-interest price terms increase. proportion of the loan (depending on the limited
The other category of CR is Strict- or non-price liability). This assumption might be applicable
CR which is based on the idea that interest rate to very large projects requiring a large loan. Due
and non-interest price terms are kept constant to the fact that the long term relationship with a
while non-price terms increase. Gowland (2010) bank (especially house-bank relationship) and a
suggest more general to differentiate between two borrowers credit history are important aspects
additional types of CR: Type I rationing occurs if for the availability of reasonably priced loans
a bank grants a customer just a proportion of the in the future, it should not be the original aim
requested loan. Whereas type II rationing occurs for a borrower to use loans with higher cost for
when a banks refuses to grant a loan to a customer higher risk projects. Furthermore, SMEs often
at all; even when the customer has apparently the have multiple small projects that do not lead to a
same profile like another customer who has been bankruptcy on its own and therefore the borrower
granted a loan. (SME) will still have to pay back high cost loans
The so-called Asymmetric Information (AI) accepted for higher risk projects. Nevertheless, a
problem occurs between the customer and supplier start-up company financing an innovative idea by
of financial services (Canals, 2002, p. 307). The the means of a higher cost loan, the assumption
bank acting as a lender might not know the real that the borrower will go bankrupt might be ap-
risk when it grants a loan to its customer and a plicable, supposing the bank grants at all a loan
depositor might not be fully informed about the to a new high risk project.
real risk of losing deposited money. In both cases The problem with rising interest rates above
there have been solutions developed to solve or the bank-optimal interest rate (where the banks
to downsize the insecurity. First for the lenders average return is the highest) is the attraction of
(bank) security, CR standards (Basel I - III10) higher risk borrowers (Adverse Selection effect).
and continuous analysis of balance sheets have According to Voordeckers and Steijvers (2005, p.2)
been developed in order to collect, compare and borrowers that know their limit of capital costs
categorize companies. Concerning the other will reject loans with higher interest rates, but
aspect of the phenomenon, there are institutions entrepreneurial SMEs or established companies
565
with higher risk investments are attracted. This In the inter-banking businesses CRAs play an
effect leads to a lower average return for the lender important role, whereas in the bank-consumer
and makes the lending business less attractive. (private and business) businesses this third-party-
service is not as important, due to the fact that
Risk Assessment and Credit Rating banks have their own credit rating processes.
The so called credit crunch is a phenom-
The risk assessment and risk management is very enon describing a situation where hardly any
important when it comes to financing innovations. loan (investment loan and working capital loan)
To assess the risk taking behaviour of entrepre- are available to enterprises. According to the
neurs (Pawlowska, 1997) it is important to relate DSGV12 (2010, p. 28), the rising risk premium
it to the offered loan conditions. As Pawlowska proofs that the credit market works efficiently
points out, loans offered to higher interest rates concerning risk differentiation. Furthermore, the
are more frequently accepted by enterprises that existence of difficulties to obtain a loan in single
are funding higher risk innovations and providing cases has been confirmed, but a general credit
lower assets than the inverse. Established enter- crunch had not taken placeaccording to Starke
prises with higher assets and innovations of lower (2010). Due to the fact that the real economy and
risk are more likely to avoid high interest rates. financial markets have international crosslink, the
Furthermore, the risk premium naturally rises recession was imported even to countries with a
within a financial crisis. The banks need to have healthy, stabilizing financial market structure, ac-
their own rating system in order to judge invest- cording to DSGV. Such a credit crisis is a stress
ments. In this example, lending money to a SME test for the lender-borrower relationship (e.g.
can be seen as the investment. Therefore the bank with house-banks), proving the dependence on a
rates the lenders ability to pay back the borrowed healthy relationship. Sometimes even a companys
money including a provision. Every bank has its survival can depend on the house-bank relation-
own rating system, criteria as well as grade system. ship, because the banks has detailed information
According to an in-depth interview with Starke as well as experiences about the potentials and
(2010)11, rating systems are concerned with loan weaknesses of the business and might be the only
behaviour, account behaviour, financial analysis, available financier.
master data, external data and qualitative factors
(grouping). However, a more detailed description Non-Traditional Financing
of the credit rating process is described later on.
Credit rating agencies (CRAs) are profit-orient- Expanding firms (especially entrepreneurial busi-
ed private companies offering financial services. nesses) are likely to utilise non-traditional financ-
The main service is the assessment of companies ing means after the personal resources, such as
from different industries as well as states to assess partners share, friends and family credits (cradle
its financial situation and creditworthiness. The equity), are utilized (Benjamin, 2005). Figure 1
service helps investors and financiers to obtain presents an overview of the major financiers for
an impartial impression of the likelihood that SMEs. Some of the non-traditional finance op-
an investment succeeds with a profit. Nowadays tions are equity financing through Venture Capital
ratings are a substantial subject to finance- and firms, Business Angels13 and governmental loan
banking regulations. There are just a number of guarantees. As Benjamin points out, ...early-
CRA which are allocated by financial institutions stage ventures have the best chance for funding,
like banking supervisions. survival, retention of a larger share of venture
ownership and control, and long-term success by
566
developing an efficient capitalization strategy to early. (Barnes, S. in Tidd, J. and Bessant, J. (2009)
find and approach Angel Investors. (Benjamin, Managing Innovation: Integrating Technological,
2005, P. XXXVIII). According to Metrick (2010, Market and Organizational Change, pp. 446-447)
p. 4-7), so called Business Angels use their own
capital and tend to focus on younger companies in Private Equity and Mezzanine
an earlier stage with smaller investments. Venture Financing for Unquoted Firms
Capital firms on the other hand, tend to focus
on larger firms that are easier to exit and to take In order to stabilize a business and make it
over some control (usually taking over 1 board economically sustainable, the equity ratio is an
member position). Both financiers can help to important ratio. A major factor, influencing the
boost product innovations or existing businesses ability to get funds (through an improved credit
by providing Value-Added Services like using rating) and overcome a credit crunch, is an equity
their contacts and experience in development, buffer. The equity ratio is also an indicator show-
managerial control and distribution. ing that a business grows naturally by its own
A major issue for both groups (Venture Capi- funds. A simplistic definition of private equity as
tal firms and Business Angels) are information providing ...long-term, committed share capital,
barriers (Mason, 1992). The firms owner needs to help unquoted companies grow and succeed is
information about the expertise, experience and given by Cumming (2010, p. 54). Nevertheless,
contacts of the future shareholder and the Business in the literature the range of application for the
Angel needs to assess the risk of investment. Ac- term private equity is however much wider than
cording to Goff and Cohen (2010) companies covered by this given definition. Fraser-Sampson
even use other (non-traditional) funding channels (2010) points out the problematic use of using the
to refinance bank loans. Due to a higher equity term equity and unquoted company by asking
ratio, the financial structure and a firms Credit the following questions: What about investments
Ration is improved. which are structured as convertible debts... [and]...
Thus, venture capital investment provides What about companies which are publicly listed
the cash to drive innovation forward within small but are taken private? (Fraser-Sampson, 2010,
companies at a faster rate than would ordinarily p.2). These questions lead to the following cat-
be possible and it provides a rigorous and ongoing egorisation of private equity according to Wickel
monitoring process that responds by killing failure (2010, p. 20): The first category is direct invest-
ing, which occurs either by an increase of capital
or acquisition of shares. The second category is
Figure 1. Major financiers of SMEs Mezzanine capital occurring by a typical or
atypical silent partnership, subordinated loan or
profit-sharing rights. Direct investing offers long-
run equity from a determined partnership with a
financial partner14. In contrast to bank financing
with debt capital, there are no securities required
and the financial partner will not just share prof-
its, but also losses. The financial partner has the
right to a say in monitoring-, supervisory- and
affirmative -matters depending on the negoti-
ated terms of contract. When the predetermined
target is reached, the financial partner has the
567
option to sell its shares to the original owner or SOLUTIONS AND

other investors (exit strategy). Mezzanine capital RECOMMENDATIONS
is generally speaking a mix of equity and debt,
therefore Mezzanine equity and Mezzanine debt The dependence on short-term bank loans seems
can be legally differentiated. When capital is to be a major problem of SMEs especially in
regarded as equity rather than debt the interest Europe. In a financial crisis, the credit conditions
rates are higher, but the credit rating improves. In are being adopted for instance by the means of
a silent partnership the interest rate and the degree risk premium and collateral requirements. Other
of transparency offered by the firms management alternatives to bank lending should be taken into
are relatively high. To sum up, Mezzanine capital consideration to reduce this dependence. Nev-
is a financing tool that can improve a firms capital ertheless, bank financing tend to improve by a
structure by the right balance of debt and equity; further developed rating system; looking at a single
depending on the financial partners preferences organisation rather than generalising it as part of
for risk and control. a branch. Therefore SMEs with a unique selling
point or product innovation are more likely to be
Online Marketplaces for Direct Loans granted a loan. However, there are alternatives like
Direct Loan Markets and Equity and Mezzanine
New types of short-term SME financing are Financing. A main problem making financing of
direct loans from online marketplaces or online SMEs more difficult is the information barrier.
social lending communities. One example of With the tax- saving transformation of profits
such an online marketplace for businesses in the into inventory provisions and accruals, the assess-
UK is Funding Circle which has been launched ment of these positions and a companys credit
in August 2010 (Financial Times, Companies rating is sometimes rather difficult. To improve
UK, 13.08.2010, p. 14). This platform offers a companys bank lending, a reliable house-bank
1-3 year loans from 5,000 up to 50,000 for relationship, in which a borrower complies with
expected interest rates of 6-9% (Fundingcircle. the information assessment requirements, has to
com15, 14.08.2010). With lower total cost of fi- be established. Similar to bank financing, direct
nance (annual review fees, monitoring fees and investments and equity financing require a man-
security fees) banks can be undercut (Funding agement of information and a transparent decision
Circle, 14.08.2010). Nevertheless, only borrowing making structure to be attractive to investors. Once
companies that pass the initial accreditation as- this information barrier is vanquished, the SME
sessment can participate; which make this service can profits from synergy and expertise to support
appear in a similar light to the lending service of its strategic development. The financial structure
banks. The default rates are expected to be only and credit rating can be improved by Equity- and
between 0.6% and 1.5% according to Funding Mezzanine Financing.
Circle. Furthermore, they are classified in risk
categories (C, B, A, A+). The base of information
about companies is according to Funding Circle FUTURE RESEARCH DIRECTIONS
similar to the ones that banks use (e.g. Experian).
Private lenders, as the source of financial funds, Future research should address the problem of
cannot just choose the sectors they want to invest achieving transparency of risks and opportuni-
in, but also diversify their investment to reduce ties related to innovations in the early stage.
the overall risk. Furthermore transparency is needed in the fi-
nancial structure and evaluation of inventory and
568
accruals. A survey (e.g. an in-depth interviews maximise the profit from the lending business, a
with manager of SMEs) could help to clarify bank will define and adjust lending conditions.
why traditional financing options are more em- There are 3 major phenomena that occur in the
ployed than non-traditional; with a differentiation credit market: Asymmetric Information, Moral
between European countries and the USA. In Hazard, and Adverse selection. The Asymmetric
order to improve the accuracy and efficiency of Information problem occurs when the bank acting
governmental support programmes, new branch as a lender does not know the real risk of losing its
characteristics on the base of the Bolton Report deposited money when granting a loan. Therefore,
should be defined. Credit Rationing standards (e.g. Basel I-III 10) have
been developed to reduce this risk. Another phe-
nomenon is the so called Moral Hazard problem.
CONCLUSION A borrower will consequently choose the higher
risk project with higher expected payoff when the
This chapter presented various definitions of loan costs are high as well. The assumption that a
SMEs, with qualitative (personalised manage- borrower is likely to take the risk of going bankrupt
ment, market share, independence of decision in case the project fails and will therefore not be
making) as well as quantitative (e.g. number of able to payback the loan; is limited applicable.
employees and turnover) characteristics. With a SMEs have to maintain a long run relationship
focus on various markets, different approaches to with their so called house-bank and have often
differentiate business types have been described. multiple projects. However, for an entrepreneurial
Different sectors do not only have different business the success of the first projects might be
numbers of employees and turnover, but also critical and therefore the Moral Hazard Problem is
differences in the management structure and applicable. The third phenomenon is the Adverse
decision making process. It can be concluded Selection effect, which states that an established
that the term SME is defining a diverse group of firm which is aware of its appropriatecapital costs
heterogeneous firms. Due to the fact that firms will reject a loan if the lending conditions do not
sometimes source-out departments or cooperate reflect the perceived project risk. Therefore only
closely with legally independent units, a low level firms with higher risk investments are attracted.
of differentiation can adulterate statistics about The loan contract is influenced by: Interest
SMEs which are based on threshold criteria (like price terms, non-interest price terms and non-
turnover and number of employees). Therefore it price terms. Interest price terms are defined by
is important to look at legal units with a clearly the interest rate. Non-interest price terms contain
defined structure; where allocation of resources collateral, compensation balances, equity require-
and financial ratios are possible. ments and commitment fees. The third type of
The major financiers of SMEs are Private influence on the loan contract deals with standards
Investors (e.g. Business Angels), Private Banks, of creditworthiness, long-term customer relation-
Non-Profit Banks, Governmental organisations ship, borrowers intended loan use and restrictive
(Funds, Guarantees) as well as Asset and Invoice covenants.
Financiers. Due to the fact that bank financing The credit rating of a firm is crucial because
is still very common for European SMEs, the in some cases it can decide about the existence of
rationale of credit rationing in the credit market the firm; due to the dependence on bank financ-
has been described. In contrast to the consumer ing. The credit rating system of banks rates the
market equilibrium, the credit market equilibrium lenders ability to pay back the borrowed money
is not defined by demand and supply. In order to including a provision. Even though rating- and
569
grade systems differ from each other, most of the Borger, K., & Kiener-Stuck, M. (2010). Die
systems take loan behaviour, account behaviour, konjunkturelle Lage kleiner und mittlerer Un-
financial analysis, master data, external data ternemen, Konjunkturelle Stabilisierung im Mit-
and qualitative factors (a firms grouping) into telstand Aber viele Belastungsfaktoren bleiben.
consideration. Mittelstandsmonitor 2010 Jaehrlicher Berich zu
Non-traditional financing is especially at- Konjunktur- und Strukturfragen kleiner und mit-
tractive to expanding firms, but also firms with tlerere Unternehmen. Frankfurt am Main: KfW,
insufficient cash-flow. Some of the non-traditional Kreditreform, IfM, RWI, ZEW, p.1-27
finance options are equity financing through
Bridge, S., ONeil, K., & Cromie, S. (2003).
Venture Capital firms, Business Angels and gov-
understanding enterprise, entrepreneurship and
ernmental loan guarantees. However, the limited
small business (2nd ed., pp. 276-277). Basingstoke,
use of non-traditional financing can be explained
UK: Palgrave Macmillian Ltd.
by the organisational structure of a one-man-
show often to find in SMEs and a conservative Canals, J. (2002). Universal banking: Interna-
attitude towards publishing confidential business tional comparison and theoretical perspectives
information (information barrier). Further details (p. 307). Oxford, UK: Oxford University Press.
about SMEs and non-traditional financing are
Clower, R. W. (1995). Economic doctrine and
described in the next chapter.
method: Selected paper of R. W. Clower (p. 311).
US: E.Elgar.
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Lords: Vol. 707, Column 1223 (part 1.2). The a situation where hardly any loan (investment
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Verheugen, G. (2005). The new SME definition,
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rationing for SMEs in the corporate bank credit in an early stage and being accountable for the
market of a bank-based economy (p. 2). Belgium: inherent risk.
Limburgs Universitair Centrum, Department of House Bank: A bank that maintains a long-
Business Administration. Retrieved on Septem- term relationship with a certain firm. Financing
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Venture Capital: Venture Capital firms tend
Wickel, H.-P. (2010). Wie Sie neue Kapitalquellen
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anzapfen. Das Unternehmermagazin der Haspa,
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3/2010, pp.18-21ff
board member position).
KEY TERMS AND DEFINITIONS ENDNOTES
Adverse Selection: The problem with rising 1

IfM stands for Institut fuer Mittelstands-
interest rates above the bank-optimal interest rate forschung a German institute carrying out
(where the banks average return is the highest) is SME-research (Hauser, 2005).
the attraction of higher risk borrowers (Adverse 2
ISD: Investment Service Direct
Selection effect). 3
UCIT: Undertakings for Collective Invest-
Asymmetrical Information: The so-called ments in Transferable Securities
Asymmetric Information (AI) problem occurs 4
European Commission quoted in the fol-
between the customer and supplier of financial lowing parts as EU-Commission
services (Canals, 2002, p. 307). The bank acting 5
Hauser: Member of the IfM Bonn
as a lender might not know the real risk when it 6
For further reading: Reichwald, R. et al in In-
grants a loan to its customer and a depositor might formation, organisation and management,
not be fully informed about the real risk of losing 2008. Springer-Verlag Berlin Heidelberg, P.
deposited money. 211-213
Business Angel: Individuals investing in high- 7
House-bank: A bank that maintains a
risk-investments in order to gain a profit and/or long-term relationship with a certain firm.
to develop a strategic association. In the US it is Financing decisions of the bank are based
known as Angels. on experiences and insight-knowledge of
the firms business.
572
8
Medium-sized Enterprise: Annual turnover 12
DSGV: Finanzgruppe Deutscher Sparkas-
of 100-500 million sen- und Giroverband
9
Further reading: Microeconomics of banking. 13
Business Angels: Individuals investing in
Freixas and Rochet 2008, p. 4 high-risk-investments in order to gain a profit
10
Basel I, Basel II, Basel III: Banking standards and/or to develop a strategic association. In
defining for instance to what degree a bank the US known as Angels
loan has to be backed up with equity; for 14
Financial partner is sometimes called Inves-
security reasons tor or LP- Limited Partner (US)
11
Business Customer Account Management at 15
A video explaining how Funding Circle
the Commerzbank in the following quoted works is available at http://www.fund-
as Starke. ingcircle.com/
573
574
Chapter 31
Innovations and Financing
of SMEs, Part II:
Case Study of German SMEs in 2010
David S. Walker
Horst-Hendrik Scholz
ABSTRACT
Financing is one of the most critical boundaries for the establishment and growth of a Small and
Medium-sized Enterprise: SME (Moore, 1993). This chapter describes traditional and non-traditional
financing opportunities for SMEs in Germany by focusing on its applicability. The disclosure of financial
business information and giving a say to an equity financier is a difficult topic for owners of Small and
Medium-sized Enterprises (SMEs), because these companies are often run as a one-man-show (by a
single manager) and this person identifies itself with the company. The request for external funds is
in that perspective still regarded as a disability of a business to be self-financed. A comparison of the
organisational structure of a SME and that of a Large Scale Enterprise (LSE) reveals the structural
weaknesses in terms of research and development (R&D) activities. While LSE have an extra depart-
ment, budget and procedures to develop product and process innovations similarly to a knowledge push,
in SMEs, innovations are often originated from customerssimilarly to a need pull process (Tidd &
Bessant, 2009). Furthermore, CEOs and customer contribute to a great extend to innovations in SMEs
(BDI, 2010). The results of an online-based survey presented in the BDI-Mittelstandspanel 2010, show
that less than 13% of innovations are originated by external scientists, R&D organisations and consul-
tants. This proofs that external R&D sources (to compensate missing internal resources and structures)
are rarely employed; impeding or slowing down the development of innovations.
DOI: 10.4018/978-1-61350-165-8.ch031
Innovations and Financing of SMEs, Part II
INTRODUCTION BACKGROUND
There are various financing options available to The financing sector in Germany is highly com-
Small and Medium-sized Enterprises (SMEs) petitive with the three types of banks (private
that can be classified generally in traditional and banks, banks governed by public law and coop-
non-traditional financing as introduced in the erative banks) trying to maintain and gain market
previous chapter. Due to a rather conservative share and the non-traditional financiers (private
attitude towards dependence on shareholders, equity and debt financiers). Therefore, the credit
non-traditional financing options (e.g. private conditions have been favourable in Germany
equity) are not very common within SMEs (es- during the last decades. CEOs of SMEs tend to
pecially in Europe); aggravating the amelioration have a conservative attitude concerning addi-
of the companys financial structure and therefore tional shareholders and financial independence.
creditworthiness. In order to get a rather holistic Therefore, medium- and long-term bank financ-
view, a case study based on a survey presents the ing has been in Europe (especially in Germany
structural development and economic situation of and France) a major financing option for SMEs.
SMEs- and its financiers in Germany. However, with respect to the financial crisis of
German Banks offer SMEs rather medium or 2008/2009, the credit conditions (especially risk
long-term bank loans than project related loans. premium) changed, impeding the availability of
Therefore, the control and monitoring of banks loans. While financiers accuse SMEs for having
over the efficient use of borrowed money is low a weak financial structure, SMEs representatives
compared to project financing. Looking at finance accuse the financiers (especially banks) for the so
as an Organisations Creative Area (OCA), called credit crunch with unacceptable credit
non-traditional financing can be more suitable to conditions.
develop core competencies and promote product
innovations. Sometimes they are even the only
financial source available when it comes to high- SME-FINANCING AND INNOVATIONS
risk project financing. In order to support SMEs
and generate a high profit, Private Investors are Financial Resources and
more likely to take part in project related (e.g. Innovation Boundaries of SMEs
for a product innovation) financing. The level of
control and monitoring, in order to ensure that The BDI1 announced in its latest report (BDI,
a product or service innovation is turned into 2010), based on an online survey, the developments
money, is high. By the financial and managerial and weaknesses of German SMEs in 2009 and
support, Private Investors especially promote expectations for 2010. These weaknesses include
the knowledge push innovation model. Due to innovative boundaries, based on fundamental
lack of resources, the knowledge push innova- problems of the organisational structures and re-
tion model is rarely used compared to the need sources. Therefore, finance can also be regarded
pull innovation model in which the innovation as an Organisations Creative Area (OCA) that
is originated from customers. helps develop core competencies especially with
the support of Private Investors, controlling and
monitoring the realisation of product and service
innovations.
575
The funding of a SME is regarded as one of the last 2 years- one product innovation. In order to
most difficult process from the management point assess the innovative capability of SMEs under
of view. Because the owner or manager identifies existing structures, it is worth it to have a look
itself with the business, asking for external funds at the different types of innovations. Concerning
indicates helplessness and dependence on others. process innovations, a third of consulted SMEs
As discussed in the section Financial interests apparently have been successful within the last
and characteristics of SMEs of the previous sec- 2 years (BDI, 2010, p.25). The business models
tion, there are several trade-offs between financial of most SMEs have evolved within time, but are
figures. One example for a trade-off is the reduc- based on traditional management ideas and struc-
tion of tax payments and establishment of a good tures (Figure 1); therefore, a strategic reorientation
credit rating. Additionally, the financier requires an and the receptiveness towards non-traditional
extensive disclosure of detailed business informa- financing are rarer to find. In addition, every new
tion, which is sometimes perceived as a potential reorientation is associated with a risk of failure.
risk of plagiarism due to changing account manag- According to the report, just 1 out of 200 ideas
ers of banks and their wide range of customers and are successful on the market.
financial services. Furthermore, the development Innovation ideas originate from a diverse range
of interest rates and lending conditions as well as of sources. The main source of innovation in
the term of loans are important factors to take into established SMEs (in contrast to entrepreneurial
consideration when making a financial decision. businesses) are customers and suppliers. The
As presented in the BDI-Mittelstandspanel (2010, customer and supplier (BDI, 2010, p.25) initiate
p.19) 71.8% of SMEs have trouble with getting for instance in Germany on average 64.4% of
new credit lines granted, 48.35% complaint about innovations. In contrast to LSE, where resources
strict documentation and safety requirements when enable knowledge pushes, in SMEs, innovations
applying for a loan, 55.85% gained a lower credit are more likely originated from customers in a
rating in 2009 and just 16.5% of SMEs have an need pull process (Tidd & Bessant, 2009, pp.232-
own budget for R&D. Nevertheless, most SMEs 236). In SMEs where the CEO is involved in the
do R&D activities within the framework of cus- product- or service development process and
tomer orders (BDI, 2010, p.25). The insufficient customer relationship management, this person
innovation performance of some SMEs is not only causes major innovative stimulation. Furthermore,
caused by a lack of external funds, but also by on average 55% of innovations are originated
detrimental organisational structures. Just 16.5% from the CEO. Other external sources on the
of SMEs have a special budget to execute R&D other hand are rarely used. Scientists and R&D
(BDI, 2010, p.25). The establishment of a R&D organisations as well as external consultants ac-
department, definition of its responsibilities, sys- count for less than 10% each for innovations.
tematic collection and evaluation of innovative Compared to LSE, employing R&D staff, this can
ideas and the method budgeting are regarded as be regarded as a competitive disadvantage or
useful auxiliary activities for innovations. respectively potential.2
Innovation Sources of SMEs Historical Background

of German SMEs
There are three main areas where innovations can
take place: Product, Process and Business Model. Due to socialistic influences, SMEs located in the
According to the BDI (2010, p.25) four out of east of Germany have been challenged to rebuild
ten firms are working on- or released within the old company structures from the time before the
576
Figure 1. Time-to-market failure
German Democratic Republic3; or create com- feisenbank) supported SMEs by lending small
pletely new company structures. During the era loans. Larger loans mainly came from official
of the DDR, small enterprises were nationalised banks of the Lnder (OECD, 1982).
and forced into central planning structures, which In the western parts, the Federal Ministry of
were rather ineffective; in terms of not only in- Economics and Technology (Bundesministerium
novations and expansion plans. Limited foreign fr Wirtschaft und Technologie) launched a Pri-
trade caused a lack of spare parts for machines, mary Innovation Scheme from 1972 to 1979 by
which blocked growth and innovations down. Due spending 114 million on 230 projects covering
to the fact that unemployment was higher and the 50% of high risk new technology costs. These
minimum wage lower than in western parts, SMEs loans are repayable if the projects have been
needed help from the federal- and Lnder (states) successful (OECD, 1982). Additionally, the
government and banks to finance the development government-backed risk capital bank (Wagnisfi-
of companies in the post-war period. According to nanzierungsgesellschaft) bought shares of firms
Mullineux (1994, p.7), the government provided with a minimum participation of DM4 400,000 per
SMEs in the east with investment and depreciation firm. Furthermore, Private and State supported
allowances. Additionally, local saving banks and participation banks (Beteiligungsgesellschaften)
community-type banks (like Volks- and Raif- provided risk capital to SMEs. Low interest rate
577
loans have been offered to SMEs through the Eu- in the east and just 21% of firms in the west use
ropean Recovery Programme (ERP) Funds. This public funds. This phenomenon can be explained
budget was DM 500 million in 1978. In 1979, the not just by the increased availability of subsidies
federal Government aid programme raised capital in the east, but also by the fact that the need for
with low interest rates in order to fund SMEs for 20 subsidies is even 20 years after reunification
years. The so-called Lnder (states) offered capi- higher. The government funded and supported
tal guarantee schemes backed by official Lnder Universities and Technical Universities in rural
banks supporting new companies. A programme areas (especially in the East of Germany) to provide
by the Ministry of Economic Affairs announced companies with highly trained staff and promote
in 1979 the law, that SMEs with a lower turnover innovations (Broekel, 2009, p.7). Nevertheless,
than 150 million and less than 1000 employees can most eastern states suffer from movement of la-
subsidise 40% of R&D cost (up to DM 300,000) bour from east to west and demographic changes.
and 25% of excess costs (up to DM 400,000) per According to a newspaper article by Astheimer
year. In 1980, the budget was increased to DM (FAZ, 05.08.2010, no.179, p.10), the highest pre-
390 million. To sum up the development of SMEs dicted emigration rate of 25% until 2025 will take
in east and west it can be stated that profited from place in parts of Saxony-Anhalt and will cause a
a diverse range of supporting programme in the critical shortage of specialised employees in this
post war period. The following paragraph will area. According to Haselhoff (FAZ, 05.08.2010,
present the current situation of the Mittelstand5 no.179, p.10), 90% of 59,000 firms have less than
in Germany mainly influenced by post-war sup- 20 employees and a low wage level compared to
port programmes. the western standard. Therefore, many specialised
and trained workforces emigrate to western states.
Regional Differences of Figure 2 shows the median7 equity ratios of
SMEs in Germany different size classes of the non-financial industry
in east and west of Germany. With an average
Analysing SMEs in Germany, two regions with value of 9.5% in the east and 6.6% in the west,
similar SME-patterns can be distinguished: The SMEs in the east have shown higher equity ratios
new- and old federal states of Germany6. Addition- during the last years. Since 2007 the equity ratio
ally, Baden-Wrttemberg and Bavaria (as states of increased minimal stronger in the east than in the
the west) should be mentioned as major locations west. When it comes to investment decisions,
for the engineering industry, mainly characterised SMEs located in the so-called neue Bundesln-
by suppliers (SMEs) for the automobile industry. der (literally translated New States which are
Furthermore, the Rhine-Ruhr metropolitan region located in the east) tend to regard the necessity of
with services in the financial, insurance, high tech liquidity protection as more important than SMEs
and multimedia sectors has the third highest GRP in the west (Boerner, 2008, p. 8). The equity ratio
in the EU (Eurostat, 2010). Furthermore, the city- is a major part of quantitative factors influenc-
state Hamburg has one of the biggest harbours in ing a firms Credit Rating and therefore access
Europe and is an important place for the aviation to bank credits. A higher equity ratio indicates
industry As described in the previous paragraph, a better financial situation and a better ability to
SMEs in the east have evolved their organisational overcome a crisis. Presumably, the recession will
structures differently due to socialistic influences have an impact on the more current upcoming
and make still more use of governmental subsidies. equity ratios. Due to the fact that the recession can
According to Boerner (2008, p.8) 49% of firms be regarded as an imported recession, businesses
578
which are more focused on the domestic market The German Banking System
(like many businesses in the east) will be belated
affected from the recession (DSGV, 2010, p. 55). Banking systems have different structures accord-
In the western states, the automobile industry is a ing to the history and needs of nations. In Germany
very important sector. LSE in this industry are very there is a system based on three pillars (Figure 4).
export oriented and therefore subject to economic Private Banks as one pillar of the banking
fluctuation. This fluctuation has a strong impact system aim at a profit maximisation; serving either
on many SMEs which are supplier of LSEs. private- or business customer. Their core busi-
The Net Profit (NP) ratio8 is, unlike the eq- nesses are depositing- and lending. Banks gov-
uity ratio, a figure direct linked to the economic erned by public law, in contrast to private banks,
situation of a business. As shown in Figure 3, the do not aim at profit maximisation but are subject
decrease of NP ratios since 2006 indicates the to governmental guarantee schemes to support
effect of the recession clearly for all size classes businesses. Especially during the recovery after
of the non-financial sector in east and west. WW2 or in a financial crisis, these institutions
Not just SMEs, but especially larger companies play a vital role. Due to the fact that major Private
in East Germany have problems with their net Banks, small Private Banks, credit associations
profit ratios. This can be explained by a relative and state banks all target business customer, there
increase of material and labour costs during the is a high competitive pressure arising leading to
last years (Plattner, 2008, p.11). However, today relatively low prices for banking services in Ger-
there are many successful and specialised firms many. On the other hand, the system approved its
in the east; closing the gap between the two areas cushioning effects in the financial crises and re-
continuously. cession 2009 thanks to different functions and
diverse product/service portfolio of each bank
type (Starke, 2010). The small local banks gov-
Figure 2. Development of equity ratios (DSGV, 2010, appendix p. 5)
579
Figure 3. Comparison of net profit ratios (DSGV, 2010, appendix p. 10)
erned by public law (Sparkassen and Volks- The Credit Rating Process
banken) are serving local companies and because
of their independence from the international bank- The banks need to have an own rating system
ing business, they are less affected than other to judge investments. In this example, lending
larger bank institutions. Some larger banks have money to a SME can be seen as the investment.
to revise their risk assessment methodologies Therefore, the bank rates the lenders ability to pay
because of the credit crunch and low lending costs; back the borrowed money including a provision.
in order to be able to target new customer. Serv- Every bank has its own rating system, criteria,
ing private-, business-, and corporate customer, and grades. Nevertheless there are institutions
large private banks (also called universal banks) like the Initiative Finanzstandort that provide
helped to get through the financial crisis. Never- reference and comparability information. At
theless, some institutions needed governmental the beginning of every relationship between the
help. business customer and banks, the customer (bor-
rower) needs to offer information to issue a file
Figure 4. Three- pillar based structure of the German Banking System
580
generated by a rating programme. According to the corporate structure and dependence on linked
an executive of a leading German Private Bank, organisations or owners having a right to take or
the rating programme can consist of the follow- influence decisions. If the company is a subsidiary
ing modules: Loan behaviour, account behaviour, of another company, it is important to look at the
qualitative factors, external data, finance analysis level of dependence on the holding company. If
and master data. The Finance analysis is based the dependence is strong and the subsidiary is
on collected and automatic evaluated balance strongly integrated, the credit rating of the hold-
sheets. Due to changing financial ratios, a certain ing applies to the subsidiary as well. A subsidiary
economic development can be interpreted. In order which is rated as weakly integrated, gets its own
to execute such a financial analysis, at least two credit rating. An additional agreement to improve
annual balance sheets are required. Key figures (or rather not to adulterate) the credit rating, is
are equity ratio and Earnings before Interest and the agreement of the transfer risk. This agreement
Taxes (EBIT). The account behaviour is dealing has the advantage, that a bank lending a loan to a
with the customers overdraft history, capitalisa- company has the security to refund itself by the
tion of credit line and booked turnovers. Master central bank. Therefore, the company (borrower)
data is set of information put together by a key needs also to provide the central bank with its
of professional categories (according to the balance sheet as a security. In case the borrower
industry of customer), evaluation of industrial disagrees, the credit rating slightly adulterate, be-
sector, as well as the length of customer rela- cause it is more difficult for the bank to refinance
tionship and the time that the company is on the itself. The firms credit rating can be represented
market. When judging about short- and long-term by a range of grades between 1 and 14 or 1 and
loans, the behaviour of borrowers is particular 6. Each grade represents a certain Probability of
of interest. Furthermore, qualitative factors are Default (PD) for a company with an investment
being judged by an experts evaluation of the project (Table 1).
market, competition, and management. The last Additional to the working instructions accord-
module is presented by external data, which are ing to the final score of the rating, some banks
information from other financial service provid- have superordinated working instructions. Ac-
ers like Kreditreform. All six modules are being cording to Starke (2010), an example for such
evaluated according to its importance to generate instructions would be an industry-traffic-light-
a result that gives an approximate value. Even if schematic, where certain industries have a red
the business itself generates attractive financial light; meaning they are not being granted financial
ratios, the Master data factor, which judges for services (no matter how good the credit rating
instance the companys industry, can influence score is). The idea is to reduce the overall Prob-
the result towards a low credit rating. According ability of Default concerning payback of loans.
to Starke (2010), previous rating systems used to This is a problem for companies in the industry
evaluate financial ratios with qualitative factors that have loyal customers and a product with a
each with a fixed weighting. For example, all fi- unique selling point to generate profit even in
nancial ratios account for 85% and the qualitative difficult times. Utilizing an industry-traffic-light-
factors for 15% of the overall score. However, in schematic can lead to a loss of profit; therefore
some cases it is possible to change the credit rat- the rating systems are getting more precise focus-
ing manually (known as overruling) to either ing on individual firms rather than just branches.
improve or adulterate it; which of course requires
documented rationales. The next important step of
current credit rating processes is the evaluation of
581
Table 1. IFD rating scale in Germany (Reichling, 2007, p. 96)
IFD-rating-level Deutsche Bank Commerz-bank Dresdner Bank Hypo-Vereinsbank PD-Area

I iAAA to iBBB 1.0-2.4 1 to 5 1+ to 3 Up to 0.3%
II iBBB to iBB+ 2.6 to 2.8 6, 7 3- to 4- 0.3% to 0.7%
III iBB 3.0 to 3.4 8 4- to 5- 0.7% to 1.5%
IV iBB to iB+ 3.6 to 3.8 9 (or 10) 5- to 6 1.5% to 3%
V iB to iB- 4.0 to 4.8 11 (or 10) 6 to 7 3% to 8%
VI iCCC and more 5.0 and more 12 to 14 7 and more 8% and more
Survey to Assess the Financial all theories presented in literature and secondly
Structure and Financing of SMEs larger surveys that have been conducted (like the
survey of the BDI).
Focus Group and Type of Survey
Discussion and Results of the Survey
In the focus of the conducted survey were 30
non-financial businesses from different states in The average polled firm has an age of 55 years,
Germany. These SMEs, (according to the defini- employs 30 people and earns less than 10 million
tion of the European Commission, described in p.a. in 85% of cases. Leaving the financial crisis
paragraph 6.1.4.) were questioned by the mean of behind, 92% of polled firms claimed to be in a
a questionnaire. The questionnaire, as a type of good and stable economic situation, whereas 8%
survey, was chosen because of limited resources claimed to be in a not stable and close to crisis
and because questionnaires are easy and confort- situation. These results raise hope for SMEs and
able to answer and submit (via email, fax, letter). underline the perceived importance of a high eq-
Moreover, the evaluation of a standardised ques- uity ratio. According to the survey, 64% of polled
tionnaire is likely to be free of errors and simple firms have an equity ratio above 31%, which can
to administer. The questions were designed in a be regarded as an outstanding result. 27% had an
defined sequence in order not to influence the equity ratio between 10% and 30% the last 9%
respondents answers. The first questions were had a ratio below 10% (Figure 5).
easy to answer and helped to classify the business; According to an in-depth interview with an
whereas the later ones were more detailed (e.g. executive from a leading German bank, most of
about the use and knowledge of specific financing SMEs in the producing sector only have equity
options). Besides questions about financial key ratios below 20% and in the trading sector between
figures (e.g. equity ratio), also questions about 5% and 10%. The highest equity ratios of polled
financing needs and preferences were raised to trading firms are between 10% and 30%. Further-
evaluate the firms financial situation. Further- more, to put it in an international perspective,
more, the perception of funds availability was German SMEs have been spoilt by favourable
of particular interest. The questions take the last credit conditions during the last years due to the
three years, the current- and future situation into competition between financiers (especially foreign
consideration. The results of the survey do not banks entering the market). In addition to an in-
raise the claim of representing all German SMEs in creased risk premium due to the crisis, the bank-
every state and sector with a respective statistical ing regulations (Basel I III) prescribe ratios in
relevance, but it is rather used to validate first of which a credit must be based on equity. Therefore,
582
Figure 5. Equity ratios of polled SMEs
the requirements for credits rose during the last options) do not seem to be common financing tools
years. The survey confirmed that not a single firm at this stage. This can be explained either by the
rated the lending requirements as rather low; fact that firms do not want to give any financial
not to mention the options low or very low. information to external bodies or simply by not
Compared to the last years influenced by the re- knowing their financing options. 40% of polled
cession, polled firms judged the requirements to firms stated that they have a lack of information
gain a credit as slightly higher in the next 3 years. concerning non-traditional financing options.
Nevertheless, the perceived availability of finan- As shown in Figure 7, the credit rating of 36%
cial funds shows that in future the majority of of firms has improved during the last 3 years,
polled firms (64%) are expecting no changes; while 18% of firms stated that their credit rating
nevertheless, 27% stated that it would be more has decreased. A reason for this negative develop-
difficult to receive the traditional financing funds ment might be the fact, that 46% of polled firms
like bank credits. do not employ financial experts for their financial
In accordance with the Moral Hazard and planning and do not have a strategy to improve
Adverse Selection effect, described in the theo- their credit rating (30%). A critical result of the
retical analysis of credit rationing in chapter 6, survey was the statement that 60% of firms do
most firms (73%) agreed on the fact that the risk not regard offered financial solutions as being
taken for an investment depends on the credit based on the firms needs.
conditions. This leads to an increase of higher
risk projects with worsening credit conditions. Recommendations and Possible
The most common financing options of polled Solutions
SMEs were long- and short-term bank loans as
well as leasing. Medium-term bank loans in the The lack of expertise in financing as well as
second place and deposits by partners in the third research and development is a major barrier for
place (Figure 6). Factoring as well as types of SMEs. According to the executed survey, most
private equity (as some non-traditional financing firms do not seek advice from financial experts to
583
Figure 6. Importance of financing options
Figure 7. Credit rating of polled firms
develop a strategy to improve the credit rating and have to be ready to give away some confidential
cash flow. With a clear strategy employing non- business information in order to overcome the
traditional financing options, SMEs can become information barrier. Therefore, the creation of a
less dependent on bank financing. However, firms long-term relationship with financiers based on
584
trust should be aimed. The classical house-bank more financial funds to support struggling SMEs.
relationship is especially important during a credit Therefore, it is critical how a lenders credit rat-
crunch because lending conditions make it difficult ing system judges the credit worthiness of firms.
for SMEs to obtain funds. In order to stabilize As the in-depth interview with the executive of
the business for the future, lack of innovations a leading German Private Bank confirmed, some
and resources can be compensated by Strategic banks apply a so called industry traffic light
Alliances and Business Angels; profiting from schematic which looks at the economic situation
the expertise and resources of others. In order of specific sectors rather than at individual firms.
not to loose too many shares of the business, This might lead to a scenario where an innova-
exit strategies for investors and business partner tive firm with a core competency is refused a
might be helpful. loan because of its branch ranking. Fortunately,
the credit rating systems evolve towards a more
individual and differentiated rating. On the other
FUTURE RESEARCH DIRECTIONS hand, bankers complain about low equity ratios
and in-transparent capital structures of SMEs due
Future research could address the problem of to grouping structures, creating of reserves and
achieving transparency of risks and opportunities assessment of materials and semi-finished prod-
related to innovations in order to ease the credit ucts in order to minimize taxation (by lowering
application process. Furthermore, it would be retained earnings).
helpful to analyse why firms employ non-tradi- Besides the traditional banking loans, there
tional financing rarely and how non-traditional are other options for SMEs to obtain funds.
financing can fill gaps of traditional financing. Especially for start-ups or entrepreneurial busi-
Furthermore, future research could address the nesses, so-called Private Investors provide funds,
following questions: expertise and contacts in exchange for a business
share. This funding process has to be carefully
What criteria does a Credit Rating System planned as it has a bigger impact on the business
have to fulfil to be focused on individual than a traditional bank loan (especially in terms
firms rather than branches? of independence). Two critical aspects (which are
To what extend should firms be financed sensitive topics for owner/manager of SMEs) are
through bank loans and what are the in- the necessity for transparency of business infor-
fluencing factors (comparing USA and mation and operational interference.
Europe)? Finance can also be regarded as an Organisa-
How to develop an investors exit strategy tions Creative Area (OCA) that can develop core
to regain independence? competencies especially with the help of Private
Investors, controlling and monitoring the realisa-
tion of product and service innovations. Other
CONCLUSION types of non-traditional financing are short-term
direct loans from online market places offered
Boosting the economy by supplying SMEs with by private persons. Major aspects influencing
loans and maintaining a risk sensitive credit rat- SME financing:
ing system can be a trade-off for banks in the
lending sector. While during a financial crisis Capital structure (e.g. Equity Ratio)
the risk premium of loans rises, the media ask for
585
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ests rather than own interests) and innovativeness: An empirical analysis of four
Traditional financing (long-term house- German industries (p. 7). Utrecht University: Sec-
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Non-traditional financing (Knowledge Marburg: Economic Geography and Location
Management, Mezzanine capital) Research. (DOI 10.1007/s00168-009-0364-x).
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ENDNOTES
1
BDI: Bundesverband der Deutschen Indus-
Adverse Selection: The problem with rising
trie e.V. (Federation of German Industries)
interest rates above the bank-optimal interest rate 2
More about innovative tools and methodolo-
(where the banks average return is the highest) is
gies are described by Lowe and Marriott
the attraction of higher risk borrowers (Adverse
(2006, p.287-298).
Selection effect). 3
in German: Deutsche Demokratische Re-
Asymmetrical Information: The so-called
publik (DDR)
Asymmetric Information (AI) problem occurs 4
1 Euro = 1.95583 DM
587
5
The term Mittelstand sums up small and 7
The median values state that 50% of en-
medium enterprises with 1-50 million an- terprises (in a particular category) have an
nual turnover and 10-250 employees. equity ratio in the balance sheet of median
6
New federal states of Germany (East Germa- value, and 50% of enterprises have an equity
ny): Former Soviet Occupation Zone located ratio of median value.
in the east of Germany includes the states: 8
The Net Profit ratio represents the profit-
Mecklenburg-Vorpommern, Brandenburg, ability of firm and indirectly the ability to
Saxony, Saxony-Anhalt and Thuringia. face a recession.
588
Section 8
Internationalization and
Innovation
590
Chapter 32
The Recent Internationalization
of Brazilian Companies
Glauco Arbix
University of Sao Paulo, Brazil
Luiz Caseiro
ABSTRACT
The recent wave of internationalization among Brazilian companies differs from past experiences, in
terms of volume, reach, destination and quality. Brazilian multinationals are not restricting their activities
solely to regional markets, nor are their first steps entirely directed towards South America. In amount
of investment and number of subsidiaries there are signs they prefer assets and activities in advanced
marketsincluding Europe and North Americawhere they compete on an equal footing with major
conglomerates for a share of these markets. Some Brazilian companies have previous international-
ization experience, and a significant portion had been prepared and initiated outward growth in the
1990s, after the economy opened up. However, the boom of internationalization that began in 2004 took
place in such unusual conditions as to deserve highlight and special analysis. This chapter discusses
the recent expansion of Brazilian multinationals as a result of: (1) the functioning of a more responsive
and targeted system of financing, (2) transformation of the Brazilian productive structure, which led
to the emergence of a group of companies seeking internationalization as a strategy, (3) preference for
seeking more advanced economies as a means to expand access to new markets and suppliers, as well
as to absorb innovations and technology, (4) the States performance in several dimensions, especially
in financing the implementation of policies which support the creation of large national groups with a
presence in the globalized market.
DOI: 10.4018/978-1-61350-165-8.ch032
The Recent Internationalization of Brazilian Companies
INTRODUCTION1 like Gerdau (steel), WEG (engines), Coteminas

(textiles), Marcopolo (buses), BRFoods (food),
After the reduction of Outward Foreign Direct Votorantim (cement, mining and pulp and paper),
Investment (OFDI) flows in 2009 due to the in- Odebrecht (construction) and Camargo Corra
ternational economic crisis, the rhythm of expan- (textiles, cement, and construction)which al-
sion by Brazilian multinationals abroad quickly ready held leadership positions in South America,
accelerated, accompanied by the resumption of consolidated, expanded and diversified their in-
economic growth.2 In just the first nine months of ternationalization. Besides this, a number of
2010, the sum of acquisitions abroad by Brazilian other companies from different sectorslike
companies totaled US $17 billion, a value greater Marfrig (food); Totvs, Stefanini e Bematech (in-
than the total international acquisitions made by formation technology); Randon, Sab and Ioschpe
Brazilian companies throughout the 1990s. Ac- Maxion (cars and car parts); Lupatech, Romi and
cording to data from the Brazilian Central Bank, Tupy (mechanics); Natura (cosmetics); EMS and
a definite and unprecedented acceleration of Eurofarma (pharmaceuticals), among othersel-
investments by Brazilian companies abroad only evated their standards of competitiveness and
started in 2004. However, the first movements of broadened activities abroad. Unlike prior experi-
this new wave had its roots exactly in the 1990s, ences, the more recent internationalization of
after the opening of Brazilian economy, a period Brazilian companies possesses particular charac-
of rehearsal and preparation for this more aggres- teristics: in this most recent migration, the Brazil-
sive thrust into the path of globalization, as can ian multinationals went beyond their niches and
be seen in Figure 1. their closest market, South America, and pursued
During this same period, companies like targets like the OECD countries, North America
Petrobras (oil and gas), Vale (mining), Embraer and Europe in particular, where they compete
(aeronautics industry) Braskem (petrochemicals) directly with large conglomerates for an important
and JBS (meat processing) established themselves slice of the international market (Figure 2).
as large international players; other companies
Figure 1. Brazilian companies OFDI
591
Figure 2. Background information for selected Brazilian multinationals
592
The main objective of this chapter is to under- The preference among Brazilian compa-
stand this unprecedented activity among Brazilian nies to act and establish themselves in the
businesses. Recurring explanations seek to reduce most advanced countries and markets. The
this dynamic to the good moment that the Brazil- data and its analysis allows us to conclude
ian economy is currently experiencing, or even that the internationalization of Brazilian
advantages due to the low exchange rate, which companies does not necessarily follow a
has facilitated international acquisitions. From a linear route, with the assumption of us-
different angle, a substantial portion of academic ing a regional base, in this case, South
literature emphasizes individual cases of entre- Americaas a platform for its expan-
preneurism and business success stories. These sion, nor do, at a basic level, direct them-
explanations, although pertinent and useful, help selves to countries with linguistic affinity.
to clarify only specific cases and do not address Without negating the explicative value of
how and why the internationalization movement these components, our research reveals, on
grew so rapidly, and was incorporated, as a strat- the other hand, that Brazilian companies
egy, by a significant number of companies. Our have accepted the challenge of competing
hypothesis seeks to reveal the four factors that in OECD countries, where the community
work together to make viable and to accelerate of shared language is small.
the expansion of Brazilian companies abroad: The clearly pro-internationalization posi-
tion of the Brazilian government, which
The capitalization of companies and avail- strongly and formally encouraged inter-
able financial resources, both foreign and nationalization of companies as one of
domestic, with special highlight on areas its industrial policy objectives beginning
of the economy linked to production of in 2003. Changes in BNDES (Brazilian
commodities, whose prices have boomed Development Bank) regulation, sown in
in the international market, basically due 2002, with the first version of the Policy for
to the rise of China. Industrial, Technological and Foreign Trade
The increase in capacity for innovation and Policy (PITCE, 2004) and the Productive
entrepreneurship among Brazilian compa- Development Policy (PDP, 2008) allowed
nies. After the opening of the economy, at the bank to play an increasingly important
the beginning of the 1990s, many Brazilian role in supporting internationalization.
companies started to gradually adopt stan- The Ministry of Development (MDIC),
dards of international competitiveness, to the Bank of Brazil (BB), Petrobras and
modernize their management processes, to the Brazilian Agency for the Promotion of
improve the quality of products and ser- Exports and Investments (APEX) worked
vices and to increasingly pursue innova- in harmony with the BNDES.
tion in every step of their operations. These
changes allowed many companies to incor- Beyond this introduction, this chapter is
porate exportation into their growth strate- structured into four sections, in addition to the
gies, going beyond a business culture ori- conclusion: Capitalization and Financing; In-
ented to the internal market and to prepare ternationalization and Innovation; Destination
for a bolder expansion abroad; of Brazilian OFDI; and New relations between
State and Business.
593
The rapid and aggressive emergence of Bra- This boom in commodity prices, in turn, con-
zilian multinationals finds support in these four tributed to the valuation of companies producing
processes that function in a linked and interde- and marketing commodities, and also attracted a
pendent manner, within an economic environment great deal of foreign capital to BOVESPA, where
distinct from the past, from both a domestic and it has significant weight (Figure 4). Some of the
international perspective. leading Brazilian multinationals are producers of
commoditiesincluding Petrobras, Vale, Gerdau,
JBS Friboi, BRFoods, Marfrig, Magnesiteand
CAPITALIZATION AND FINANCING directly benefitted from these factors. However,
other companies also indirectly benefited from
In this moment that Brazilian companies intensi- the greater international visibility of Brazilian
fied their internationalization, Brazil, like many capital markets.
other emerging countries, experienced an ex- Also contributing to the increased availability
tremely positive and rare moment from the point of financial capital: (1) low interest rates in the
of view of finance, which hadnt occurred since main developed countries, which liberated a
the 1970s. Starting in 2004, the country benefited major portion of capital seeking more profitable
from high prices for raw materials and from the applications, and (2) a series of financial innova-
solid entry of foreign capitalmainly due to the tions that allowed for the multiplication of liquid-
resumption of economic growth. ity and the profitability of high-risk financial
Prices of raw materialsoil, minerals, and securities (Ocampo, 2007; Jenkinson, Penalver
foodhave been driven by the accelerated in- & Vause, 2008).
dustrialization and vigorous growth of China and It is appropriate, however, to show the impor-
India, countries heavily dependent on imported tance of strategies adopted by both the Brazilian
food and basic supplies (Figure 3). government and companies in order to maximize
this financially favorable moment and use it to
Figure 3. Commodities prices
594
Figure 4. Domestic market capitalization
stimulate greater competitiveness of the Brazilian expansion and increase in social policies was
economy. Maintaining economic stability and the shown to be essential for growth in family income
drastic reduction of external vulnerability (with in Brazil and improved revenue for companies in
unprecedented increase in liquid reserves) was order to leverage and maintain domestic demand
fundamental for decreasing country risk and cost during the 2008-2009 crisis (Landim Jnior &
of credit for the entire Brazilian economy. Menezes Filho 2009; SantAnna, Ambrozio &
The pro-activity of the government in reduc- Meirelles, 2010).
ing strong economic constraints, coupled with the Brazilian multinationals has adopted new
increasing competitiveness of Brazilian compa- financing strategies to take advantage of the situ-
nies, helps to understand the contrasts between ation and the conducive business environment in
capitalization of BOVESPA and the Buenos Aires several ways, beginning with the myriad initial
SE, given that both countries have benefited from public offerings to leverage resources to strengthen
high commodity prices. and expand internationally. From 2004 to the first
The reentry of a set of industrial policies half of 2010, 30 Brazilian multinationals from
designed to modernize Brazilian productivity various sectors (with the exception of the finan-
and raise standards of competitivenessmainly cial industry), and raised a total R$ 57.2 billion
through stimulating innovation, technology and (~ US$ 33 billion) on the BOVESPA (So Paulo
investmentrepresent significant moments in Stock Exchange), half of this value coming from
the resumption of a proactive state. It should be foreign investors3.
remembered that this new state activism in Brazil The reduction of country risk linked to increas-
has gone beyond the boundaries of economics, and ing international competitiveness also facilitated
generated social impacts through the restructure access to external financing sources for the main
of the labor market, in raising minimum wage, Brazilian companies. According to research from
expansion of social protection network, and cash Economtica Consulting, the trading volume of
transfer programs (e.g. Bolsa Familia), aimed at 32 Brazilian companies listed on the New York
combating social inequalities and poverty. The Stock Exchange (NYSE) in 2007 was valued at
595
US$ 555.6 billion, higher than the trading volume practices and incorporate the diversification of
of these companies on the Bovespa (US$ 528.9 products and services into growth plans, expand-
billion)4. In the same sense, large companies also ing their activities and exporting. On the positive
increased their share of loans from international side, from the restricted angle of the economy,
banks, with interest rates lower than in Brazil. As an (without regard to social costs, for example) in
example, Vale alone raised US$ 14.6 billion from the first four years of the 1990s, industry in Brazil
foreign banks to acquire the Canadian company reached a relative gain in labor productivity ten
Inco in 2006, which became the companys clear times higher than that obtained throughout the
advantage in relation to its competitors (Fluriet 1980s (Bielschowsky & Stumpo 1996:172).
& Braga 2009:116). The stabilization of inflation since 1994 has
During 2009, at the peak of the international helped to stimulate domestic consumption and
financial crisis in Brazil, large firms secured allowed for a significant increase in production,
US$25.3 billion abroad, a figure higher than that but has also attracted more foreign companies
obtained in the years 2007 and 2008 combined. to Brazil, increasing local competition The ra-
The fact that record volumes can be achieved in tionalization of organizational practices showed
a context of credit restriction shows that the large itself to be insufficient to ensure long term com-
Brazilian companies were regarded as a safe haven petitiveness in the most dynamic sectors, and
for risk aversion and had acquired robustness, pres- many companies began to quickly lose ground to
tige, and confidence in the international market. foreign competitors. Product differentiation and
This was completely unthinkable a decade ago. internationalization of activities were alternatives
(sometimes complementary) for cost reduction,
and for sophistication of business processes and
INTERNATIONALIZATION products incorporated by these companies.
AND INNOVATION Innovation, exportation and internationaliza-
tion, though not always implemented simultane-
The opening of the Brazilian economy that be- ously, become more widespread among Brazilian
gan during the government of former president companies. In the second half of the 1990s, even
Fernando Collor and continued throughout the in unfavorable financial conditions and without
Fernando Henrique Cardoso administration, the support of governmental policies, there was
was designed to inject competitiveness into an a significant expansion of OFDI. In the last five
economy accustomed to protectionism, and gen- years of the 1980s, Brazilian OFDI was, on aver-
erated contradictory or even negative results for age, US$ 212 million annually. In the first half of
many firms in its early phase. While it triggered the 1990s, this jumped to US$591 million annually
profound changes in standards of competitiveness (an increase of 178%) and in the second half to
in the economywhich drove many companies US$1.57 billion annually (an increase of 640%
to restructure to adapt to a more open environ- compared to the 1980s) (Figure 5)6.
mentit destabilized or even lead to the downfall It was during this period that Gerdau (metal-
of many companies which could not raise their lurgy/siderurgy), which already had subsidiaries
low productivity to match new times. abroad since 1980, intensified its internationaliza-
During this early reorganization of the econo- tion. From 1995 to 1998, Gerdau launched new
my the Brazilian industrial GDP fell by 12% just plants in Canada, Argentina and Chile. In 1999,
from 1990 to 1992.5 The companies that survived after an IPO on the NYSE, it aggressively entered
were forced to quickly and often radically restruc- the North American market, acquiring AmeriSteel
ture production, to learn advanced management for US$ 872 million. Since then, it has continu-
596
Figure 5. First steps of Brazilian OFDI flows
ally increased its market position via several the company, the greater its advantage over local
further acquisitions, becoming the second largest firms and the greater its chances of success in
producer of steel throughout the Americas. Gerdau internationalization.
also took advantage of cross-borders acquisitions Recently, however, many studies emphasize
to diversify its operations, transforming itself into other aspects of the relationship between interna-
one of the largest worldwide suppliers of special tionalization and innovation, mainly when it occurs
steel products, of larger aggregated value (stain- in companies from emerging countries (Mathews,
less steel, car parts, tools, hospital supplies). This 2002; Arbix, Salerno & De Negri, 2004; Child
was done through the acquisitions of Spanish & Rodrigues, 2005; Aykut & Goldstein, 2006;
companies Sidenor (2005) and GBS Acero (2006) Borba Vieira & Zilbovicius, 2008). For emerging
that allowed Gerdau to strengthen its presence in companies, innovation would not be necessarily
the Europeans auto parts and machinery indus- a prerequisite, but instead a consequence of es-
tries. (Fleury & Fleury, 2009). tablishing overseas subsidiaries. When entering
The literature on International Business seeks new marketsespecially more demanding ones
to show that the relationship between internation- such as the American and Europeancompa-
alization and innovation is two-way. According nies would be able to absorb higher standards
to the classic conception of multinationals, based of competitiveness, capture new trends, become
on the Anglo-Saxon experience (Dunning, 1981; acquainted with new products and processes and
1988), to internationalize successfully a company even the tastes, habits and demands of new sup-
had to possess some competitive advantage trans- pliers and customers.
ferable to the host country. Advantages derived Though recent, the studies have already
from labor cost or a brand only locally known, for traced trajectories that show the different types
example, would not be transferable to other coun- of relationships between innovation and interna-
tries. More appropriate would be the advantages tionalization. There are casessuch as Embraer
linked to technology and innovation (of products (Miranda, 2007)where innovation is mainly
and processes). Therefore, the more innovative related to product design and in networks of
597
international partnerships that ensures access to ing to 1% of its revenues, in R&D in 2007.
technology and also the most competitive prices. It has subsidiaries in 28 countries and about
In others cases, the strategy is to specialize oneself 10% of its assets and jobs are overseas.
as a preferred supplier of a major multinational, Vale is in first place in the mining sector,
installing factories close to them around the world with R&D expenditures of 368 million, or
and taking on new challenges and contractsas is 2.3% of its revenues. It has subsidiaries in
the case of Sab (auto parts) in partnership with 34 countries and 25% of jobs and 39% of
automakers (Aykut & Goldstein, 2006). A different assets are outside Brazil.
road leads to acquisition of companies, mainly in Embraer is the 16th among aerospace and
developed countries, in order to absorb essential defense companies with 131 million in
technological assets. This path has been taken by R&D investment, equivalent to 5% of its
many Chinese companies, which rely on strong revenues. It has subsidiaries in six coun-
state support (Rui & Yip, 2008; Luo, Xue & Han, tries and 12% of jobs and 39% of assets
2010). This was also, in part, the strategy adopted are abroad.
by Gerdau when it acquired steel mills in Spain, Braskem appears in 90th in the chemical
and by Magnesita in acquiring LWB Refractories sector, with investments of 22 million in
of Germany, the world leader in basic refractory R&D, representing 0.4% of its revenues.
product, in 2008. It has subsidiaries in eight countries and is
Beyond technology, strategy based on acqui- part of Odebrecht, which has about 56% of
sitions also helps reduce the negative impact of their jobs and assets abroad.
cultural differences on the productivity of the WEG is the 106th in the electrical equip-
subsidiary abroad. This means that in addition ment and electronics sector, with invest-
to tangible assets, technology, and brand, the ments of 21 million in R&D, or 2.1% of
company has access to contractual relationships its revenues. It has subsidiaries in 26 coun-
established with employees and suppliers, and the tries and 11% of jobs and 18% of assets
habits and demands of customers. abroad. (FAPESP, 2010 and Valor, 2009).
There is strong evidence on the complemen-
tary relationship between internationalization and Although Brazil has fewer companies in the
innovation in the activities of Brazilian multina- R&D investment ranking than India and China (15
tionals. In a survey conducted by the Department and 9 firms respectively), the above companies are
for Business, Innovation & Skills in the UK in responsible for activities that impact on the entire
2008, five Brazilian companies appear among Brazilian economy. Recent research (De Negri,
those who invest most in R&D, detailed below 2010) states that about 40% of all engineers with
(apud FAPESP, 2010). These companies are also formal work contracts in Brazil work for suppli-
among the fourteen Brazilians companies ranked ers of Petrobras, a company that has a business
on a Boston Consulting Group (2009) list of 100 plan to invest US$ 224 billion between 2010 and
emerging companies that vie for global leadership 2014 and expand its production rates of 10% p.a.
in their respective industries: This link between internationalization and in-
novation is also evident even when the analysis
Petrobras appears in second place among involves the whole Brazilian industry. Arbix,
companies in the oil and gas sector, with Salerno & De Negri (2004) crossed statistical
investments of 442 million, correspond- data corresponding to 72,000 industrial compa-
598
nies in Brazil, relating to the year 2000. While the Brazilian crisis of the 1980s and 1990s and
30.5% of the enterprises of the sample claimed created dynamic competitive advantages based on
to have done some product or process innova- product diversification, investment in R&D, and
tion after 1998, that figure rose to 70.4% among internationalization. These mechanisms continued
the firms that possessed OFDI. The authors also and intensified in recent times, and explain how
identified a cluster of approximately 250 com- these companies came to be recognized as global
panies in which their subsidiary abroad was the players (BGC, 2009).
main source of information for innovative activ- These companies began their growth with
ity. These companies, despite representing only imitation strategies, through intensive licensing of
0.35% of the sample, accounted for 5.8% of total technologies (Embraer), or adapting of products
national industrial exports. Their competitiveness for the domestic market (Marcopolo), or through
was also demonstrated by the fact that they paid hiring from large multinationals (Natura). These
higher salaries and hired more qualified labor than fast-followers moved into the position of prospec-
average, generating positive impact for the entire tors, and, more recently, began to be guided by
Brazilian economy. offensive strategies, based on a quest for global
Borba Vieira and Zilbovicius (2008) observed technological leadership (Griffin, 1997; Freeman
a similar phenomenon when conducting case & Soete, 1997; Goldstein, 2002, 2007).
studies of three Brazilian multinationals from the In the last decade, these companies expanded
auto parts, petrochemicals and adhesives sectors; themselves vigorously in the domestic as well as
they concluded that OFDI is a strategy for them in the foreign market, showing that that foreign
to gain exposure to the most modern technology and domestic expansion were not mutually exclu-
in foreign markets. sive strategies, as the literature showed during the
Another dimension of the relationship between 1980s and 1990s, but instead more complementary
internationalization and innovation is revealed in (e.g. Iglesias & Mota Veiga, 2002:19; Cyrino
research from the Dom Cabral Foundation (2008), & Tanure, 2009:18). The stronger a companys
of about 100 Brazilian multinationalsthat was position in the domestic market, the greater the
a reissue of a survey applied in 2002. While in muscle for companies to raise the bar. Moreover,
2002 none of the companies interviewed declared the more internationalized a company, the more
they performed R&D activities abroad, in 2008, competitive it is in the global market, as it pos-
one third of the sample stated they had adopted sesses fast access to new productive knowledge,
this strategy. financial resources, suppliers, and clients.
Three Short Case Studies on Embraer

Innovation and Internationalization
The building of high-technology companies in
The major goal of this chapter is to understand emerging countries generally involves the incor-
the strategy transformations that occurred at poration of productive knowledge from foreign
various Brazilian companies that led to intense markets. The case of Embraer is no different. Its
acceleration of their internationalization. In the first commercial success, the Bandeirante turbo-
following we present a succinct overview of how prop (commercial aviation, eight seats) and the
three companies developed different strategies Ipanema (agricultural spraying) were developed
for innovation and internationalization: Embraer by foreign technicians brought in to work at the
(aviation), Marcopolo (busses) and Natura (cos- Aerospace Technical Center by the Brazilian
metics). The three are innovative and rapidly grow- government.
ing companies that understood how to respond to
599
In addition to this, in its early years Embraer ment of boards for each specific aircraft project,
also learned to manufacture jets and entered into which begun to operate as semiautonomous cells
the military segment thanks to a partnership with of the company. The result was optimization of
the Italian company Aermacchi, using technol- learning and enhanced agility for development
ogy transfer for the development of the Xavante of new projects (Vasconcellos et al., 2008). The
ground-attack jet (1971) and afterwards the AMX time for delivery of the EMB-120Braslia (30-seat
jet fighter in 1985 (Miranda, 2007). commercial aircraft) fell from 16 to nine months
It was also through licensing of technology with (Goldstein, 2002).
the North American Piper (1975) that Embraer However, the principal innovation of the period
took its first steps into the executive jet market, occurred during the ERJ-145 project (commercial
now one of its major segments. In both segments, jet for 50 passengers) that required the creation of
however, the growth of the company was only a wide international network of 350 vendors and
possible due to continual investment in R&D, clients participating in diverse steps of product
and in the diversification of products. development. Four of its main suppliers were risk
In fact, the innovations that Embraer has ob- partners, that is, they helped to finance the project.
tained through its precocious internationalization The major clients were invited to participate in a
were as essential for its success as the major state pre-project phase, in order to define the character-
support it received. The first subsidiary abroad was istics of the aircraft (Vasconecellos, et al. 2008).
opened in the USA in 1979 and three years later Besides capturing market trends, the partner-
the company already dominated one-third of the ships made Embraer, as supervisor of projects,
North American market for 10-20-seat planes. In the main beneficiary of international integration
1983, it established a new subsidiary in France, of the R&D routines of its vendors. The strategy
aiming to service the European and Middle Eastern was revisited even more intensely with the EMB-
markets, and a couple of years later was already 170/190 family of jets, for up to 122 passengers,
competing for worldwide leaderships of aircraft when 16 supplies took on a role as partner of
of 30-40 seats. risk. These mechanisms were fundamental to
Beyond this, the strong dependence on the stimulate the whole innovation system of the
State brought financial difficulties when serious company and could be considered as one of the
crises hit the country in the 1980s and 1990s. first successful experiences of Open Innovation,
State management also became problematic when even before the dissemination of this concept by
the technological capacity of Embraer began to Henri Chesbrough, in 2003.
serve foreign policy interests without proper at- The success of the new commercial jets, in turn,
tention to necessary market demands, as was the pushed internationalization even more. In 1999,
case with the CBA-123, an expensive turboprop a consortium of French companiesDassault,
that revealed itself to be a commercial failure in Aerospatiale/Matra,Thomson-CSF e SNECMA
a troubled partnership with Argentina at the end acquired 20% of the ordinary shares of Embraer,
of the 1980s (Goldstein, 2002). making possible greater financial solidity and
With the opening of the Brazilian economy generating new opportunities for technological
in the early 1990s, the financial situation of Em- capacity, especially in the military segment. In
braer grew more complicated. In 1994, the year the following year, the company executed an
of its privatization, its debts surpassed US$1 IPO on the New York Stock Exchange (NYSE)
billion (Miranda, 2007). After privatization, the and opened its first commercial offices in China
company adopted a new organizational structure, and Singapore. The year of 2002 saw the open-
with sizeable investments in IT and the establishing of the first factory in China, in Harbin, near
600
Beijing, for the creation of the ERJ-145 family In 1991, when the crisis in Brazil was intense,
of jets (Miranda, 2007). In 2004, it bought the Marcopolo opened its first factory abroad, in Co-
Portuguese OGMA and should inaugurate two imbra, Portugal. The choice of this country was
new plants, with complex structures and composite not due just to linguistic and cultural proximity,
materials fundamental for the production of more but the location also functioned as a laboratory
agile aircraft, in 2011. to incorporate technology from European facto-
Embraer is today a global company. It is the ries, principally through access to simultaneous
third largest producer of planes in the world by engineering with suppliers outside the Brazilian
annual delivery and is the market leader in regional market. Thanks to this intense learning, coupled
jets. To maintain its competitiveness, Embraer is with its own efforts in R&D, Marcopolos vehicles
diversifying its portfolio even further, currently became capable of competing in whatever country
moving in the direction of military aviation seg- and the company became a worldwide exporter
ment and aeronautical services offerings. In the of technology for production of busses (Rosa &
newest defense area, the project is a transport and Rhoden 2007).
air refueling plane KC-390, with a capacity to Unlike Embraer, Marcopolo was able to obtain
transport up to 23 tons. The project, currently in success through an elevated level of verticaliza-
the phase of vendor selection, expects to generate tion, maintaining direct control over its principal
more than 14 technology transfer contracts with Brazilian suppliers (materials, seats, doors, win-
foreign companies7. dows, plastic components, etc.) that facilitated
The mechanisms of open innovation developed the transfer of technology for European vendors
by the company teaches us that successbeyond to local vendors (Rosa, 2006).
state support- is linked to the sources of its own Between 1999 and 2001, Marcopolo opened
business dynamism and of the close ties main- its new productive units in Argentina, Colombia,
tained with partners, suppliers, and clients around South Africa, and Mexico, beginning with part-
the world. nerships with large local chassis manufacturers
(Mercedes Benz in Argentina and Mxico; Sca-
Marcopolo nia, in South Africa). This model of entry via a
joint venture with major local manufacturers was
The Brazilian bus producer was founded in 1949, repeated in India and in Russia in 2008, when it
initially dedicated to the production of artisanal established joint ventures with Tata Motors and
wooden car bodies. It had a trajectory of rapid Ruspromauto, and in Egypt in 2009 in partnership
expansion and at the end of the 1970s, it was ex- with GB Auto8
porting steel car bodies to practically all of Latin In its first internationalization experiences,
America and some Africa countries from its three Marcopolo exported all components manufactured
factories in Brazil. in Brazil and only performed the assembly in
Since its first years, the company invested the host country. However, starting in 2004, the
in constant diversification of products for the company began to work to develop new suppliers
launch of its lines of microbuses (1972) linked abroad, to protect against currency oscillations, as
busses (1978) and electric busses (1979). It was the strategy of internationalization for Marcopolo
also the first company to adapt European bus had as its focus the large emerging countries that
makers innovations for South America, as in possessed few consolidated companies and high
the case of the high-decker bus in 1984, and the growth potential, but volatile exchange rates.
double-decker, launched in the Argentine market At each industrial plant, Marcopolo has its
in 1996 (Stal, 2007). own R&D team responsible for adapting prod-
ucts to customer demand. One of the companys
601
competitive advantages is the ability to mount the company hired Ansio Pinotti, an industrial
bodies on any type of chassis. The high quality of chemist, who had experience in other companies in
its products and its flexible development capabili- the cosmetics industry, to lead the development of
ties were fundamental for the Indian giant Tata new products based on herbal extracts and marine
Motors to be convinced to sign a joint venture compounds (Ghoshal et al., 2002).
with a Brazilian company within its own country. The rapid growth of Natura began when it
Currently the Indian factory is Marcopolos lead- joined Pro-Estetica, a company specializing in
ing international operation. direct sales at home, in 1974. This business model
With installed production in eight countries and was clearly inspired by the U.S. company Avon,
exports to more than one hundred, Marcopolo is already used in Brazil for more than a decade.
now a company with global coverage that holds The partnership moved forward. Natura, with its
40% of the Brazilian market and 7.0% of the world inexpensive, but quality products, saw its revenue
market. It is also an exporter of technology and jump from $53,000 in 1973 to $ 3 million in 1979,
has an internationalization model that is above all when the company had 1,000 sales consultants
pragmatic and flexible. Control and development (Nakagawa, 2008).
of supplier networks and aggressive associations Since then, the companys rapid growth has
with local champions sustains Marcopolos excel- attracted several other entrepreneurs by creating
lence in design and assembly technology of its a set of sister companies including a fragrance
car bodies. and makeup company that used the same vendors
as Natura, and two distribution companies that
Natura send their products to all regions of Brazil. In
the late 80s, Natura has merged the operations
Natura is a leader in cosmetics, fragrances and of these four companies as a way of responding
personal hygiene in Brazilthe worlds third to the crisis that affected the Brazilian economy
largest market, behind only the U.S. and Japan, and prepare itself for the market opening that was
according to data from Euromonitor (apudABIH- already being announced.
PEC, 2009), with annual revenues of $ 2.4 billion The merger was followed by a deep organiza-
in 2009. Like the two other cases seen here, this tional restructuring in the early 90s which included
is a young company that had rapid growth based the hiring of several executives and consultants
on constant innovation of products and processes. who had worked for large multinationals in the
Its internationalization is less intense than in sector. Among the new executives hired was Phil-
the other two cases examined and the domestic lippe Pommez, a French citizen, PhD in Physical
market accounts for 93% of its revenueswhile Chemistry from the Sorbonne who had been vice
this figure is 60% for Marcopolo and just 7% of president at Johnson & Johnsons headquarters.
Embraer. Its plans, however, are ambitious, and He took on the role of research director at the
it is important to note that company always tried company and today he is vice president for in-
to absorb knowledge from abroad and strove to ternationalization and a major contributor to the
integrate the strategies of innovation and inter- French subsidiary of Natura9. It was also after
nationalization. the hire of Pommez that Natura launched some
Natura was founded in 1969 by Antonio Luiz of its main family of products, such as Simbios in
Seabra, a young economist who was manager of 1991, Chronos in 1992, and Mother and Baby in
a small cosmetic laboratory owned by a French 1993, and Ekos in 2000, which only uses active
esthetician in So Paulo. Three years later, in 1972, ingredients extracted from Brazilian biodiversity.
602
The importance of innovation in Naturas suc- Besides having an R&D center, the European
cess has continued to grow. In 1990, 10% of its subsidiary also had a distinct business strategy.
revenue was derived on the sale of products created Anticipating difficulties in implementing its
in the previous two years. In 2009, the percent- system of direct sales in France, Natura opened
age was 67.5%, revealing a high dependence of a sensory store in Paris so that customers could
innovative activity (Natura 2009). Spending on try out their products. Today, in addition to the
R&D also increased. Recently, Natura decided store, the company already has a network of 1,700
to reduce by half the high number of launches salespeople in the country.
per yearwhich reached 200 annuallyto con- The strategy of opening a sensory store
centrate on innovation efforts on sales of its key was also replicated in Mexico in 2005 and in the
products (Frederick & Vasconcellos, 2008). Colombian market in 2007 (Lima et al., 2008). In
It was also in the 1990s, when it embarked on both countries the activities are still incipient and
its most innovative phase that Natura also obtained the company is studying the possibility of chang-
success in its internationalization process. In 1994, ing its distribution strategy for faster penetration
it opened its own distribution centers in Argentina abroad, such as establishing partnerships with
and Peru, where an intensive training program local companies and outsourcing manufacturing
for vendors and a reward scheme for successful of products abroad (Valor, 2010:62).
management of operations were developed. The Despite internationalization of some of its R&D
same model was replicated successfully in Chile and early production abroad, the company still
in 2002 and in 2004 a new corporate headquar- focuses most of its innovative effort in Brazil. Its
ters was created in Buenos Aires, responsible for main laboratory is located in the city of Cajamar,
operations in the countries of Hispanic America near So Paulo, and houses about 250 researchers.
(Lima et al., 2008). In 2007, Natura acquired 300,000 square meters
It was in 2005, however, that it began its of land within the Ciatec 2 Technological Hub,
most ambitious international project, entry into near the University of Campinas (the second
the French market, one of the most worlds most largest university in Brazil), to install the com-
competitive markets in this sector. That choice, panys newest and most modern R&D center, to
which at first glance appears to be irrational from accommodate 300 researchers10. Also in 2007, the
the perspective of opportunities for growth, was company created the Natura Campus Program,
supported by a strategic vision of leveraging its which seeks closer ties with leading university
innovative activity. centers in the country. There are now more than
The French subsidiary is part of a project of 250 research groups registered voluntarily in the
relative separation of research and development initiative, which has received about 100 proposals
activities. In this project, research teams are for university/company cooperation.
moving towards medium and longterm plan- On the one hand, Natura is recognized as an
ning, directed towards radical innovations, while example of Brazilian innovation and has an intense
development teams are focused on short-term and material and symbolic relationship with national
on fulfilling the yearly plan of launching new biodiversity, and on the other hand, one of its
products. To optimize the potential for radical strengths is precisely its longstanding openness
innovation, research activities then began to be to knowledge flows from other organizations in
allocated in knowledge-intensive areas (Frederick Brazil and abroad. In the 1990s, it restructured its
& Vasconcellos, 2008). management activity and R&D by hiring several
highly qualified professionals from multinationals
603
in the sector. Most recently, in the current decade, to make acquisitions in distant countries, where
it looked to France for a chance to renew its in- it is more difficult to achieve success through
novative activity. organic growth (Goldstein 2007:17). In addition
to the assets located in tax havens, Brazilian com-
panies state they possess more assets in Europe
DESTINATION OF BRAZILIAN (16.5%) and North America (8.9%) than in their
COMPANIES own region (6.4%).
Given the difficulties in determining the real
The predisposition of the Brazilian business elite destination of OFDI, this study sought to identify
to follow the path of innovation is also evident the location of the subsidiaries of Brazilian com-
if we map out the main destinations of Brazilian panies. This exercise was conducted in detail for
multinationals going abroad. 88 multinationals across various sectors (Figure
Although some authors insist that Brazilian 7 and Figure 8).
companies concentrate their international activi- This exercise has limitations because, in the
ties in South America (e.g. Dunning, Kim & Park, first place, there is no available data on the amounts
2008:167), there is no available data to support invested by each company in each destination,
this hypothesis. Despite the fact that Brazilian and secondly, the sample size does not necessar-
multinationals have important influence in this ily represent the full number of enterprises with
region, evidence suggests that migration is increas- investments abroad. However, the authors believe
ingly directed to the more dynamic markets in the that this is a useful exercise to capture important
United States, Europe, and more recently, China. features of expansion by major Brazilian groups.
Two-thirds of Brazilian OFDI is reportedly The visual result of the second analysis (Figure
located in tax havens (Figure 6). With rare excep- 8) is very different from what might be expected
tions, it is not possible to accurately determine from a mapping of OFDI. As is already known, a
their final destination11. These assets are often used significant proportion of Brazilian investments are
Figure 6. Brazilian MNEs reported OFDI stock
604
Figure 7. Number of Brazilian MNEs in each other
Figure 8. Number of Brazilian MNEs by industry in each region
605
concentrated in a few large commodity-producing OFDI, Spain ranks first among Europeans while
companies, especially Petrobras, Vale, Gerdau12 Portugal is only the seventh destination. In the
and more recently JBS Friboi (Fundao Dom Far East, a significant number of companies make
Cabral, 2007). This does not underestimate the efforts to serve the Chinese market, which is
role of these companies for the Brazilian economy. already the fifth-largest destination for Brazilian
The mapping, however, shows the number of multinationals. Almost all of these subsidiaries
companies in each sector in each region of the were opened in the last decade, with 26% of the
globe, emphasizing a little studied aspect of the sampled companies already having a foothold in
recent internationalization process: in other words, China. Despite the importance of cultural fac-
it reveals the involvement of a growing number of tors and linguistic community, it is possible to
midsized businesses and sectors of medium-high conclude that the typical destination of Brazilian
and high-technology looking at the foreign market multinationals, across all continents, shows a
as a way to gain competitiveness. preference for admission to the largest and most
The country that attracts the largest number dynamic markets.
of Brazilian multinationals is the United States, This search for more dynamic markets is due,
with 59 companies, in contrast to Argentina, which on one hand, to the fact those markets demand more
has 51 Brazilian companies. The Central Bank constant and intense presence from firms hoping
data also points in the same direction: the U.S. to succeed through exports and therefore, given
is the largest destination countryexcluding tax its competitiveness, they are the markets that offer
havensfor Brazilian OFDI, with US$10.5 bil- greater returns. On the other, however, it is due to
lion, while Latin America accounts for a total of the fact that these markets are the privileged locus
US$ 8.05 billion.13. This preference for the U.S. of innovation, construction and dissemination of
market questions the interpretations that identify new knowledge production, emergence of new
South America as the preferred area for Brazilian trends, and of partnerships and synergies with
multinationals. competitive companies.
In a broader sense, this also calls into question, This is precisely the justification that Mar-
in the Brazilian case, the validity of the gradual- cel Malczewski, former president and founder
ist approach of Johanson & Vahlne (1977; 1990) of Bematech, a Brazilian multinational in the
that gives a theoretical basis for many important hardware and automation industry, offers in ex-
works on emerging multinationals. The gradualist plaining why his company set up subsidiaries in
approach assumes that firms first internationalize China and Taiwan in recent years, accepting the
themselves close to home, geographically and challenge to participate among fierce Asian com-
culturally speaking, as a way to reduce risk and petition: a very important part of our company,
uncertainty for business owners and managers, of our business, is in Asia, because if we have a
then expand into more distant markets. In Brazil, hardware company and we want to innovate, we
the major multinationals in the country do not have a presence there. Malczewski stated that
necessarily follow this pattern when it comes to the company invests between 4% and 8% of its
establishing subsidiaries. net revenues in R&D14.
By observing the European market, we see A similar phenomenon occurred with the IT
that Portugal has fewer numbers of Brazilian services companies, CI&T and Politec which has
subsidiaries when compared with the United subsidiaries in the United States, Britain, China
Kingdom, and Germany also stands out, contrary and Japan (Valor, 2009:62; Arruda, Almeida &
to the arguments for preference based on access Casanova, 2009:202), and with the IT sector in gen-
facilitated by language. In the declared value of eral, which tends to always seek the U.S. market.
606
It also occurred with several companies from the The third is that the companies do not limit
metalworks and auto parts sectorsWEG, Romi, themselves to regional or niche markets,
Lupatech, Gerdau, Tupy, Tramontina, Randon and and instead compete openly for larger slic-
Sabthat moved into the competitive German es of the market with multinationals that
market; with Natura (cosmetics) which opened have been traditionally better equipped and
a subsidiary in France; and Renner Sayerlack more powerful.
(industrial paints) which has a factory and R&D
center in Italy, among others. The internationalization of business strategies
Yet from Figure 8, it is possible to note that in Brazil started with the opening of the economy
Latin America and Africa are preferred targets for in the 1990s due to the needand also the pos-
a larger number of companies in the engineering, sibilityof becoming more competitive against
mining and textiles sectors, while the greatest foreign competition. This strategy is associated
number of companies from the IT, chemical, with- as both cause and consequence ofsophis-
mechanical and vehicles and auto parts sectors tication in production and management standards
prefer the American, European and East Asian and a more entrepreneurial stance among the
markets. This is another indication that the more business elite.
knowledge intensive the sector in question is, the The argument that Brazilian firms internation-
more it tends to seek out competitive markets as alize due to low growth in the domestic market (e.g.
a source of innovation. Cyrino & Tanure, 2009:18), although it might seem
Although the first internationalization activi- plausible for much of the 1990s, loses strength
ties of some of the leading Brazilian multinationals when we look at the recent boom of Brazilian
(e.g. Petrobras, Vale, Embraer, Gerdau, Odebre- OFDl, which occurs precisely as the Brazilian
cht, and Andrade Guitierrez, Coopersucar, Tigre, economy is growing at a faster pace. Throughout
Duratex, and Alpargatas) had their start in the the last decade, OFDI is highest precisely during
1970s and 1980s (Guimares, 1985; Diaz, 1994), those years of the greatest GDP growth. This shows
the recent expansion, besides being more intense that internationalization is no longer merely the
and including a larger number of companies and result of a tactical choice between domestic and
industries, has three fundamental differences from foreign markets. It has evolved into a constant,
the past in respect to business strategies. becoming part of the strategies of a growing group
of companies, and connected to a global vision of
The first of them is precisely the fact that opportunities in the business world, in which the
they are not more concentrated in Latin chains of production value and knowledge are ex-
America, as was the case in the 1990s. tended across countries, with suppliers, customers
(BNDES, 1995; Iglesias & Mota Veiga, and competitors found in the key global markets.
2002). This strategic direction among a group of
The second is that it is no longer just a situ- companies in search of internationalization and
ational movement, as it was during the 80s, innovation, the fruit of a new commitment to
when, protected by the domestic market competitiveness, has been fundamental in the
some companies became internationalized success of recent expansion among Brazilian
as an alternative to escape the stagnation multinationals.
and instability that plagued the Brazilian From this point of view, it is important to note
economy. that the two-part innovation-internationalization
of these efforts could be more intense. The total
607
Brazilian investment in R&D is still only half reality for many companies of expansion abroad.
the OECD averagearound just 1.1% of GDP Given the incipient nature of the State role in this
(FAPESP, 2010)and the country has struggled process, it is necessary to recognize that, for the
to raise this level, despite incentives created over most part, efforts to internationalize business are
the last decade. For the pathways of globalization still conducted without direct State aid. However,
identified by this study, we are led to believe in some cases this support has been essential.
that the more innovative firms are, the greater With the return of industrial policies in Bra-
the opportunities to grow in the global market. zil in 2004, internationalization incentives for
Therefore, strategies to enhance innovation and companies officially became part of the govern-
internationalization can and should be articulated ment agenda. In this same year, the Minister of
by both firms as well as public policy-oriented Development Luis Furlan stated that the goal
development. of the government for this mandate is to keep at
least 10 Brazilian transnationals in operation15.
In September 2005, BNDES funded for the first
NEW RELATIONS BETWEEN THE time an acquisition abroad by a Brazilian company,
STATE AND THE BUSINESS WORLD disbursing US$80 million to meat processor JBS/
Friboi for the purchase of the Argentine subsidiary
Some authors (Schneider, 2009; Aman, 2009; and of the North American company Swift. (Alm &
Finchelstein, 2009) analyzed how the Brazilian Cavalcanti, 2005).
government, over decades, helped to structure Between 2005 and 2009, BNDES disbursed
some of the leading corporations todayCSN, via loans and securities underwriting- more than
Vale, Petrobras, Embraer and a good portion of US$8 billion to the meat processing industry, of
Braskem. Moreover, the government furnished which at least US$4.5 billion went to the interna-
incentives and protection in the formation of large tionalization of the JSB and Bertin groupswhich
private groups. Even Gerdau, which justifiably then merged in yet another operation financed
boasts of its entrepreneurship, has expanded its by the institution. Thanks to financial support
operations with subsidized loans from BNDES from BNDES, JBS acquired several companies
(Brazilian Development Bank) since the 1970s from the United States (including the American
(Andrade & Cunha, 2003), and in the early 1990s companies Swift & Co. and Pilgrims Pride), as
strengthened itself through the acquisition of three well as Australia and Italy, making it the largest
state steel companies, whose privatization was processor of animal protein in the world16.
restricted to national capital (Finchelstein, 2009). The vast majority of BNDES resources directly
For this study, we opted to identify only involved in acquisition of companies abroad were
State-implemented devices to encourage inter- allocated to the meat processing industry. In other
nationalization of enterprises from this decade. sectors there have been few operations, with sig-
Emphasizing the important role played by the State nificantly lower values, such as loans of US$80
is not meant to minimize the companies roles as million to Itautec (IT) to buy the U.S. company
the principal agents in this process. As already Tallard in July 2007, US$17 million to Bematech
explained, the intensification of globalization (IT) to purchase U.S. company Logic Control in
initially began in the 1990s when there was no March 2010, and US$7.5 million for Eurofarma
type of policy stimulus whatsoever. It was only (pharmaceuticals) to complete the purchase of
with the Luis Incio Lula da Silva administra- Argentine company Quesada Pharmaceuticals
tion that the government began to outline a clear in June 201017.
direction to support the movement already a
608
The fact that the BNDES allocated the major- In another key measure the State supports,
ity of its investments for internationalization of a via BNDES and Petrobras, the formation of large
low knowledge-intensive sector, thereby reducing private groups. From February 2005 to February
potential to transform the Brazilian productive 2010, the bank offered at least US $10 billion of
structure, has been a source of much commentary, funding for the strengthening of large companies in
including some from the authors of this chapter. the domestic market in various sectors, including
As explained (Arbix & Caseiro, 2010), although some with high innovation potential (Figure 9).
the recent inflexion of Brazilian industrial policy In reference to this strategy, the banks president,
and its decision to support internationalization is Luciano Coutinho, said, it is consistent with
considered positive, the authors highlight the ur- the governments industrial policy to enable the
gent need to prioritize innovation and technology- development of global players in Brazil, on a
oriented initiatives, in order to break away from worldwide scale.19.
the Brazilian dependence on commodities. A particularly interesting case is the petro-
It is also necessary to recognize that there are chemical sector, one of the sectors that have re-
various other mechanisms, direct and indirect, by cently received more state investment. Largely
which the State currently still stimulates the growth built in the late 1970s from a complex alliance
of Brazilian multinationals. Under the scope of between the State, Brazilian companies, and
BNDES, it was thanks to the banks funding for multinational companies, it was decentralized in
construction projects in other countries (with the terms of geography and capital control. Through-
support of Brazilian diplomacy), that construction out the 1980s the industry lost competitiveness
companies Norberto Odebrecht, Camargo Corra and, at the beginning of the following decade, a
and Andrade e Gutierrezdespite their know-how total of 27 companies were privatized (Montene-
accumulated over decadescould resisted Chi- gro, 2002). In 2001, Odebrecht and the Ultra
nese competitors in Latin America and Angola18. Group initiated a move to consolidate the sectors
Figure 9. State financial support to M&A in Brazilian
609
assets. In 2007, Petrobras entered vigorously into 10). In 2009 the bank also opened a holding
this project, first participating in the acquisition company in London, BNDES Limited, with the
of the Ipiranga Group in a transaction of US$ 4 goal of facilitating acquisitions of assets abroad
billion, and incorporating its petrochemical assets by Brazilian companies22.
in Braskem, part of the Odebrecht Group. Subse- It is also important to note that in the last few
quently, it acquired Suzano Petrochemical for years, with the resumption of industrial policies
US$1.5 billion and merged it with Grupo Ultra, and accumulation of reserves by the Brazilian
creating Quattor. State, BNDES has enormously increased its ac-
In early 2010, Petrobraspossessing a 30% tivities. Between April 2009 and March of 2010,
stake in Braskem and a 40% stake in Quat- the bank was responsible for injecting about US$82
torworked for the merger of the two largest billion into the Brazilian economy. The Brazilian
petrochemical companies in the country, spending multinationals took advantage of this offer of
more than US$1.5 billion in a deal that formed the cheap creditabout 6% p.a. against 28% in the
largest petrochemical company in the Americas, marketto increase their operations, therefore
surpassing the North American DOW in produc- gaining the muscle needed to compete abroad
tion capacity20. In the shareholders agreement (Figure 11).
between Petrobras and Braskem it was estab- The internationalization of Petrobras (a mixed-
lished that one of the goals of this partnership capital firm, though under state control), as well
was to allow a process of internationalization its impact on the Brazilian economy in terms of
through the acquisition of petrochemical as- productive investments, R&D, and mobilization
sets, with the subsequent increase in its world of suppliers, is also increasing. Detail on the
market share (p.2). Less than a month after the companys activities, however, is outside the scope
agreement, Braskem announced the acquisition of this chapters objectives.
of the American company Sunoco Chemicals
for US$350 million and investments of US$2.5
billion in Plo Petrochemicals in Coatzacoalcos, Figure 10. BNDES share in Brazilian MNEs
Mexico. Petrobras, which owns 36% of the latter
company, also gained veto power over any change
in its controlling interest21.
Other multinationals like Totvs (IT), Vo-
torantim (construction, mining and pulp & pa-
per), BRFoods (food) and Vulcabras (footwear)
benefitted from consolidation via participation
from BNDES. All of the operations in Figure 9
obtained financing from the bank, via loans and/
or securities underwriting. The operations most
frequently combinethe two forms of financing,
with the institution also typically receives golden
shares as was the case for Vale, Embraer, CSN
and Friboi, in order to avoid future acquisition by
foreign companies (Mattos, 2008).
According to Bovespas figures, BNDES is
a member of at least 18 Brazilian private capital
multinationals across different sectors (Figure
610
Figure 11. BNDES lendings to Brazilian MNEs
Besides BNDES and Petrobras, other institu- global players still has a long way to go, especially
tions linked to public administration, such as the compared to what Brazils competitor economies
Bank of Brazil and APEX, are also involved in such as China and India are doing (Pradhan, 2007;
supporting the multinational activities of Brazil- Luo, Xue & Han, 2010).
ian firms.
APEX made supporting the internationaliza-
tion of mainly small and medium enterprises, as FINAL CONSIDERATIONS
one of its three main goals since 2007. Currently,
the institution has six Business Centers located Internationalization can potentially generate ben-
in Miami, Beijing, Dubai, Moscow, Warsaw and efits for all of Brazilian societyby increasing
Havana. At these centers, Brazilian companies, in the competitiveness of firms, by establishing new
addition to relying on logistical support, can rent knowledge streams, and by providing access to
offices that serve as an initial commercial base new technologies and connecting the Brazilian
abroad. According to the website of the institu- economy to global chains of greater value. This
tion there are now over 150 companies using is a process that can invigorate the entire Brazil-
this service. APEX also works in conjunction ian industrial structure and that, if well managed,
with Brazilian diplomacy to negotiate the entry helps to generate more skilled jobs.
of firms to markets considered more difficult In the last decade, there has been an unprec-
or closed. In 2009, APEX negotiated the first edented expansion of Brazilian multinationals.
establishment of a multinational pharmaceutical Some such as Petrobras, Vale, Embraer, JBS and
in the Cuban market, the Brazilian EMS Sigma Braskem have become big global players. Oth-
Farma. The Bank of Brazil already has branches ers, like Gerdau, WEG, Coteminas, Marcopolo,
and subsidiaries in 14 countries and recently Votorantim, Odebrecht and Camargo Corra are
acquired the sixth largest bank in Argentina23. In leaders in their respective industries. Dozens of
this capacity it helps to secure and transfer funds other firms, however, are also seeking to interna-
for the structuring of financial operations and tionalize to reach the highest standards of quality
financing activities of several companies abroad24. and competitiveness.
Despite these measures, which were fun- What we aim to demonstrate in this chapter is
damental for the international success of some that the historical phenomenon of the expansion of
companies, the state incentives for the creation of Brazilian multinationals was: (1) fast and intense,
611
companies saw more international expansion in linking internationalization strategies to innova-

just six years than throughout history, (2) large tion strategies, which are ultimately the engines
and diverse, reaching different sectors of differ- of development.
ent magnitudes. Finally, it is necessary to consider that despite
Moreover, we seek to explain how the simul- all the advances and benefits, the choice of inter-
taneous linking of four processes, was essential nationalization is neither an easy nor risk-free.
for the economy, corporate strategies and public For a company, a poorly planned acquisition may
policy decisions made at the government level: bring serious complications and even jeopardize
(1) financial conditions and sustainable domestic its future, and for the country, the application of
economic growth, with greater external credibil- public resources must be subject to criteria that are
ity, (2) a new attitude on the part of the Brazilian politically healthy, transparent and modernizing.
business community, marked by an intense and This means that to effectively meet the urgent
forceful search for higher standards of quality demand to raise the level of competitiveness of
and competitiveness, (3) the preferential choice the Brazilian economy, public support should be
among Brazilian companies to expand, establish intensified in areas, sectors and companies most in-
subsidiaries and compete in more dynamic mar- tensive in knowledge, innovation and technology.
kets, and (4) interaction with the Brazilian State, Today, Brazils economy, its companies, and
which has lately intensified its industrial policies its state apparatus are stronger than they were in
and its stimulation of this process. the 1990s, but and partly as consequence of
None of these factors alone could have sus- this- the competitive pressures that led the push
tained the recent successes. Entrepreneurship and for internationalization in that period have also
innovation are fundamental for participation in the intensified. On the one hand, the Brazilian market
global market. However, they cannot go very far if today is one of the worlds most attractive for
they do not find favorable economic and political foreign capital (UNCTAD, 2010a, 2010b), and on
conditions. Likewise, it does no good to create a the other hand, the expansion of multinationals
favorable environment without strong players to from other developing countries, especially China
seize the opportunities. The favorable external and India, combined with low growth rates in
conditions have occurred throughout all of Latin developed countries, has resulted in an increasing
America, but our companies have stood out more number of new players competing for the same
than our neighbors. Our main references have now space, and introducing rapid and radical changes in
become the East Asian and developed countries25. the various sectors. We are witnessing a moment of
Furthermore, as we tried to demonstrate in profound international geopolitical redesign in the
this chapter, all these factors have endogenous business world, with Asia occupying an increas-
and exogenous causes that have no guaranteed ingly central place in the global scenario. At this
continuity. Many advances have been made, but to moment, great opportunities and challenges for
sustain and broaden this process, it is critical that Brazil and for Brazilian companies are appearing.
the public and private sector continue modernizing What is needed is a strong partnership between
and increasing transparency and options for the the public and private sectors to take advantage
Brazilian capital market, enhancing investment of these opportunities at the right time and in the
while maintaining fiscal discipline and, above all, best possible way.
612
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Valor (2010). Anurio das multinacionais Brasilei- assets. However, the exchange rate cannot
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October, 2010. the most recent years; foreign investment is
ten times higher than the end of the 1990s,
Vasconcellos, E., Nascimento, P., Lucas, P., &
despite the elevated exchange rate.
Nelson, R. (2008). Estrutura matricial-celular para 7
Embraer acelera escolha de fornecedores
desenvolver novos produtos de alta complexidade
para o KC-390 (Embraer speeeds up choice
em nvel internacional: O caso embraer. In Vascon-
of vennders for KC-390)in Jornal Valor
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So Paulo, Brazil: Editora Atlas. 8
The Russian factory was paralyzed during
Williamson, O. (1975). Markets and Hierarchies. the crisis of 2009 and has not re-opened yet.
New York, NY: Free Press. 9
Executivos franceses comandam negcio
da Natura em Paris (French executives led
Natura business in Paris) in Jornal Valor
Econmico, 12/04/2005
ENDNOTES 10
Natura recebe R$ 34,7 milhes do BNDES
para construo de centro tecnolgico (Na-
1
The authors are very grateful to CNPq and
tura receives R$ 34.7 million from BNDES
Fapesp for their support.
to construct technology center) in Jornal
2
Data from the Central Bank shows that
Valor Econmico, 30/04/2007.
Brazilian multinationals repatriated a total 11
In 2006, Vale acquired Canadian mining
of US$ 10.1 billion from their subsidiaries
company Inco for US$ 19 billion. Although
abroad in 2009, which could be interpreted
declared Brazilian OFDI in Canada never
as regression in the process of internation-
reached US$ 1 billion, in the same year
alization. However, this repatriation came
Brazilian OFDI in Bermuda saw an increase
principally in the form of inter-firm loans.
on the order of US$ 14.3 billion.
In the general computation for 2009, Brazil- 12
Emphasizing that, as we have seen, Gerdau
ian companies acquired more assets abroad
does not produce commodities only.
than they sold in a positive balance of US$ 13
Available at: www.bacen.gov.br (last access
4.5 billion - a result much above the annual
in 09/2010)
averages before 2004 (Figure 1), despite the 14
Marcel Malczewaki, president of Bemat-
difficulties imposed by the crisis.
ech. Statement collected by Luis Caseiro
3
It is fitting it highlight Petrobrs, which
on 19/08/2009, during the Five-Diamond
made a capitalization in September 2010 of
Conference in Nova Lima-MG, Brazil.
US$68 billion for investment in the Pre-salt, 15
Interview in newspaper Jornal Valor
announced by the government as the largest
Econmico on: 09/12/2004
in the World History. 16
Source: BNDES Transparency: www.bndes.
4
Folha de So Paulo, January 6, 2008: NY
gov.br. Consulted in 09/2010
negocia mais aes brasileiras que SP (NY 17
Source: BNDES Transparency: www.bndes.
negotiates more Brazilian shares than SP)
gov.br. Consulted in 09/2010
5
Data available on the site: www.ipeadata. 18
In return, the bank required that at least
gov.br. Last accessed 09/2010.
35% of the amount disbursed for works
6
Obviously, currency pegging favored this
be spent on exportation of Brazilian prod-
movement, in lowering the costs of foreign
ucts (Sennes & Mendes, 2009). Folha de
617
So Paulo: Brasil faz obras nos vizinhos 23

Source: Jornal Estado de So Paulo
temendo China (Brazil makes works in 22/04/2010: BB compra sexto maior banco
neighbors fearing China) , 27/09/2009; e argentino (BB buys sixth-largest Argentine
BNDES bate recorde de desembolsos bank).
AL (BNDES beats record disbursements 24
Source: Jornal Folha de So Paulo:
to Latin America), 08/03/2010. 19/01/2010: BB aumentar oferta de crdito
19
Luciano Coutinho interview in Valor empresas brasileiras no exterior (BB
Econmico on September 22, 2009. will increase credit to Brazilian companies
20
Isto Dinheiro Magazine, edition 642, abroad).
January 2010: Braskem agora Brastudo 25
According to UNCTAD (2010a) stock of Bra-
(Braskem is now Bras-everything). zilian companies OFDI is nearly double the
21
Available at: http://www.braskem-ri.com. OFDI of Mexican and Argentine companies
br/braskem/web/arquivos/Brakem_Acor- combined. Additionally, Fernanda De Negri
doAcionistas20100401_pt.pdf. Consulted (2007) shows that the amount of resources
on September 6, 2010. invested by private Brazilian companies
22
Jornal Estado de So Paulo: BNDES em in R&D is nine time greater than Mexican
Londres ter empresa de participaes and Argentine companies combined. This
(BNDES in London wil have have holding performance, while a differential in Latin
company), November 17, 2009. America, is still not sufficient to be equipped
against Asian competition.
618
619
Chapter 33
R&D Internationalization as
Mechanism of Innovation
in Global Enterprises:
A Brazilian Case Study
Simone Vasconcelos Ribeiro Galina

ABSTRACT
Internationalization of Research and Development (R&D) allows transnational companies (TNC) to
access different and important resources overseas, which may lead to the improvement of their techno-
logical innovation. The literature in this field has been mostly created from studies of TNCs coming from
developed countries. This chapter presents some of the main topics the literature addresses on R&D
internationalization, then it will explore and verify how companies in developing countries internationalize
their R&D activities. In order to do so, a bibliographic review about strategies of internationalization
of TNC operations, as well as motivating factors and management of R&D internationalization have
been conducted. The chapter finishes by presenting a case study about international R&D conducted in a
Brazilian TNC. The results enabled to evidence that, like developed countries TNCs, developing countries
companies also seem to perform internationalization of R&D activities with very similar characteristics.
DOI: 10.4018/978-1-61350-165-8.ch033
R&D Internationalization as Mechanism of Innovation in Global Enterprises
INTRODUCTION The chapter finishes with a case study of

Embraco, a Brazilian manufacturer of electric-
The success of technological innovation in enter- electronic products for cooling solutions (hermetic
prises depends on their competences in Research compressors, condensers, evaporators and others).
and Development (R&D), since it is one important This is an innovative company whose manufac-
source of knowledge and innovation. When R&D turing activities are located in three continents
is decentralized to worldwide subsidiaries, corpo- (America, Europe, Asia), also internationalizing
rations are able to access knowledge and connect product development function. This example al-
to local markets. Therefore, these corporations lowed us not only to illustrate topics discussed
improve their competitiveness over firms whose on the literature section, but also to shed light on
innovations are generated on national basis only R&D internationalization by company from an
(Birkinshaw et al., 1998). emerging country.
The spreading of global R&D has grown rap-
idly over the 1990s (UNCTAD, 2005); phenom-
enon resulting from companies originating from STRATEGIES FOR ENTERPRISES
advanced economies such as USA, European coun- INTERNATIONALIZATION
tries, and Japan (von Zedwitz, 2005). However,
internationalization of R&D from developing Internationalization of companies is quickly in-
countries is on the rise (von Zedwitz, 2005, p. creasing as shown by United Nations Conference
127), because MNCs from emerging economies on Trade and Development [UNCTAD] (2009,
are investing in R&D abroad (UNCTAD, 2005). 2005). In 1990, the number of worldwide Trans-
Inevitably, most previous research focused national Enterprises was about 37,000 and with
on the scenarios of developed economies, thus at least 170,000 foreign affiliates; in 2004 this
meaning the issue still needs to be studied from number increased to 70,000 with at least 690,000
the perspective of developing countries (Wu, foreign affiliates; and in 2008 the number of MNCs
2007, p. 298). In this manner, this chapter aims jumped to 82,000 with 810,000 foreign affiliates
at presenting an exploratory research from the half of them being located in developing countries.
Brazilian perspective. In order to do so, it is in- The internationalization of companies is not
troduced a literature review addressing relevant a recent scenario. In the 18th century, there are
aspects of R&D internationalization analyzed in accounts of companies, especially European
a Brazilian company. This bibliographic review ones, which held business out of their country of
is conducted from two approaches: strategy and origin. However, several aspects of globalization
management. The first approach is based mainly (financial, commercial, productive, economical,
on the strategies of companies to locate operations institutional) modified the behavior of companies
abroad by Foreign Direct Investments (FDI) and worldwide, thus intensifying their migration. As
on the driving forces towards R&D Internation- it is presented, globalization is relatively recent
alization. The role of subsidiaries of transnational and was originated amidst the significant growth
corporations is the linking topic for strategy and of the post-World War II international business
management, once distribution of units globally (Baumann, 1996; UNCTAD, 1994), and has
is strategically determined and the interaction consolidated especially due to the technological
among these global units has to be well managed development of fundamental areas to base global
in order to benefit the whole corporation. institutional operation: information technology,
communication and logistics.
620
From works of authors such as Dunning (1993), Multinational Corporations (MNC) or

Bartlett and Ghoshal (1989), and others, it is pos- Multidomestic: They work using the
sible to trace a timeline overview on the global whole production chain in an overseas
actuation of companies since their first efforts of country, with independent unities, and
being overseas to their current globalization strat- mark strong local presence by means of
egies. Companies which operate internationally sensitivity and receptivity regarding do-
present some important behavior changes. In the mestic differences.
1960s, the major worldwide activity was related Global: They are much more centralized
to export operations of output or components to in operational and strategic decisions than
the simplified assembly of products to national/ the MNCs. They have competitive advan-
regional markets. From de 1970s on, there was tage in terms of costs by means of opera-
the building of manufacturing plants in strategic tions centralized in global scale, dealing
countries in order to improve the performance of with the world market as a whole.
local unities and products. International: They explore knowledge
The fierce competition of the 1980s put and resources from the headquarters by
pressure on companies to a more emphatic in- world diffusion and adaptation. The head-
ternationalization of production, although not so quarters exert considerable influence and
adjusted as the one witnessed in the 1990s, when control, but less than in a global company.
productive activities were fully world-integrated, The domestic units are allowed to adapt
that is, companies begin to be described as co- products and ideas from the headquar-
ordinators of an activity network inter-related to ters, although with less autonomy than the
add value (Dunning, 1994, p. 28). MNCs.
Such history overview also influenced the Transnational (TNC): They integrate
classification of current global companies. There processes in global scale, making them
are a myriad of classifications for worldwide com- improved, rationalizing resources, elimi-
panies, that is, those which hold activities out of nating redundancies, and operating world
their home countries. One of the most renowned is spread products. They seek for efficiency
Bartlett & Ghoshals (1989), which classify glob- in order to achieve global competitiveness,
ally operating corporations as follow (Table 1): understand local receptiveness as a tool to
obtain flexibility in international opera-
Table 1. Organizational characteristics of multinational, global, international, and transnational com-

panies (Adapted from Bartlett & Ghoshal, 1989)
Multinational Global International Transnational

Assets and resources Decentralized and Na- Centralized and globally Centralized basic compe- Dispersed, interdepen-
management tionally self-sufficient sited tencies resources, other dent and specialized
multisite ones
Role of the subsidiaries Perceive and explore Implement headquarters Adapt and leverage head- Differentiated contribu-
local opportunities strategies quarters competencies tions of domestic units
to integrated world
operations
Development and Knowledge developed Knowledge developed Knowledge developed in Knowledge jointly
spread of knowledge and kept in each unit and kept in the center the center and transferred developed and shared
to overseas units all over the world
621
tions, and see innovation as result of a pro- its original one). Business risks and complex-
cess which comprises several members of ity increase as there are more involvement and,
the company. consequently, dependence of the company on
its foreign businesses. It results according to the
The differences between these classes can be means of entrance/operation listed as follows:
subtle, and a company may behave in similar man- export, contract, and investment.
ners in more than one of them. In order to make There are several models/theories of com-
the comparison easier, Table 1 shows a sum up of pany internationalization, that is, the strategies it
the organizational characteristics of Multinational, adopts when enter international markets (related
Global, International, and Transactional corpora- to entrance by investment), including Bartlett
tions. Development and knowledge spread may and Ghoshal (1989) presented above. Economic
be the most clearly distinct. The rest of them pres- theories are basically related to currents which
ent less perceptive difference, for instance, the study firm internalization and the factors which
role of the subsidiary overseas of an MNCto lead corporations to internalize their operations
explore local opportunitiesis also common to in another country. One of the most notorious
TNC and can also be fundamental to the survival theories is Dunnings eclectic paradigm (Dunning,
of global and international companies. 1988, 1993, 1994), which avows that the greater
Another approach to the International operation the net benefits of internalizing cross-border
is of a Metanational company developed by Doz, intermediate product markets, the more likely a
Santos and Williamson (2001). The Metanational firm will prefer to engage in foreign production
model focuses on companies coming from coun- itself, rather than license the right to do so (e.g.
tries not among the traditional capital holders or by a technical service or franchise agreement) to
leader industries, hence they can appear to be a foreign firm (Dunning, 2000, p.164).
inappropriate environments to allow local compa- The behavioral theories, whose most known ap-
nies to take part in global competition. However, proach is the Uppsala Model (Johanson & Vahlne,
according to the same authors, once the know-how 1977), relate the incremental internationalization
the companies of these countries need to compete of a company to the level of its learning abroad.
in a global level is not available in their home That means that a corporation would follow an
countries, they are led to develop competencies in established order due to the higher or lower level
market and technology knowledge in an interna- of know-how required: exports, sales unit, opera-
tional perspective. This is a learning opportunity tions subsidiary, and Research and Development
to place them in an advantageous position. (R&D) activities engagement.
Besides organizational characteristics, it is Nevertheless, despite the relevance of this
important to undestand the strategies which lead model and the countless works based on it, this
companies to locate units globally. There are sequence of operation abroad has been questioned
manners for a company to enter the international by new theories and empirical evidence of corpo-
market in terms of business involvement, imply- rations procedures. It is undebatable that many
ing different levels of risk and management com- companies do not follow the sequence determined
plexity. They usually come by exports, contracts by the level of knowledge resulting from their
(association between company and institution in work abroad, that is, they do not follow Uppsalas
a foreign country with no assets investments) or model presupposition. The network theory itself
by direct investments abroad (when a company (Forsgren & Olsson, 1992), also considered a
installs subsidiaries in a different country than behavioral theory, is an approach showing that the
622
need for insertion in a global value-added chain Since the 1990s, it is observed a strong
strongly interferes in the manner a company enters growth of R&D internationalization within
and operates on international markets, as well as global companies. Several studies show that TNC
in the role of each affiliated/subsidiary abroad. investments in R&D are increasingly oriented
Concluding, companies currently operate toward subsidiaries located outside the home
globally aiming to take competitive advantages country (UNCTAD, 2005; Doz, et al., 2006).
in each region/country they locate, and from that The exposure of a global company to a variety of
on, their management process is substantially environmental stimuli is a great advantage over a
changed. An important change refers to techno- national company. Thus, there are several argu-
logical innovation, approached by means of two ments pro-internationalization of R&D, not only
trends: products and processes commercialized, to support local manufacturing activities, but also
developed and manufactured in global scale; and to create interfaces with local innovation systems
decentralization of their R&D. It modifies not only (Ohmae, 1990).
the management of R&D function itself, but also There are different nature of studies related to
of other functions related to it such as operations, the internationalization of R&D. Some of them
marketing, and sales. discusses the subject under the point of view of
One of the issues emerging from studies on in- TNC and their strategies to globalize R&D activi-
ternationalization management is the coordination ties, taking advantage from local situations in favor
of subsidiaries distribution and the role of each of global development (Ronstadt, 1977; Terpstra,
foreign unit (Bartlett & Ghoshal, 1992; Ferdows, 1977; Hakanson, 1990; Bartlett & Ghoshal, 1989).
1997; UNCTAD, 1999). When focusing on R&D Influencing these strategies are factors that orient
internationalization, this subject is highly relevant the investment in R&D towards specific countries/
and it is presented here. regions, and some other works under this approach
were carried out (Cantwell, 1992; Reddy, 1997,
2000; Niosi, 1999; Gerybadze & Reger, 1999;
INTERNATIONALIZATION UNCTAD, 2005; Cantwell & Santangelo, 1999;
OF R&D ACTIVITIES Kumar, 2001; Florida, 1997; Patel & Vega, 1999;
Pearce, 1999).
The roles of TNCs subsidiaries out of their head- Besides these, and yet considering the interna-
quarters origin country are not restrained to the as- tionalization of R&D strategies, there are authors
sistance of local market, but organized in integrated who work on market analysis, establishing prod-
network so that they have the necessary conditions ucts characteristics which can be standardized to
to explore capacities or know-how in each country worldwide markets or need to follow local market
not only in production terms, but also in technol- contingencies in the world perspective, which
ogy development (Cantwell & Santangelo, 1999). may or may not influence the R&D centralization
Transnational companies locate their activities in or decentralization (Hult, Keillor, & Hightower,
sites where there is competitive advantage, and 2000).
besides related to production, these activities Some works in this area refer to manners to
are related to distribution, marketing, and R&D manage R&D world centers and technologic
(Reddy, 2000, p. 10). TNCs are the main agents development activities under different aspects
of productive globalization and consequently (Chiesa, 2000; Gassmann & von Zedtwitz, 1999),
internationalization of R&D (Cantwell, 1994; especially on data/information group exchange
Gerybadze & Reger, 1999). management (for instance, type, costs, code
and infrastructure for the global communication
623
process) and on the organization of work teams that remains today, especially for companies from
around the world (for instance, organizational developed countries and their growing need for
structures, leadership, and team formalization). highly qualified manpower. Internationalization
The literature in internalization of R&D also led the enterprises to search for new knowledge
shows that this is not recent practice by compa- and technologies abroad. In the 1980s, the main
nies. Vernon (1966) shows that in the 1960s the industries involved in globalization of R&D ac-
enterprises exploited resources overseas, including tivities were from microelectronics, pharmacy,
to obtain technological know-how. In 1971, the and civil aeronautics areas.
amount that North American enterprises invested Adapted from Reddy (1997), Table 2 presents
in R&D out of their country was 10% of the total the background process of R&D globalization
invested in R&D (Terpstra, 1977). Reddy (1997) into enterprises. For each decade relevant to the
mentioned that the US Tariff Commission had internationalization of technological development
declared in 1973 that North American companies in TNCs, the author shows driving factors, that is,
carried R&D in foreign countries yet in the 1960s. those which leveraged and favored this interna-
The main industries involved were in the areas of tionalization, the sort of R&D carried out abroad,
mechanics, electrics, and engineering (including and the characteristics of R&D units.
automotive engineering). However, more evidence As observed, internalization of R&D is a true
of this practice emerges only after some works fact. However, the country of origin of TNC is
were carried out in the 1970s, with the famous usually the most important place to the techno-
classification of Ronstadt (1977). It distinguishes logical development of the corporation (Cantwell,
the different types of R&D world units, thus 1995, p. 172), although there is solid evidence of
validating the practices of internationalization of the strong growth of R&D expenses in foreign
TNCs development activities. subsidiaries. According to UNCTAD (2005), from
Another work produced in the 1970s (Behrman 1993 to 2002, these costs rose from 10% to 16%
& Fischer, 1980) presents evidence of R&D unit of the whole investment in R&D. The same study
allocation in developing countries such as Brazil shows these expenses were geographically con-
and India, especially due to some of their charac- centrated. In 2002, for instance, the ten major
teristics: profitable subsidiaries, growing market, economy investors in R&D represented 86% of
and structure suitable to Science and Technology. the world sum, whereas eight of them are devel-
The major industries to internationalize R&D dur- oped countries (China and South Korea, excep-
ing this period were from chemical and food areas. tionally).
The distributed execution of R&D up to middle Also according to UNCTAD (2005), the sort
1970s was difficult, particularly due to some of R&D performed overseas may vary depend-
problems to supervise and control international ing on the region, whereas Asia prevails with the
activities. Such issue was minimized when new most innovator R&D (particularly China, India,
information technologies and communication and Korea). Some new members of the European
were introduced. Community have attracted activities for technol-
Although internalization of R&D has begun ogy innovation; Latin America and the Caribbean
in the 1970s, it became a phenomenon only by have little direct investment in intensive activities
the end of the 1980s (Cantwell, 1995). Back then, and focus on adaptation of technologies or prod-
foreign subsidiaries were involved not only in de- ucts to the local market; some African countries
veloping processes and products to both local and (especially Morocco and South Africa) attract
global markets, but also in basic research (Reddy, limited investments in R&D.
1997). Those were trends introduced in the 1980s
624
Table 2. Background process of R&D globalization (adapted from Reddy [1997])
Driving forces Type of R&D Forms de R&D

1960s entry into the local market abroad adaptation; technology transfer unit own-R&D with manufacturing af-
(TTU) filiate
1970s build-up market share in the local product development for the local mar- acquisition or green-field invest-
market abroad; national government ket; indigenous technology unit (ITU) ments in own-R&D and production
policies facilities.
1980s need for worldwide learning and new products and processes development for own R&D affiliates; joint venture
technology inputs global markets & basic research; global R&D; inter-firm cooperation; sponsor
and corporate technology units (GTU university research; subcontract R&D
& CTU)
1990s access to scarce R&D personnel and products and processes development own R&D affiliates; joint venture
increasing R&D costs for global and regional markets & basic R&D; interfirm cooperation; sponsor
research (GTU & RTU & CTU) university research; subcontract R&D
Great part of the studies on R&D localization to access foreign skill and resources; to reduce
by foreign enterprises in Brazil (Dias & Salerno, development costs with cheap labor; to obtain
2009; Galina, Sbragia, & Plonski, 2005; Gomes, advantage on local ideas and products; trying to
2006) shows that R&D activities done in the coun- accelerate development by means of parallel ef-
try by local subsidiaries are focused on adaptation forts of laboratories working simultaneously; in
of products and processes. However, some TNC order to sustain development activities performed
have considered this country as a guidance of more by companies acquired abroad; to obtain advantage
relevant investment in R&D (Galina, Camillo, & from domestic laws of government incentive.
Consoni, 2010). In general, the pertinent literature presents
Considering early discussion, with the world- two major subjects to list the main reasons for
wide distribution of R&D, companies look for R&D internationalization (Chiesa, 1995; Florida,
greater competitive advantage. It is known a 1997): marketing-related factors (necessity to
myriad of arguments favorable to the interna- access markets, responding to local needs and
tionalization of product development not only strengthening bonds to clients/consumers), and
to support local production, but also to create technology-related factors (qualified labor, out-
interfaces of local innovation systems (Ohmae, standing technology). Chiesa (1995) states that
1990). In the next section the main reasons that factors related to technology and demand are the
underlie companies decision to internationalize two main reasons to promote R&D internation-
R&D are debated. alization. There is also factors regarding finance
aspects, such as labor cost reduction and local
incentive policies; and some other more subjective
DRIVING FORCES TO R&D factors such as the connection between headquar-
INTERNATIONALIZATION ters and subsidiaries in what concerns personal
relationship of their respective executives.
There are many reasons for R&D resources to The market-related factor is motivated to the
be directed to countries other than the company adaptation of products to foreign markets and to
headquarters. Terpstra (1977) summarizes the production/operation technical support. When
most frequently found among TNCs: in response locating their units abroad, the TNCs look for a
to the pressure applied by host countries; in order better service to their client, with more appropri-
to improve international relationships; intending ated and faster adaptations of products, essentially.
625
When establishing development activities in branches try to maximize the local technological
sites next to the clients, the enterprises are better development by means of receiving incentive or
structured in order to understand and to provide pressure. They are more successful with foreign
local needs more efficiently, especially because enterprises which buy domestic companies and
in general TNCs have gigantic and extremely red ensure continuity to R&D processes than pres-
tape organizational structures, thus complicating suring these foreign companies to start new local
the decision-making process. The marketing factor R&D activities.
is considered less relevant or more superficial, as As for financial factors, despite less relevant,
quoted by Inzelt (2000): skin-deep collabora- companies have shown they take them into
tion. account when spreading their development ac-
The second factor, related to technology, is tivities worldwide, especially when they choose
aimed at guaranteeing access to Science and Tech- developing countries. As mentioned by Reddy
nology (S&T) and qualified human capital, and (1997), development costs in research centers
creating bonds with local science communities. based in developing countries (India, Brazil) are
Once more intrinsic to the development process, proportionally lower than in traditional centers.
this factor is considered more relevant, since In what concerns the factor of relation between
it establishes a deeper relation of dependence headquarters and subsidiary, the most subjective
between the company and the regions where the of all, it is important to consider that if the com-
subsidiaries are. It is what Inzelt (2000) calls pany staff involved in strategic decision-making
soul-deep collaboration. handles good relationship with the subsidiarys
Yet regarding technological factors, Cantwell executives, chances are for the local unity sig-
(1992) mentions two approaches as main reasons nificantly involve in corporate technological
to the internationalization of R&D: to obtain ad- development. For Birkinshaw and Hood (1998),
vantage from distinct innovations characteristics a high quality relationship between headquarters
in different domestic systems, thus gaining access and subsidiaries has a positive impact on enter-
to further technologies, and to have contact with prising subsidiaries, that is, those working for
new threads for technological innovation. the development of local competencies.
Despite considered more or less relevant, Summarizing, factors (or driving forces)
technological and marketing factors are para- considered by companies to increase internation-
mount to attract local investors, thus enabling the alization of R&D are many. They may be related
transformation of less advanced countries in more to some companies internal aspects (such as
advanced ones. It is also common to see companies internal competence, relationship among units,
which consider both factors when guiding their historical trajectory/path, etc.), to environmental
investments in R&D abroad. aspects (such as market characteristics, level of
The internationalization of R&D is often a wages or existence of competencies on local uni-
result of actions non-related to company strate- versities or research centers) or to public policies
gies such as govern requirements, acquisition of (direct incentives to internationalization). These
foreign units already owning R&D departments, factors are motivated mainly by marketing and/
etc. (Granstrand et al., 1992). For Terpstra (1977), or technological reasons.
governments of countries where MNCs have
626
MANAGEMENT OF products for the local market); Outpost (monitors

INTERNATIONAL R&D the local environment for the global corporation);
and Lead (creates new processes, products and
Roles of Subsidiaries technologies for the entire organization).
In every one of the subsidiary role classifica-
As previously stated in this chapter, transnational tions (models) mentioned, there are company units
organizations structure themselves in order to ob- in charge of generating technology for the sub-
tain most units abroad. To do so, subsidiaries are sidiary itself or even for the entire corporation.
given strategic roles and responsibilities and are Ronstadt (1977) shows different types of units
distributed all over the world so the resources of which perform overseas R&D (out of the origin
each country can be reasonably exploited. There country of the company) by TNCs:
are several classifications to the subsidiaries roles
of global enterprises (Bartlet; Ghoshal, 1989; Technology Transfer Units (TTUs):
Birkinshaw, 1996; Ferdows, 1997; Gupta & Go- Enable technology to be transferred from
vindarajan, 1991, 1994; Pearce & Papanastassiou, headquarters to subsidiary and provide lo-
1996; Roth & Morrison, 1992; UNCTAD, 1999). cal technical services.
The typology presented by Ferdows (1997) is Indigenous Technology Units (ITUs):
based on a cross between local competencies (high Develop new products to local market us-
and low) and three clusters of strategic reasons: low ing local technology.
production costs, market proximity, and access to Global Technology Units (GTUs):
skills and knowledge. This combination lead to six Develop new products and processes to
subsidiary roles (Figure 1): Offshore (not innova- major world markets.
tive and abiding by corporate decisions); Source Corporate Technology Units (CTUs):
(autonomous with regard to certain manufacturing Generate basic long-lasting exploratory
activities); Server (produces for the local market); technology to be used by the headquarters.
Contributor (has its own process engineering and
Figure 1. Strategic roles of subsidiaries (Ferdows, 1997)
627
Adding to this typology developed by Ronstadt, This typology was tested by the authors in
Reddy (1997) offers, and quite appropriately so, North American, European and Japanese compa-
another class of global R&D units as certain nies, and the model was then validated. However,
regional clusters are also becoming stronger they found internal differences in organizations
despite market integration around standards and in what concerns the role of know-how and its
technologies (Reddy, 1997, p. 1822): flow to the subsidiary. Thus, it shows that the
role of technology to TNCs unities does not vary
Regional Technology Units (RTUs): only according to their nationality and industry
Develop products and processes for re- sector, but also depends on the characteristics of
gional markets. the each enterprise. It indicates that this situation
is highly complex and that attempting to create a
Ronstadts classification is a way to understand systematic strategic and practical pattern or model
that subsidiaries play important roles in innova- in the transfer and allocation of technology may
tion. Terpstra (1977) suggests that the more a be very troublesome (Howells, 2000).
company is engaged in international business, In short, independently from the typology of
the more significant its businesses are, as well as subsidiaries roles, a TNC is aimed at coordinat-
its R&D activities. ing a global network in order to take the best
Related to the debate on classifications relating advantage from spatial assets, and once they are
transfer of technology/knowledge to corporation specialized and interdependent, the subsidiaries
strategies, there is a seminal work by Gupta and make differentiated contributions to integrated
Govidarajan (1991, 1994), focused on the subsid- world operations (Blarttlet & Ghoshal, 1989).
iary roles in the company structure. It identifies This logic of the role of operational subsidiaries
four generic roles for TNCs abroad units: comprises the development and propagation of
knowledge in the world corporation, which is
Global Innovator: The subsidiary acts as jointly developed by different domestic units and
a leader in the development and knowledge shared all over the world. Since it is important to
to other unities of a product group particu- analyze, that is the subject to be discussed in the
lar technology. next section.
Integrated Player: The subsidiary is as a
source of technology creation as a key user Structure for International R&D
of a technology developed by other unity.
Implementer: There is little engagement In basic, Hakason (1990) suggests that the structure
of the subsidiary to build know-how, and TNCs use to perform world R&D has three basic
it is strongly dependent of technological stages: centralized, decentralized, and integrated.
transfer from other TNC units. Gammelgaard (1999) presents a model to the work
Local Innovator: The subsidiary is re- division of international R&D which initially
sponsible for developing technology to establishes the difference between centralization
key functional areas, although almost to- and decentralization, besides the specification
tally of local use, there is, the knowledge in case the company chooses a decentralized
developed by itself is too idiosyncratic to development. In this case, it is necessary to es-
be used in other countries. tablish whether the company will operate in top-
to-bottom strategy, when the tasks are assigned
by the headquarters, or in bottom-to-top strategy,
628
when there is a greater autonomy of the branches, a number of international subsidiaries of world
developing products on the subsidiary (bottom) enterprises and the interaction among them, there
and sending to the headquarters (top), then to the is a classification with four R&D structures:
whole organization.
In a little wider view, Bartlett & Ghoshal (1990) Isolated Specialization Structure: A for-
present four different structures to the management eign laboratory is totally responsible for
of innovation processes: the development of certain global technol-
ogy/product/process. This research center
Central-for-Global Innovations: The de- is unique in the TNC on the referred area.
velopment of new products and processes It is considered center of excellence, and
is promoted in the home country and trans- there is no interaction between units on
ferred to global markets. the course of the project development. The
Local-for-Local Innovation: Independent transfer of knowledge is limited mostly to
development of new products and pro- the phase of introduction of products to the
cesses occurred in each R&D unit, with subsidiary market, going from the center of
worldwide distribution and oriented to the excellence to the TNC units. It can be per-
subsidiary local market. formed in different ways, with temporary
Locally-Leveraged Innovations: The de- transfer from the central unit to the sub-
velopment of new products and processes sidiary (usually when the product is pro-
is made in the subsidiaries and distributed duced in the local unit) or the employees
to the company as a whole. are trained in the center of competency to
Globally-Linked Innovations: The devel- provide technical support to the introduc-
opment is promoted in collaboration with tion of the product in a local market (usu-
R&D units located in different countries ally when the product is produces in a local
for operating profits of global markets. different from the subsidiary). This struc-
ture is also known as Center of Excellence
Each of these management modalities presents Structure (Chiesa, 2000).
advantages and disadvantages, and is applied Supported Specialization Structure:
according to the company strategies and its busi- There is a global center responsible for
ness characteristics. They comprise a number R&D work, as well as in the isolated spe-
of technological development possibilities in a cialization structure. However, there are
transnational company, whether centralized or not. many units in different countries which
However, in order to decentralize R&D, provide the global center with informa-
companies make use of different strategies when tion useful to the innovation and devel-
distributing their activities and control worldwide. opment of new products, originated from
Ronstadts typology (1977) presented in the previ- requirements technology and marketing)
ous section does not include intraorganizational of the local environment. Such structure
relationships, although widely used as pattern of combines the specialization/concentration
TNCs international R&D. benefits (efficiency, scale economy, proj-
The literature shows many models for decen- ect coordination low cost) with the pos-
tralized development management, even with sibility of monitoring local opportunities
central coordination. In the model developed of innovation. In this structure, the only
by Chiesa and Manzini (1996), an analysis of phase to not imply in transfer of techno-
629
logical knowledge is development itself These different structures are more frequently
(Chiesa, 2000). The phase of creation/ used for the development of products. For the
conception takes place in the central unit, research activities, the network structure is more
but the information originates from other usual since each unit makes its own program under
supervision units. The strategies to transfer some coordination, but the effort duplication is, in
knowledge are similar to those used in the a certain way, allowed (Chiesa, 2000). The build-
isolated structure. ing of similar projects by many units at the same
Specialized Contributors Structure: A time is a way to accelerate the learning process,
division of tasks is established among units, since each subsidiary work on different manners
thus maintaining a centralized coordina- and under different perspectives, which can lead
tion and each subsidiary is attributed indi- to internal competition among independent units,
vidual activities within the program. The thus increasing their creativity and benefiting the
know-how developed in each unit is trans- company as a whole (Chiesa, 2000).
ferred to the central. In this structure, the A classification similar to Chiesas was devel-
interaction between globally spread units oped by Gassmann and von Zedtwitz (1999), who
is much more complex than the supported present five models of structural and behavioral
specialization structure. In the conception orientation in international R&D organizations:
phase, the data flow is ongoing from the
units to the center and among the subsid- Ethnocentric Centralized R&D: Every
iaries themselves. The phases to define the R&D activity is concentrated in the head-
project and the technical development are quarters country of origin, considered
performed by international teams and in- technologically superior to their subsidiar-
volve different units. That is, in this type of ies. Their purpose is to protect against
structure, there are much more interaction their competitors technologies regarded as
in the phases of definition and technologi- fundamental to the company.
cal, product and process development. Geocentric Centralized R&D: It central-
Integrated Laboratories Structures: izes know-how acquired over the world
Different laboratories spread across many and technologies available in overseas
countries and operating in the same pro- countries by means of sending R&D em-
duction segments or technological areas. ployees abroad in order to intensify rela-
The TNCs holding such structure tend to tionships and collaborate to the local pro-
give autonomy to foreign laboratories, but duction, suppliers and key clients. In this
their initiatives and activities are centrally manner, it is adopted in companies more
monitored in order to avoid duplications, dependent on foreign markets and local
coordinate spread efforts, and engage competencies than those which make use
different markets. Just as in the special- of the ethnocentric model.
ized contributors structure, the transfer of Polycentric Decentralized R&D: It is
knowledge is made with close interaction characterized by local development labo-
among the many unities in the phases of ratories with no supervision of the corpora-
planning, formulation and technological tion center, whose relationship is restricted
development. A second name given to such to the report of activities from the local
structure is Network Structure (Chiesa, labs to the headquarters. The subsidiary
2000). R&D directors report directly to the man-
ager of their own unit.
630
R&D Hub Model: The R&D central unit, ethnocentric to a geocentric structure. Another
usually located in the headquarters, is the current presented by Gassmann and von Zedtwitz
corporation technological leader since it is (1999) intends to create a R&D decentralization,
the major advanced R&D laboratory. All then characterizing the transition from a central-
activities are decentralized, though tightly ized structure (ethnocentric or geocentric) to a
controlled by the head office. These foreign central coordination model (Hub).
labs are usually involved in local monitor- As the R&D local units across the world in-
ing and focus their activities on predeter- crease their technological competencies, a third
mined technological segments. current of structural change is identified; an evo-
Integrated R&D Network: In this struc- lution based on the autonomy the R&D control
ture, each integrated network unit spe- center grants to the local units and, due to it, hey
cializes in a product, component, or tech- become more flexible and free to carry technologi-
nological field, thus becoming center of cal development. This change characterizes the
competency in its segment and has world transition from a central coordination structure
product mandate for both product devel- (Hub) to an Integrated Network.
opment and introduction to other markets. A fourth tendency identified by Gassmann
Differently from the Hub structure, the and von Zedtwitz is related to enterprises whose
R&D foreign units play strategic roles, that international R&D growing and strengthening
is, a center of competency should not only background based on labs is relatively autono-
supervise potential changes, but also en- mous. When these companies identify the benefits
gage in defining strategies and prospecting of integration and interconnection of their inter-
businesses, reaching the TNC as a whole. national R&D activities, centers of competencies
Once connections are established among are created, and mechanisms to coordinate them
the participant units, this structure requires are introduced. This tendency characterizes the
a complex coordination of the R&D inter- transition from a polycentric structure to an inte-
national activities. grated network.
However, in order to reduce costs, the compa-
These structures are not definitively established nies which adopted the Integrated Network struc-
in a company, that is, the international organization ture are forced to focus their efforts on a smaller
can be and usually is continuously modified number of centers of competencies, characterizing
in order to promote the evolution of R&D pro- a R&D recentralization. This consolidation is
cesses. Gassmann & von Zedtwitz (1999) point aimed at exploring scale effects and improving the
five currents to this change, all based in two coordination of R&D global activities, thus reduc-
criteria: allocation of R&D activities (centralized ing task duplication and intensifying the transfer
or decentralized), and type of integration among of technology among laboratories (Gassmann &
teams (competition or cooperation). von Zedtwitz, 1999, p. 246).
The first tendency pointed by the authors The polycentric decentralized model must
emerges from the necessity to align the R&D be highlighted: is the dying model among the
process with the international market require- five forms of international R&D organization
ments (increasing cooperation in favor of the (Gassmann & von Zedtwitz, 1999, p. 241). In
development of products and processes), so the this structure, despite the benefits from strong
R&D center starts to gather outer information and orientation to local markets, the lack of central
feedback. It characterizes the modification of an coordination increases costs and efforts to promote
631
R&D. According to the authors and creators of The company exports for more than 80 countries
such, the polycentric configuration leads to the and, besides Brazil, it has factories in Italy, China,
central control (Hub) or the integrated network. and Slovakia. In addition to globally locate its
Under Gassmann and von Zedtwitzs consid- manufacturing activities, it also international-
eration, the similarities between these structures izes product development intentionally (Galina
and those developed by Chiesa are stronger. & Moura, 2010).
Furthermore, both classifications complete each
other. There are common points, in special those Methodological Aspects
regarding clear divisions between the two main
characteristics: development centralization (with In order to analyze the R&D function within the
or without the participation of development local company, as well as its internationalization, we
units), and the integration in favor of the develop- looked into the following: the structure of R&D
ment (with a stronger or lighter connection with functions, how to implement it, how product
the development local units). development activities are conducted by the com-
In short, the modes of managing global prod- pany in Brazil and, finally, how they are carried
ucts development may differ from sector to sector, out abroad.
and company to company. There are a myriad of The case study was made by extensive in-depth
relevant aspects to consider in the international- face-to-face interviews with the R&D director,
ized R&D management process, but two of them the manager of product development and the
are more intensely debated. One are related to manager of internationalization. These interviews
the division of work among teams distributed were made with a semi-structured questionnaire
throughout global subsidiaries, and the other which addresses specific issues contemplated in
refers to the organizational structure required to this study: the driving forces, roles of subsidiaries,
coordinate these R&D functional unities, both and structure for R&D offshore.
studied in the present section. Data used in this study are not only primary,
but also secondary, and they were collected be-
tween the years of 2006 and 2007. The sources of
R&D INTERNATIONALIZATION secondary data included: news, scientific articles,
OF A BRAZILIAN COMPANY reports on internationalization process of Embraco
compared to other Brazilian multinationals, and
The present section presents an example of documents gathered directly in the organization
international R&D carried out by Embraco, (reports, contracts, plans, metrics).
a former Brazilian company now part of the
North-American Whirlpool Group. Although it Results and Discussion
is formally a company from USA, its R&D (like
most of its operations) is still managed from Brazil The main drive forces that led Embraco to inter-
and by Brazilian executives, which make it an nationalize R&D were as follows:
interesting case of a Brazilian company with
North-American capital control. Adaptation of products to local markets:
Embraco is a manufacturer of electric-elec- Embraco has, with regard to technologies
tronic products for cooling solutions, including already dominated by the company, grant-
hermetic compressors, condensers, and evapora- ed autonomy to its subsidiaries to adapt
tors. It employs around ten thousand people, was and customize products and manufacturing
founded in 1971 and its first FDI was in 1994. processes according to the characteristics
632
of local plants and markets. The company In relation to the role of foreign subsidiaries,
has opted for decentralization because it two of the three plants owned by Embraco outside
needs to operate closer to the customer and Brazil have considered proximity to market as
to respond more quickly, and this means strategic reason for being located in the site, but
identifying customer needs, translating one of them (Italian unit) creates new processes,
them into projects and implementing these products and technologies for the entire organiza-
in a shorter time period than it would be tion (in specific niches), being considered Lead
possible if development were centralized. of the global corporation according to Ferdows
Development of partnerships with lo- (1997). According to Ronstadts classification,
cal suppliers: The internationalization of the Italian subsidiary may be classified as Global
manufacturing activities at Embraco has Technology Unit, and the other two are Regional
enabled its offshore plants to develop a lo- Technology Units.
cal supplier interface that can not only fos- It is worth to consider, however, that Embracos
ter cooperation to improve technology but Server unit in China is going through a process of
also improve local product development. this kind as the company is considering the pos-
Thus, agility is not restricted to the com- sibility of transferring to it certain R&D activities
panys responsiveness to its customers; in that were handled exclusively in the home country
fact, it permeates the entire supply chain. (Brazil). Thus, the plants strategic focus is shift-
Technology monitoring and accessing: ing from market proximity to access to skills and
Embraco is offshoring R&D activities to knowledge, what may lead it to be reclassified as
China not only because of the rapid growth a Lead unit (Ferdows, 1997) and a Corporate
observed in that market but also because Technology Unit (Ronstadt, 1977). Still with
of the large number of engineering gradu- regard to Embraco, the companys plant in Italy
ates and post-graduates entering the job is undergoing a reverse process. At the time of its
market every year, which is transforming acquisition, the plant had a product line that the
some regions in that country into centers of parent company lacked, which offered an opportu-
excellence in technology. The same com- nity for the latter to internalize new competencies.
pany also benefits from its local partners Despite the disadvantages, Embraco opted for a
to monitor technology development. The divestment strategy, causing the plant to shift
company studied indicated that the devel- its focus to high value-add products and thereby
opment of proprietary technology was also to become operationally sustainable. However, if
a decisive factor behind internationaliza- the situation becomes unsustainable, a plant previ-
tion. It claimed to have signed contracts ously classified as a Lead unit can be reclassified
with competitors to acquire technology for as an Outpost.
the ultimate purpose of developing prod- Thus, summarizing, the Italian subsidiary is a
ucts of higher quality. In other words, the global technology unit while the one in Slovakia
company attempted, from the very begin- can be regarded as a regional technology unit.
ning, to monitor the overseas technology Finally, the plant in China is a regional technol-
environment. Many of the technological ogy unit that may become a global and corporate
competencies were internalized from technology unit as the company plans to expand
abroad, which then allowed the company the R&D function there.
to develop its own. Concerning to the coordination of R&D in Em-
braco, we may consider that the company shows
two R&D configurations: one for the development
633
of company-dominated technology, and another The case study draws two general conclusions:
for non-dominated technology. In the first case, first, Brazilian TNC internationalizes its R&D,
the offshore units are free to engage in product thus corroborating with studies pointing tendency
development activities with very little coordina- to the growing of internationalized R&D in devel-
tion from the parent company because the purpose oping countries companies (von Zedwitz, 2005;
is to streamline products and processes for local UNCTAD, 2005). Second, this Brazilian interna-
markets. This configuration could therefore be tionalization is performed similarly to developed
described as polycentric decentralized. However, countries. Similar conclusions are achieved by
with regard to technologies not yet dominated by Wu (2007) in his study on Taiwanese companies,
Embraco, R&D is almost entirely conducted by showing that firms in developing countries appear
the headquarters in Brazil. The purpose here is to to follow a similar path towards the globalization
allow the organization to internalize the knowledge of R&D activities (Wu, 2007, p. 308).
first. Once the technology has been mastered, it The study presented in this chapter was
is then internationalized to the manufacturing carried out from gathering important issues on
units. Thus, this configuration was regarded as global R&D strategies and management. One of
ethnocentric centralized. these issues is the driving forces towards R&D
The division of the company in dominated- internationalization, and the results of the Brazil-
technology and not-dominated-technology proved ian company are also related to the most known
to be an interesting approach to the management factors that influence corporations: market and/or
of technological innovations. That management technology. Another issue is related to the roles
maintains centralized R&D activities for not- of foreign subsidiaries, which are determined by
dominated-technologies at the same time that it Embraco the same way as companies from devel-
establishes mechanisms for transferring this tech- oped countries determine specific contributions
nology, when dominated, to foreign subsidiaries, of affiliates for integrating a global corporative
disseminating knowledge throughout the organi- network. Finally, management of global R&D also
zation and enabling that further developments of follows established rules observed in the literature.
this technology are carried out also abroad. From the results, we conclude that Embraco
has decided to internationalize its product de-
velopment process by looking for better condi-
CONCLUSION tions for meeting the clients needs in foreign
markets, and this organization has been succeed
This chapter presented a theoretical literature on this purpose. Competencies and experiences
review which demonstrated that transnational of the R&D team abroad were assimilated into
companies have accessed important resources the corporation headquarters (in Brazil) in a
abroad by internationalizing R&D, and also their way they have intentionally decided to locate an
R&D investments into foreign subsidiaries have R&D unit in China, intending to access skills and
presented strong growth. Most of literature has knowledge. R&D activities were thus managed
been based on studies with TNCs from developed in order to have differentiated contributions of
countries. Studies on global R&D are neglected for domestic units, leading to jointly development
developing countries (Wu, 2007). Corroborating of knowledge, similar to transnational model by
to this discussion, this chapter shows a study with Bartlett and Ghoshal (1989). Considering this
a Brazilian company that have internationalized reality, it raises the question whether companies
its product development. from emerging countries that recently have been
globalized (the called late movers) may follow,
634
some decades later, the same steps to consolidate Birkinshaw, J., Hood, N., & Jonsson, S.
TNC in terms of R&D internationalization. The (1998). Building firm-specific advantag-
answer is positive for the example here analyzed, es in multinational corporations: the role
but it requires additional research to achieve fur- of subsidiary initiative. Strategic Manage-
ther conclusions. ment Journal, 19(3), 221241. doi:10.1002/
(SICI)1097-0266(199803)19:3<221::AID-
SMJ948>3.0.CO;2-P
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638
Section 9
Information Systems and
Innovation
640
Chapter 34
Tools That Drive Innovation:
The Role of Information Systems
in Innovative Organizations
Jason G. Caudill
Carson-Newman College, USA
ABSTRACT
The purpose of this chapter is to examine computer technology as a tool to support innovation and
innovative processes. The primary problem that this chapter is intended to address is the multitude of
widely held misconceptions that seem to exist regarding technology and innovation; technology is not
innovative in and of itself. The primary method of research for this chapter is a literature review and
case study method examining how technology is being successfully integrated into innovative processes
in industry. Specifically this chapter focuses on technologys role in communication and creativity, two
of the many activities found in an innovative process. Findings indicate that while directly connecting
technology use to innovation is difficult, technology can play a substantial role in facilitating the innova-
tive process. Thus, technology is a qualifier for many innovative processes, a resource that is necessary
for the work of innovation to take place.
INTRODUCTION Businesses produce the goods that people need

to live and provide the jobs that people work to
In modern, developed countries around the world earn money to purchase what they need. Peoples
commerce, and by extension life itself, have incomes and spending habits, in capitalist markets,
changed dramatically in the past few decades. drive businesses in what they do to capture market
Commerce ultimately touches every aspect of life. share and generate profits. While this connection
DOI: 10.4018/978-1-61350-165-8.ch034
Tools That Drive Innovation
between people and economic activity is certainly as tools through which innovative activities can
not new, the way in which much of this interac- be fostered, and with which efficiencies and ef-
tion occurs is. fectiveness can be improved.
The rise of ecommerce and the globalization
of commerce have changed not only the methods
by which people consume goods and services, but TECHNOLOGY AS A TOOL
the very development of those goods and services.
Innovation is central to this change as, ICTs (in- Technology is an incredibly powerful force in the
formation and communication technologies) foster developed world. Compounding not only tech-
a broad spectrum of innovation activities which nologys importance but also its impact, the rise
involve the individual, organizational, industrial, of digital technology and its penetration into the
and national levels of economic productivity market has been unrivaled in human history. In
(Ho, Kauffman, & Liang, 2008, p 1). Markets just a few short years personal computers moved
of all types are more dynamic now than at any from very expensive diversions for a limited
time in the past. Product development moves number of technically-engaged hobbyists to a
more quickly, products change more often, and common household appliance. In just a few more
consumer expectations are for this to happen and years they moved from being stand-alone devices
continue to happen. Brynjolfsson and Schrage to networked devices that brought the world
(2009) explain that, Technology is transform- into living rooms and offices. Ultimately, such
ing innovation at its core, allowing companies to connectivity moved from full-sized computers
test new ideas at speedsand pricesthat were to handheld devices in the form of smartphones.
unimaginable even a decade ago. Such devices are constantly changing and
In todays digital age innovation and tech- the highly competitive marketplace brings new
nology are inexorably linked. Baldwin and von features and new models to customers on a fre-
Hippel (2009) explain that technologies like the quent basis. Technology is inherently innovative,
personal computer and the Internet provide more particularly where competition among technology
opportunities for innovative activities to occur in providers is concerned. Where misunderstanding
more forms. Many people may feel that technol- often occurs is the idea that just by having technol-
ogy by virtue of its existence is innovative, and ogy in a process that process becomes innovative.
that applying technology to any situation means Technology is, and always has been, nothing
that innovation is taking place. While perhaps more than a tool. Dosi (1988) explains that, In
understandable this is not at all accurate. This very general terms, technological innovation in-
chapter will discuss technology as a tool, an aid to volves the solution of problems-for example, on
the innovative process. There are many different transformation of heat into movement, shaping
ways that technology can be appropriately applied materials in certain ways, producing compounds
to innovation, and innovation has benefitted from with certain properties-meeting at the same time
these applications, but an innovative process must some cost and marketability requirements (p
exist before technology can serve as an aid to it. 1125). Notice that not only does technology
Technology in this sense is not in itself a creator solve problems, but it solves problems within the
of competitive advantage, but it does serve as a bounds of what is acceptable in the marketplace.
facilitator to innovative activities through which The innovation is not the technology, rather the
advantage can be gained. The focus of this chapter technology helps to find the answers as part of
is to introduce ideas of technology applications an innovative process.
641
As a tool technology can serve to enhance in- Thus, what we think of as a single innovation is
novation. Better communications, faster analysis often the result of a lengthy process involving
of data, greater ability to assess alternatives, and many interrelated innovations. This is one of
many other factors make digital technology a great the reasons why many students of technology
asset to the process of innovation. Technology is and innovation find it natural to apply a systems
not a traditional capital investment, but serves a perspective rather than to focus exclusively on
more general purpose for an organization; invest- individual inventions/innovations (p 4).
ments in information technology can contribute
to higher productivity and it is such related Historically, communication technologies have
contributions that provide a return on technol- been of substantial importance to humanity. From
ogy investments (Brynjolfsson & Hitt, 2000). clay tablets to parchment scrolls to Gutenburgs
Not only can technology enhance innovation printing press the written word made archiving and
through providing focused process improvement, disseminating information ever more accessible
it can also impact the innovative nature of an (Schneiderman, 2000). Going forward broadcast
organization as a whole. Bartel, Ichniowski, and media, radio and television, and then the Internet
Shaw (2007) noted in their study on information have reached people in remote locations all over
technology and innovation that, the adoption the world and changed daily lives in society
of new computer-based IT also increases the skill (Schneiderman, 2000).
requirements of workers, notably technical skills, Von Hippel (2002) examines innovation net-
while also promoting the adoption of new human works as the development mechanism for free and
resource practices (p 1723). Not only do tools open source software applications. Communica-
give workers more options, but the presence of tion is part of that innovation network, explained
new tools can change the practices and capabili- in context as, individual users do not have to
ties of those workers. This chapter will be dealing develop everything they need on their own: they
primarily with todays digital technology, but the can benefit from innovations developed by oth-
concept of technology and integration holds true ers and freely shared within and beyond the user
for all types of technology; effective tools enhance network (Von Hippel, 2002, p 1). The process
innovative processes. of innovation is certainly much more than just
communication, but communication does play
a key role in innovative activities. Increasingly,
TECHNOLOGY, INNOVATION, this communication takes place through the use
AND COMMUNICATION of technology.
Herrmann (2008) discusses the field of Com-
Sometimes innovation is the result of a single puter Supported Collaborative Work (CSCW),
individual finding enlightenment or inspiration to which focuses on using computers to support
change the way something is done or made. More creativity. Herrmanns work explores the idea
often, particularly in organizational contexts, in- that while different people engage in the creative
novation is the result of collaboration, teamwork, process in different ways technology tools are
and ultimately communication. Fagerberg (2005) flexible enough to support individuals according
explains that: to their preferred work habits. These technology
tools can take many different forms in CSCW,
including: supporting the large picturevisu-
642
alization of rich material, malleability of shared Communication and collaboration may be

material and stimulation of variations, support of somewhat interchangeable terms. If people pursu-
convergence within evolutionary documentation, ing innovative work are communicating, they are
smooth transitions between modes of creative in effect collaborating, and if they are collaborating
collaboration, and integration of communication with others then there must be communication.
with work on shared material (Herrmann, 2008). Regardless of this connection the exchange of ideas
Awazu et. al. (2009) identifies five roles of is critical to the innovative process. The difficulty
information and communication technologies in many situations is that in any circumstance
(ICTs) in innovation: understanding idea sources; teamwork poses challenges to organization and
documenting ideas and sources; distribution and management. In an innovative effort, however, a
sharing of ideas for cross-application; idea design, common space must be developed. The abstract
testing, and refinement; and idea commercializa- territory in which design search takes place
tion. These ICT roles mirror Herrmanns (2008) (p 1297) has been termed the design space (Bald-
view of the benefits of technology tools in CSCW. win, Hienerth, & von Hippel, 2006). Herrmanns
Supporting the large picture and visualizing rich (2008) points about the assistive possibilities of
material can be support functions for document- technology and innovation can be part of creating
ing and distributing ideas. Shared material and the design space to provide innovation a place in
stimulation of variations can support distribution which to happen.
of ideas as well as idea design, testing, and refine- Innovation thrives on the input of multiple
ment. Support of convergence can benefit idea perspectives, but often such diverse inputs create
commercialization. These tools of technology- overly complex decision environments. Inter-or-
enabled collaboration align with the innovation ganizational collaboration, partnerships between
benefits of ICT. multiple organizational entities, is an important
In order to successfully fill these roles ICTs part of business innovation today, but even with
must be properly implemented and managed in the such great potential value as many as 60% of such
firm. This is not a static effort, rather continuing ventures fail (Faems, Van Looy, & Debackere,
monitoring, assessment, and updating must occur 2004). As industry continues to progress towards
in order for a firm to apply technology towards a more global operating environment there are
maintaining continual competitive advantage. certainly opportunities for more diverse perspec-
McAfee and Brynjolfsson (2008) define a three- tives to act as inputs for innovative processes.
step process for doing so: Concurrently, there are also many more compli-
cating factors, ranging from global differences in
Deploy: adopt a uniform technology time zone, the impracticality of physical meeting
platform; spaces, and language barriers. Additionally, tech-
Innovate: design better ways of doing nology can increase participation in innovative
work; processes by better incorporating persons with
Propagate: use IT to replicate process disabilities into active participation. Technology
innovations. in the form of CSCW can offer technical solutions
to these organizational issues and, by eliminating
If technology is properly managed then it can the barriers, enhance innovative activities.
successfully fulfill its role to support communi- In relation to time zone issues, asynchronous
cation and collaboration as a component of the communication technologies are a familiar tool to
innovative process. many today. Discussion boards and other forums,
in addition to older technology like e-mail listservs,
643
give contributors the opportunity not only to share Any exchange, whether synchronous or
their ideas at any time but also to have those ideas asynchronous, ultimately depends on a common
archived as a part of the innovative process for language existing among the participants. While
later reference. Both the ability to communicate still in its early stages there are technical solutions
effectively across time zones, effectively creat- to language barriers. Software solutions exist that
ing a 24-hour a day office, and the archiving of can roughly translate written materials online and
conversations can aid everyone involved in the display the result in a variety of languages for the
process. If technologies are used that provide for reader. Admittedly these technologies are not a
the threading of discussions effectiveness is further substitute for a fluent speaker of the language, but
enhanced by keeping topics closely connected for todays solutions can serve as a stop-gap measure
better understanding of all involved. when absolutely necessary. In the future such
Asynchronous exchanges do have their technologies will hopefully advance to a point that
limitations and sometimes the only way to ef- language barriers are virtually invisible through
fectively resolve development issues is through electronically-mediated communication.
live, synchronous exchanges. Globalization has All of the previously discussed solutions and
been a complicating factor in such meetings for others can also be very useful in giving individuals
many years due to the distances separating team with a broad range of disabilities the opportunity
members or contributing groups in different coun- to take an active role in the innovation process.
tries. Through the economic downturn that began Computer-mediated communications provide
in 2008 this difficulty has been compounded by users with auditory or visual disabilities many
the critical need for firms to reduce expenditures, opportunities to engage in the exchange of ideas
travel being one such cost. through either text-to-speech or speech-to-text
Virtual meeting spaces are a technical solution conversion tools. These tools, properly imple-
to the problem. While time zone complications mented, can provide mediation for such dis-
may make scheduling the meeting difficult there abilities in both synchronous and asynchronous
are multiple technologies available that support work environments and, by extension, improve
live audio-visual exchanges among multiple par- the innovation process by bringing more ideas
ticipants from any location while also providing to the table.
tools to share files, display materials in the group Beyond such basic applications technology
environment, and even share the ability to write provides many other valuable opportunities for
and draw on a virtual whiteboard. Such technolo- disabled persons to be incorporated into innova-
gies can provide more frequent synchronous work tion processes. The live streaming of video and
environments than are possible with travel between synchronous online communication can serve
multiple locations, thus enhancing the innovative to bring mobility-impaired persons on-site for
process for all involved. Also, many of these virtual projects that they could not physically negotiate.
workspace technologies can record and archive By seeing what the group is seeing and having a
all activity in the room so that valuable ideas medium through which they can communicate in
are not lost. Not only does the archive preserve live time with the on-site team this process can
information for future reference of attendees, it include people who in the past would have been
also allows those individuals who were unable to forced to rely on photographs or videos after the
attend the meeting to experience the full exchange fact. Also, such technologies are not only limited
of ideas for a more thorough understanding of the to serving those with disabilities; these processes
meetings conclusions. can also bring contributors unable to physically
attend such a meeting into the process. Regardless
644
of who is served, the inclusion of more people in and social practices social media is becoming a
the live environment can produce more insights necessary tool to engage people in communication
and improve the overall efficiency of the innova- and, by extension, innovation.
tive process. Communication is the first of the two major
Overall, communication in innovation is mov- categories of technical contributions to innovation.
ing from the traditional Web 1.0 environment to Perhaps the best illustration of the value of com-
Web 2.0 solutions. Fischer (2009) approaches munication to technology today is an observation
technology contributions to innovation from of how many people use computers. Before the
a Web 2.0 perspective, explaining that current Internet became commoditized and commonplace
technologies have driven a shift from information people often spent time on their home computers
consumer culture to cultures of participation that just working independently. With Internet con-
create content. This participatory culture is seen as nectivity an expectation now a computer without
an advance in innovative capabilities, explained access to the network quickly becomes an almost
as, End-user development is an essential compo- useless device. People expect technology to con-
nent of this transformation, but its impact is much nect them to others.
broader: this transformation represents a change
and new opportunity for social production, for
mass collaboration, for civic and political life, and TECHNOLOGY, INNOVATION,
for education (Fischer, 2009, p 4). Collaboration AND CREATIVITY
in multiple arenas, facilitated by technology, can
enhance innovation efforts. Leonard and Sensiper (1998) use the definition,
Of particular interest in the incorporation of The process of innovation is a rhythm of search
Web 2.0 technologies is the generational shift and selection, exploration and synthesis, cycles
occurring in the workforce. As the baby boom- of divergent thinking followed by convergence
ers begin to exit the workforce organizations are (p 116). This innovative process is cyclical, with
looking at increasing numbers of Generation X multiple decision cycles occurring as a part of cre-
members in leadership positions, a generation ative group activity (Leonard & Sensiper, 1998).
much more comfortable and familiar with tech- Leonard and Swap (1999) discuss creativity, and
nology. More important to Web 2.0 integration in its myths, in relation to innovation. Their defini-
organizations is the entry of Generation Y mem- tion of innovation is that it is, the embodiment,
bers into the workforce in ever-growing numbers. combination, and/or synthesis of knowledge in
These workers are easily the most techno-centric novel, relevant, valued new products, processes,
workers in history and expect connectivity through or services (Leonard & Swap, 1999, p 7). The
social media and online learning to be the standard process of creativity can be difficult to precisely
rather than the exception. define, yet there is an inherent understanding of
As increasing numbers of workers become what creativity is; it is the creation of a new idea,
comfortable with and demanding of Web 2.0 new device, or new work, something new. The
technologies their work, including innovative question for the technologist is how to enhance
pursuits, come to depend on such communication the creative process, the process of innovation,
technologies. The impact of these technologies with technical tools. Leonard and Swaps (1999)
is beyond simply giving workers another com- definitions of and myths about creativity are listed
munication medium. Because of changing work in Table 1 for reference.
645
There are multiple approaches in the literature Schneiderman (2000) continues the exploration
regarding how to support, enhance, and assess of the GENEX process. Specifically, he explains
creative action and, by extension, innovation. that the four phases of the GENEX framework
Leonard and Sensiper (1998) explain that creative are not strictly linear, rather they may be cyclical
cooperation is critical to the process of innovation, and iterative, repeated multiple times to arrive at
no matter what the intended product of that in- a conclusive solution. This discussion mirrors
novation may be. By understanding how creativ- Leonard and Sensipers (1998) discussion of the
ity works it is possible to connect defined actions innovative process as being similarly cyclical.
to support provided by the inclusion of informa- Such cycles often occur in group contexts and as
tion systems in the process. These connections such require active and archivable communica-
can then serve to improve the correct application tion methods to support the process. Innovation
of technologies to the creative process. is certainly more than creativity, but as creativity
Huber, Bretschneider, Leimeister, and Krcmar, is a key part of innovation and there are parallels
(2009) introduce the generator of excellence between the creative and innovative processes the
(GENEX) framework for innovation. The frame- role of technology in supporting creativity does
work consists of: feed innovation.
Components of the GENEX framework can be
Collect: searching and browsing digital li- identified in other creativity research. Shneider-
braries, visualizing data and processes; man (2007) addresses technology as a medium
Relate: consulting with peers and mentors; through which to engage in creative activities that
Create: thinking by free association, ex- lead to innovation, explaining that, Creativity
ploring solutions (what-if tools), compos- support tools extend users capability to make
ing artifacts and performances, reviewing discoveries or inventions from early stages of
and replaying session histories; gathering information, hypothesis generation,
Donate: disseminating results. and initial production, through the later stages of
refinement, validation, and dissemination (p 2).
While all of these activities have in one way Creativity support is defined as a combination of
or another always existed as a part of the innova- two factors, specific tasks that support discovery
tion process technology serves to enhance them and the capacity to generate multiple alternatives
to improve innovation. (Shneiderman, 2007).
Table 1. Definitions of and myths about creativity (Source: Leonard & Swap, 1999)
Definitions of and Myths About Creativity

Definitions of Creativity Myths About Creativity
...that process which results in a novel work that is accepted Creative output depends on a few, often flamboyantly different indi-
as tenable or useful or satisfying... viduals
...it is both novel and appropriate, useful, correct, or valuable Creativity is a solitary process
response to the task at hand... Intelligence is more important than creativity
A company is creative when its Creativity cant really be managed
employees do something new and potentially useful without Creative groups are found only in The Arts or in high-technology
being directly shown or taught. companies
...the production of something that is both new and truly Creativity is relevant only to Big Ideas
valuable Creativity only involves coming up with new ideas
...involves a process that is extended in time and character-
ized by originality, adaptiveness, and realization
646
Gathering information connects to the GENEX ings statement that, The best way to have a good
framework concept of collecting. Technologys idea is to have lots of ideas.
role in information collection is difficult to over- Lots of ideas are the foundation of hypoth-
emphasize in todays connected world. Where eses. From the generation of hypotheses comes
only fifteen years in the past a team of research- the initial production of concepts. This stage too
ers might have to make phone calls or written can benefit greatly from technical innovation.
requests via mail to obtain data from past projects A second branch of CAI, Innovative Solution
performed by others, particularly international Generation, is one technology that can help us-
works, the same information is now available ers to create innovative problem-solving models
through digital technology. If the documents are (Yu, Wu, & Lien, 2008). The collaborative ben-
not available directly online then e-mail contact efits of technology have already been discussed,
can bring electronic versions of the document but initial production can greatly benefit from
as quickly as differing time zones will allow. technology in other ways. The virtualization of
Such online repositories of knowledge and the products, components, or other parts of an inno-
digitalization of many older text works greatly vative product or idea can be greatly enhanced
enhances peoples ability to collect information. by the use of technology. Rapid prototyping is
Such technology directly enhances the collection an industry standard where much time is saved
stage of the GENEX framework. One technology by creating and testing new physical devices in
currently in use is a branch of computer aided a virtual space. Not only does the speed of the
information (CAI) called patent analysis/patent system lead to faster development cycles but the
map tools that assists the users in searching, relatively low cost allows for the exploration of
collecting, analyzing, and visualizing patent data many more possibilities. To paraphrase Pauling,
(Yu, Wu, & Lien, 2008, p 524). lots of ideas better lead to good ideas.
Stage two of GENEX, relate, is a communi- Following this initial production refinement
cations aspect of technology. This is a critical takes place. The value of prototyping and in-
component that links the collection of informa- vestigative technologies cross over from initial
tion to the analysis and use of that information. production to refinement as many of the same
Communication is the process that transforms technologies and same processes can help in-
data in the collection stage to information in the novative workers to refine their many ideas. As
create stage. the process progresses many ideas are funneled
Creation is the point at which the foundational to fewer, more practical and more probable ideas.
work of collecting and relating grows into new Refining, much like other stages of the process, is
ideas. This GENEX stage can relate to hypothesis enhanced in speed and effectiveness by technical
generation, initial production, refinement, and tools. Communication and rapid prototyping are
validation. In initial stages what innovators create both parts of this refinement.
is ideas. Brown (2008) explores the creative prod- Past the rapid prototyping technologies testing
uct analysis model, which includes the concepts technologies enhance refinement. At the refine-
of novelty, resolution, and style. The primary ment stage the bulk of ideas should be eliminated,
focus of this work is on the ability of technology with the refinement stage finding and defining
to facilitate the creation of more ideas, which by shortcomings of sub-optimal ideas. Rejected ideas
extension lead to more innovative solutions. In at this stage are not failures, and can improve the
support of this concept, Brown cites Linus Paul- ultimate solution, a process that is also technology-
enhanced. Failure points, and also positive aspects,
647
of ideas discovered during the refinement process the activities of an innovation system should be
can be archived and assessed using technical tools. mapped to identify and understand their functions.
Ideally, these individual items will be compiled These functions include: entrepreneurial activi-
to enhance the final selection. With technology ties, knowledge development, knowledge diffu-
creating more ideas and faster initial production sion through networks, guidance of the search,
technology is also needed to organize and capi- market formation, resources mobilization, and
talize on what is learned by refining the product the creation of legitimacy/counteract resistance
from so many ideas to only one or a small few. to change (Hekkert, et al., 2007).
Once that one or small few ideas have been Hekkerts (2007) work highlights several
reached through refinement those selected con- important points, not the least of which is the
cepts must be confirmed as valid ideas. The same reaction of people in the organization. Regardless
technologies already applied work here and offer of what technologies are applied to the innova-
many of the same advantages. The validation tive process people are the core resource. If the
process can move more quickly through the use people involved in the process do not support the
of technology and it may also be possible to per- technologies being applied to innovation then
form detailed validation analysis of more ideas, the system as a whole is likely to fail. With that
thus providing an in-depth analysis of more ideas in mind, creating legitimacy and counteracting
than would be possible with other methodologies. resistance to change is an early priority in any
With validation complete and a final solution innovative process. Human resource management
identified the donate stage of GENEX, dissemina- sources often identify employee buy-in as one of
tion, is the final part of the innovation process. the very first steps in any change process and that
This may be the easiest technology connection to holds true for innovative processes.
identify as the communicative and marketplace Much of the rest of the list proposed by Hek-
forces of the Internet make dissemination of new kert, et. al. involves aspects of innovation and
ideas faster and easier than at any previous point their related technology enhancements that have
in history. Integrating Web 2.0 technologies into already been addressed here. The important new
the process makes this dissemination even faster aspect highlighted by the list is that while these
as others with an interest in the discovery post different components have been identified and
and spread the news on their own, independent discussed as individual components in an overall
of the organization. innovation process they are, in practice, parts of
These individual stages of innovation help an overall system, each depending on the oth-
to produce a map of where and how technology ers. In this interdependent system of innovation
can enhance the innovative process. The goal of every part of the process shifts when any part of
technology integration in any field, however, is to the process shifts. When examining the role that
create and enhance an overall system of productiv- technology plays in such a system the impact of
ity. Hekkert, Suurs, Negro, Kuhlmann, and Smits technology enhancements is greatly magnified.
(2007) look beyond individual technologies and Improving the speed or efficiency of a single part
address technology tools as part of an overall in- of the process or allowing for more exploration
novative system, defining an innovation as, ...the in any stage of development impacts the overall
successful combination of hardware, software, and performance of the process as a whole. Thus, the
orgware... (p 414). To understand how innovative potential impact of technology integration in the
systems work, including the role of technology innovation process can be exponential.
within such systems, Hekkert et al. propose that
648
SOLUTIONS AND drawn from throughout the organization. Done

RECOMMENDATIONS properly, this effort will help to ensure a successful
use of technology to enhance innovative processes.
Utilizing the advantages offered by technology
in innovative processes in any kind of organiza-
tion is no longer an option; rather the question is FUTURE RESEARCH DIRECTIONS
how much technology will be used. This situation
presents many unique challenges to an organiza- There are many opportunities for future research
tion engaged in innovative work. The choices of connecting technology and innovation. Part of the
technology, workers use of the technology, and breadth of opportunities connects to the difficulty
overall structure of the effort must all be carefully of measuring innovation. Because innovation
determined. is, by its very nature, the creation of something
Across all categories of technology solutions entirely new there is not necessarily an existing
for innovation training for all involved is highly point against which to measure the effort. With the
recommended. At an organizational level there lack of a firm starting point assessment becomes
must be decision-makers who understand the role much more challenging. This certainly does not
of technology in the organizations strategy. A mean that effective research cannot be done, but
fundamental recommendation of the Management there are many different approaches that could
Information Systems (MIS) field is that strategy be useful, with some situations benefitting from
should drive technology; technology should never multiple studies using varied methodologies.
drive strategy. This means that decision-makers Future research should drive deeper into the
need to be properly trained in how to assess the subject and generate data from innovative fields.
technical needs of their organizational programs Possible models for such research may include
and the best ways in which to apply technology broad surveys of professionals engaged in innova-
to the problems. tive processes to reveal what technical tools they
Once technology choices are made workers use and how those tools complement each other
who will interact with the technology must be and the work preferences of the users. Surveys
trained on how to effectively use that technology. using a basic Likert scale may be used initially,
For the tools to be effective users must know but the richness of the subject matter may demand
how and when to apply them, which is where interviews and ethnographical analysis to reach
training for personnel enters into the equation. A the best data.
comprehensive, integrated training program for There may be interesting opportunities for
employees should be established in advance of new innovation research to take place in multiple
technical integrations for innovation processes. disciplines. Manufacturing, scientific research,
Tying into the issue of strategy there should software development, and media development
also be a concerted effort towards structuring the firms could all provide unique study opportunities
use of technology in the organization across all for the integration of technology in innovative
aspects of innovation and other activities. The processes. Multiple segments within each disci-
nature of structure will change for each unique pline may offer unique opportunities as well, but
organization as the structure of the technology at the very least the multiple disciplines should
implementation will need to match the structure be studied to see how different innovative efforts
of the organization. Executing such a match will apply and integrate technology differently.
require detailed study by a cross-functional team
649
One significant issue that may merit study is building of innovation. Going forward, innova-
that of necessary speed of development. Different tors need to recognize the value that technology
industries face very different competitive environ- offers as a tool of innovation.
ments and their products function on different Communication and creativity are the primary
life cycles. One aim of the research could be to contributions that technology can make to innova-
determine if industries are more or less likely to tive processes. While speed, efficiency, and other
use technology enhancements in their innovation metrics also benefit from a technology-rich inno-
processes, or if they use technology differently, vative environment, but all these positive factors
in connection to their needs for fast development ultimately tie to communication and creativity.
cycles. By strategically implementing the appropriate
The technical skill sets of employees in given technical tools an organization can enhance both
industries may also be worthy of investigation. communication and creativity, the two of which
The assumption is likely made that more technical symbiotically assist each other, and advance the
industries are more likely to use technology to innovative cause of the organization as a whole.
enhance their innovation efforts. Research could The goal of the technologist in an innovative
either prove or disprove such assumptions and firm should be to successfully align technical tools
could serve a function in guiding industries of with the strategy of the organization. Beyond this
different technical skill levels in how to effectively alignment, training and support should be designed
pursue technology-enhanced innovation. to move organizational members towards effective
These broad opportunities help to define some use of the technology. Ultimately, the approach to
of the work that may be done in researching the applying technology to innovation may of itself
role of technology in innovation. Within each be innovative, but the efforts are well worth the
broad category there are many focused opportu- positive results.
nities for study, some of which may benefit from
being replicated across multiple broad categories.
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653
Chapter 35
The Roles of Cognitive
Machines in Customer-
Centric Organizations:
Towards Innovations in Computational
Organizational Management Networks
Farley Simon Nobre

ABSTRACT
This chapter proposes innovative features of future industrial organizations in order to provide them
with the capabilities to manage high levels of environmental complexity in the 21st century. For such
a purpose the author introduces the concept of Computational Organization Management Networks
(COMN), which represents new organizations whose principles of operation are based on the concepts
of Hierarchic Cognitive Systems (HCS) along with those of Telecommunications Management Networks
(TMN). Structured with functional layers and cognitive roles that range from technical and managerial to
institutional levels of analysis, and also equipped with operational, managerial and strategic processes,
the concept of Computational Organization Management Networks (COMN) plays an important part in
the developments of future organizations where cognitive machines and Cognitive Information Systems
(CIS) are prominent actors of governance, automation and control of the whole enterprise. It is in such
a context that the new organization COMN will provide customers and the whole environment with in-
novations such as immersiveness for the production of services and goods that are most customer-centric.
DOI: 10.4018/978-1-61350-165-8.ch035
The Roles of Cognitive Machines in Customer-Centric Organizations
INTRODUCTION and to configure the new face of the industrial

organization in the 21st century. First and foremost,
This chapter mainly relies on principles of incom- this work aims to give insights and answers to the
patibility, or non-equilibrium, existing between the questions in the following whose responses are
continuous growth in the level of environmental blended over this full chapter:
complexity and the insufficient cognitive capacity
of the organization to deal with higher levels of a. What is the nature of this new industrial
uncertainty, to operate in complex task environ- organization?
ments, to attend new market demands, to manage b. What steps are required to design this new
new approaches to customers satisfaction and enterprise?
relationship, and to capture effectively information c. What would be the future of these
resources from the environment. Such a premise organizations?
has motivated organizations to pursue higher
degrees of cognition, intelligence, autonomy, and Chronologically, this work first introduces
learning through principles of organization design concepts of organizations and machines which are
(Nobre, Tobias & Walker, 2009a, 2009b, 2009c, fundamental for the understating of this research.
2010; Nobre & Walker, 2011). Such concepts comprise organizational cogni-
Therefore, this chapter focuses on the general tion, intelligence, autonomy, and learning, along
picture of organizations pursuing high degrees of with uncertainty, environmental complexity, and
cognition in order to improve their capabilities of cognitive machines.
information processing and uncertainty manage- Second, it proposes the concept and the features
ment. It assumes that improvements in the degree of Customer-Centric Systems (CCS) which were
of organizational cognition can lead the organiza- most developed through literature review and
tion to achieve higher degrees of flexibility and analyses of past and current industrial organiza-
agility, to operate through higher levels of mass tions as researched in (Nobre & Steiner, 2002;
customization (Pine, 1999), and to provide cus- Nobre et al., 2009a, 2009c); whereas, in these
tomers with immersiveness. In a broader sense, works, the authors outlined the development of
such improvements extend the capability of the manufacturing systems and organizations, espe-
organization to manage higher levels of environ- cially in the 20th century, through complementary
mental complexity. In such a context, flexibility perspectives of technology, management and
means capability to reconfigure and to adapt to organizational systems theory, respectively. As
new operational and management conditions (Toni a result of the analyses, they indicate limitations
& Tonchia, 1998); and agility means the ability to of past and current manufacturing organizations
manufacture a variety of products, services and which motivated them the proposal of the new fron-
goods, at low cost and in a short period of time tiers, concept, and features of Customer-Centric
(Lee, 1998). Systems (CCS). CCS represent new organizing
This chapter supports existing works on models of production that pursue high degrees of
manufacturing systems (Kusiak, 2000; Monfared organizational cognition in order to manage high
& Steiner, 1997; Rao et al., 1993) and industrial levels of environmental complexity, to operate
organizations (Nobre et al., 2009a, 2009c), and through intensive mass customization processes,
additionally, it extends past and present concepts and to provide customers with immersiveness.
by proposing new technological, managerial Third, from all these interdisciplinary back-
and organizational capabilities which have to be grounds, this chapter mainly contributes by
developed in order to satisfy the requirements presenting the concept, structure and processes
654
of Computational Organization Management Industrial Organizations

Networks (COMN), which are new organizations
with the capability to implement the features of For the purpose of this chapter, manufacturing
Customer-Centric Systems (CCS). In COMN, organizations are synonymous with industrial
cognitive machines and Cognitive Information organizations; which are classes of organiza-
Systems (CIS) are prominent actors of governance, tions that satisfy the concept of open-rational
automation and control of the whole enterprise systems (Nobre et al., 2009a; Scott, 1998) and
(Nobre et al., 2009a, 2009b, 2009c). also the perspective of economic organizations
(Milgrom & Roberts, 1992). They are highly
formalized organizations that pursue specific
KEY CONCEPTS OF THE goals, innovation and sustainable competitive
ORGANIZATION advantage. They produce goods and services. The
elements of the organization include goals, social
Customer-Centric Systems: structure, technology, and the participants in the
Main Features of Future organization (Scott, 1998: 17-23). Moreover, the
Industrial Organizations organization exists in a physical, technological,
cultural, and social environment with which the
This subsection introduces the characteristics of organization interacts (Scott, 1998: 21-23). Par-
Customer-Centric Systems (CCS) which concept ticipants are the agents who act in the name of
was firstly touched in (Nobre & Steiner, 2002), the organization and they subsume humans and
and latterly it was further developed in (Nobre cognitive machines (Nobre, 2008; Nobre et al.,
et al., 2009a, 2009c). Briefly, CCS represents 2009a, 2009b). Technology expands what orga-
organizational models with capabilities to: nizations can do and it supports the connection
of the organization to the environment. Goals and
1. Manage high levels of environmental sub-goals are what organizations aim to achieve in
complexity. order to satisfy peoples desires. Social structure
2. Operate through high levels of mass refers to the standards and regularized aspects of
customization. the relationships existing among the participants
3. Pursue high degrees of organizational cogni- in the organization, whereas it comprises norma-
tion, intelligence, autonomy, and learning, tive and behavioral parts (Scott, 1998).
and consequently, high degrees of flexibility
and agility. Limitations of Organizations
4. And provide customers with immersiveness.
Contingency theory (Galbraith, 1973, 1977,
This chapter proposes that Customer-Centric 2002) has defined uncertainty as the variable
Systems (CCS) are firm types which strategically which makes the organization contingent upon
organize their resources and competencies around the environment. Hence, organization design,
customers values and needs, in order to involve and thus organizational choice, depends on the
customers into their business. By involving cus- concept of uncertainty. Briefly, uncertainty can
tomers into their task environments and business, be associated with propositions of bounded ra-
CCS-based organizations have the chance to tionality theory (Simon, 1982a, 1982b, 1997a,
understand and to produce the real needs, goods 1997b), when carrying the meaning of (Nobre et
and services, to their clients. al., 2009a: Chapter 2):
655
Figure 1. Uncertainty as lack of information

a. Lack of information, which leads the orga-
nization to unpredictability of outcomes.
b. And, insufficiency of cognitive capacity for
general information-processing.
The former, lack of information, means that:
Definition 1: Uncertainty is the difference

between the total amount of information
that the organization needs to have in order
to complete a task, and the amount of infor-
mation in possession of the organization.
Organizational Cognition
The latter, insufficiency of cognition, means
Research on cognition in organizations has its
that:
roots in the publications of Simon (1947) on
Administrative Behavior, and March and Simon
Definition 2: Uncertainty is the difference
(1958) on Organizations. In these publications,
between the degree of cognition that the
the organization was associated with information
organization needs to have in order to com-
processing systems whose picture resembles a
plete a task, and the degree of cognition in
nexus of cognitive agents and processes organized
possession of the organization.
through lateral and vertical relations. In this per-
spective, the organization benefits individuals and
These two approaches to uncertainty are
groups by extending their cognitive limitations
complementary to each other since the greater
to more advanced models of rationality (Simon,
the amount of information that the organization
1997a, 1997b). However, the meaning of this per-
needs to have in order to perform and to complete
spective has been separated by some researchers
a task, the greater is the degree of cognition that
in two main streams: the computational and the
the organization needs to have in order to process
interpretive approaches (Lant & Shapira, 2001).
and to manage this information for task execution
The computational approach investigates the
and completion. Figure 1 and Figure 2 illustrate
processes by which the organization manipulates
such concepts of uncertainty using symbolic scales
information, and it associates the organization
of measurement.
with information processing systems. In such
Therefore, the question which rises in our quest
a stream, the emphasis is on information and
is: what to do in order to manage the level of
efficiency. This approach is grounded in cogni-
uncertainty that the organization confronts and
tive psychology, cognitive science and artificial
navigates in? Organizational cognition has an
intelligence. The interpretive approach examines
important part into such a perspective and there-
how meaning is created around information in a
fore it is introduced in the next subsection.
social context, and it is related to social collec-
tives and knowledge systems. In such a stream,
the focus is on knowledge and collectivities. This
approach has been grounded in the sociology of
knowledge, social psychology of organizations,
656
Figure 2. Uncertainty as lack of cognition

From such a context, this chapter proposes new
principles, concepts and features of Customer-
Centric Systems (CCS) which configure the new
face of the industrial organization in the 21st cen-
tury. These organizations are emerging in order
to pursue higher degrees of cognition and greater
capabilities of general information processing and
uncertainty management.
Degree of Organizational Cognition
social cognition, and, most recently, in knowledge In a first perspective, researchers in the field
management and organizational learning, whereas of organizational cognition have associated the
this latter subject has also been associated with concept of cognitive complexity with the degree
processes for creating, retaining and transferring or level of elaboration in which people, groups
knowledge in organizations (Argote, 2007). and organizations perceive their environment and
Most of the perspectives on organizational construct their cognitive maps. In such a case,
cognition are placed somewhere in the continu- the degree or level of cognitive complexity can
ous between such computational and interpre- be attributed to the number of hierarchical or
tive approaches. In this chapter, the authors give vertical levels (or deepness) and the number of
special attention to the computational perspective horizontal constructs which are integrated into a
and they use the metaphor of the organization as cognitive map (Calori, Johnson & Sarnin, 1994;
information processing systems. Nasser-Carvalho, 2004, 2005); whereas in this
In such a perspective, organizational cogni- association, cognitive maps are viewed as systems
tion is concerned with the processes which pro- (Hall & Fagen, 1956).
vide agents and organizations with the ability to In a second perspective, cognitive complexity
learn, to make decisions and to solve problems. can also be associated with the concept of degree
The main agents of organizational cognition are of cognition in the organization or degree of orga-
the participants within the organization and the nizational cognition as introduced in (Nobre et al.,
social networks which they form. In organiza- 2009a, 2010); whereas degree of cognition can be
tions, cognitive processes are supported by their symbolically associated with tangible and intan-
goals, technology and social structure. Moreover, gible measures of processes and representations.
organizational cognition is also influenced by Through the participant observation approach,
inter-organizational processes and thus by the Nobre et al. (2009a: 113-162) presented a case
environment. Therefore, the choice of the organi- study about an international telecommunications
zation elements (participants, technology, goals, and software business corporation, where they as-
and social structure), and thus organizational sociated the degree of cognition in the organization
design (Galbraith, 2002), plays a fundamental with levels of organizational process maturity and
task in organizational cognition. The cognition performance, along with organizational learning
of the organization can be represented as a matter results. In a macro view, the level of the organiza-
of degree whose level depends on the choice of tions process maturity was defined by the level
the organization elements. A borader review on of elaboration, integration and specification of
organizational cognition is presented in (Nobre the technical, managerial and organizational pro-
et al., 2010; Nobre & Walker, 2011). cesses, routines and norms (Nobre et al., 2009a:
122-132), which were most based on the Capa-
657
bility Maturity Model (CMM) policies, recom- whole picture about the cognitive processes and
mendations and guidelines for software process representations at the organizational level, and
improvement (Paulk, Weber, Curtis & Chrissis, this macro picture is greater than the sum of the
1994). In this macro part, the degree of cogni- individual cognitions.
tion in the organization could be associated with
one of the five CMM maturity levels. In a micro Human vs. Organizational Cognition
view, the organizations process performance was
associated to concepts and measures of customer Organisms of the ecological system have evolved
satisfaction and process quality, whereas these and improved their abilities and mechanisms
concepts were first socially constructed by a group for fitness and adaptation in the environment.
of software project management and engineering Among such organisms, the human being is the
experts in the corporation of study; second, these specie that has found the highest probability to
concepts were explicitly represented through survive, to reproduce, and to continue evolving
mental models described by IF-THEN linguistic and developing. Such a predominance of humans
rules; and third, these concepts were mapped into is a particular privilege provided by the evolution
a two-dimensional linguistic phase-plane which of their brain, emotional, and cognitive processes
indicated the implications of antecedents (i.e. inde- (Heyes & Huber, 2000; Simon, 1983). Among
pendent constructs or variables) to the consequents the results of such a continuous evolutionary
of customer satisfaction and process quality (i.e. path are their abilities to search information, to
dependent constructs or variables). In this micro organize knowledge, to make decisions, to learn,
part, the organizations process performance was and to solve complex problems. Humans adapt
associated to a set of quantitative indexes about to the environment, and they also change the
customer satisfaction and process quality which environment to their own needs. In such a con-
were calculated through the computational mod- tinuum, humans have been transferring some of
eling and simulation of the IF-THEN linguistic their abilities to systems, and most important, to
rules. Through these approaches, the authors machines and organizations (Nobre et al., 2009a,
achieved qualitative analyses and quantitative 2009b). Certainly, one of the main rationales for
measurements which indicated that improvements organizing can be explained by the perspective
in the levels of organization process maturity and that organizations benefit individuals and groups
performance were associated with improvements by extending their cognitive, physical, temporal,
in the degree of organizational cognition; and also institutional, and spatial limitations (Carley &
that improvements in organizational learning could Gasser, 1999).
be associated with improvements in the degree In such a perspective, while human cognition is
organizational cognition. part of a natural system, cognition in organizations
Similar methods have been adopted by other is part of a symbiosis between natural (human)
researchers who associated organizational per- and artificial systems because it involves the art
formance and productivity gains with practices of design (Simon, 1996). Therefore, the cognitive
of organizational learning (Argote, 2007). ability in the organization can be changed and im-
Therefore, in this chapter, the concept of degree proved through processes of organization change
of organizational cognition can be understood as and design. Hence, the degree of cognition in the
synonymous with cognitive complexity at the organization is contingent upon the goals, the
organizational level of analysis. In such a case, social structure, the participants, the technology
degree of organizational cognition involves a and the environment of the organization.
658
Organizational Intelligence, its goals and sub-goals. Therefore, the greater the
Autonomy, Learning, and Complexity degree of cognition in the organization, the greater
is its chance to exhibit intelligent behavior (Nobre
Like organizational cognition, definitions of or- et al., 2009a, 2010).
ganizational intelligence, autonomy, learning, and
complexity are proposed in (Nobre et al., 2009a, Organizational Autonomy
2010; Nobre & Walker, 2011). Nevertheless, they
are briefly defined in this subsection. Autonomy is the ability of individuals, groups, and
organizations to act through the use of cognition.
Organizational Intelligence Autonomous organisms are continuously in the
pursuit of intellectual independence and therefore
Intelligence is a general mental ability (Schmidt they are continuously attempting to improve their
& Hunter, 2000), which depends on rational and cognitive abilities. Similarly to cognition and
emotional processes (Goleman, 1994). Rational intelligence, autonomy is a matter of degree. The
process or rationality is the ability to follow pro- degree of autonomy of individuals, groups and
cedures for decision making and problem solving organizations improves as much as they interact
in the pursuit of goals (Simon, 1997a). When with the environment by capturing, processing,
rational processes lead individuals to satisfactory creating, storing, exchanging and managing new
(satisfice) outcomes, rationality can be associated resources. In such a view, organizations with
with intelligence. Emotional process (Scherer, higher degrees of cognition have higher degrees
1982) is less procedural than rationality and it is of autonomy (Nobre et al., 2009a, 2010).
less purposeful in the context of achieving goals.
However, researchers have shown that emotions Organizational Learning
play an important part to motivate, to direct, and
to regulate actions in the service of goal pursuit Organizational learning has been associated with
(Bagozzi, 1998; Keltner & Gross, 1999; Keltner the creation and management of knowledge in
& Haidt, 1999). When emotional processes lead organizations (Argote, 2007; Dierkes, Antal, Child
individuals to excel in life, emotion can be as- & Nonaka, 2003). In psychology research, learning
sociated with intelligence. Complementarily, is the process of making changes in the individu-
while emotion influences cognitive processes als mind and behavior through experiences along
such as attention, learning, decision making, and with cognitive, emotional, and environmental
problem solving (Goleman, 1994), cognition is in influences (Bernstein, Penner, Clarke-Stewart
the service of emotion when interpreting stimuli & Roy, 2008; Illeris, 2007; Lefranoies, 1995;
(Plutchik, 1982) and regulating emotional pro- Minsky, 1986; Reed, 1988). In such a process,
cesses and states. Therefore, intelligence, and learning involves acquiring, enhancing, or making
in particular, intelligent behavior, depends on changes in ones knowledge, skills, values, and
cognitive and emotional processes. world views. This work supports this definition and
Organizational intelligence can also be associ- it puts forward the perspective that organizational
ated with degrees of intelligence in the organiza- learning is the process of making changes in the
tion. However, while organizational cognitions organizations elements (goals, social structure,
are associated with cognitive processes and technology, and participants) and behavior through
representations in the organization, organizational experience, cognition, emotion, and environmen-
intelligence is associated with the degree in which tal influences, for the organization benefits. Such
the organization satisfy or satisfice (Simon, 1997b) a perspective implies relations on the effect of or-
659
ganizational learning on organizational cognition, Environmental Uncertainty

and vice-versa. On one hand, it is plausible to say and Complexity
that organizational learning affects organizational
cognition, and more specifically, the degree of Environmental uncertainty can be associated with
organizational cognition, by changing cognitive the level of uncertainty that the organization,
processes and representations in the organization. groups and participants perceive or sense from
On the other hand, it is also plausible to state that the environment (Ducan, 1972). The complexity
organizational learning depends on organizational of the environment is contingent upon the level of
cognition, and more specifically, on cognitive pro- uncertainty that it represents to the organization.
cesses and representations, for the corroboration Similarly, the complexity of a task environment
of change, and for the creation and management is contingent upon the level of uncertainty that it
of knowledge in the organization. The process of represents to the organization during task execu-
change in the organization follows mechanisms tion and completion. Therefore, it can be asserted
and models which are mostly based on principles that the greater the level of environmental com-
of feedback control, adaptive and learning systems plexity, the greater is the level of environmental
originated in the broad fields of cybernetics and uncertainty that the organization confronts and
general systems theory (Ashby, 1968; Bertalanffy, needs to manage.
1968; Buckley, 1968; Wiener, 1961). Well-known
models of organizational learning include single-
loop and double-loop types (Argyris & Schn, COGNITIVE MACHINES
1978) along with meta-learning which concept
was introduced in Biggs (1985) to describe the Initial lines of contribution on the perspectives
state of being aware of and taking control of ones of cognitive machines in organizations were first
own learning. Further studies on the concept of touched in (Nobre, 2008; Nobre et al., 2009a,
meta-learning and its distinction from deuteron and 2009b).
planned-learning are discussed in Visser (2007); Cognitive machines are information processing
and the use of organizational meta-learning for and knowledge management systems which unify
the construct of dynamic core competencies is computational and cognitive strengths of humans
presented in (Lei, Hitt & Bettis, 1996). and computers. They are necessary when we need
In such a view, cognition is what provides to extend the reasoning or mental capacity of hu-
individuals, groups and organizations with the mans, groups and organizations to more advanced
ability to learn. Therefore, organizations with models of cognition. Cognitive machines are
higher degrees of cognition have higher capacity agents whose processes of functioning are mainly
or degree of learning (Nobre et al., 2009a; 2010). inspired by human cognition. Therefore, they have
great possibilities to present intelligent behavior.
Organizational Complexity When participating in organizations, cognitive
machines are agents of organizational cognition
This chapter defines the level of complexity of and they contribute to improve the degree of
the organization as contingent upon its degree of cognition, intelligence, autonomy, and learning of
cognition. Therefore, the complexity of organiza- the organization. Intensive and extensive research
tions are synonymous with their cognitions which on the design and analysis of cognitive machines
are processes used to solve complex tasks. Hence, in organizations is proposed in (Nobre et al.,
the greater the degree of cognition of the organi- 2009a, 2009b). The design of cognitive machines
zation, the greater is its ability to solve complex comprises theories of cognition and information-
tasks (Nobre et al., 2010). processing systems, and also the mathematical and
660
theoretical background of Fuzzy Systems (FS), COMPUTATIONAL ORGANIZATION

Computing with Words (CW) and Computation MANAGEMENT NETWORKS (COMN)
Theory of Perceptions (CTP) (Zadeh, 1973, 1999,
2001). This class of machines has the capabilities This section introduces a new kind of organization
to carry out complex cognitive tasks in organiza- that implements the main features of Customer-
tions, and in particular the tasks which involve Centric Systems. It contributes by presenting the
representation and organization of knowledge via definition, the structure and the processes of Com-
concept identification and categorization along putational Organization Management Networks
with the manipulation of perceptions (percept), (COMN) as proposed in (Nobre et al., 2009a).
concepts and mental models. The ability of COMN are new organizations whose principles of
these machines to manipulate complex symbols operation are based on the concepts of Hierarchic
described in the form of words and sentences of Cognitive Systems (Nobre, 2008) along with those
natural language provides them with higher levels of Telecommunications Management Networks
of information-processing than other symbolic- (ITU-T, 2000). Structured with functional layers
processing machines; and according to the theory and cognitive roles which range from technical and
of levels of processing in cognition (Reed, 1988) managerial to institutional levels of analysis, and
these machines can mimic, even through simple also equipped with operational, managerial and
models, cognitive processes of humans. strategic processes, the concept of Computational
Similarly to the definitions of organization Organization Management Networks (COMN)
intelligence, autonomy, learning, and complex- plays an important part in the developments of
ity, it can be stated that the greater the degree of future organizations where cognitive machines
cognition of the machine, the greater is its chance and Cognitive Information Systems (CIS) are
to present intelligent behavior; the greater is its prominent actors of governance, automation
autonomy; and the greater is its ability to learn and control of the whole enterprise. Moreover,
and to solve complex tasks. this section introduces the concept of immersive
The concept of cognitive machines plays an systems in order to provide the new organization
important role in the organizations proposed in with the capability of immersiveness.
this research. These machines participate in the
organization and they provide the organization The Scope of the New Organization
with higher degrees of cognition, intelligence,
autonomy, and learning as investigated in (Nobre Computational Organization Management Net-
et al., 2009a, 2009b). works (COMN) fall in the class of organizations
The next section demonstrates the application that pursue high degrees of organizational cogni-
of some of the new features of Customer-Centric tion, intelligence, autonomy, and learning, and
Systems and it enhances the roles of cognitive consequently, high degrees of agility and flex-
machines, Cognitive Information Systems (CIS) ibility, in order to manage high levels of environ-
along with the concept of immersiveness in the mental complexity, to operate through intensive
new Computational Organization Management mass customization, and to provide customers
Networks (COMN). with immersiveness (Nobre et al., 2008, 2009a).
This chapter advocates that such a kind of new
organization has to be equipped with high levels
of automation in order to pursue the necessary
capabilities to govern, to coordinate and to con-
661
trol cognitive tasks of technical, managerial and Functional Layers of the New
institutional levels in the whole enterprise. Hence, Organization: Steps of Design
it focuses attention to the conception of organiza-
tions of this type. Therefore, the creation of COMN Functional layers play the fundamental part in the
requires intensive investments in information definition of the structure and processes for the
technology, artificial intelligence and knowledge new organization of COMN. Their concepts are
management systems. This section shows the steps based on the definition of Hierarchic Cognitive
of design of such new organizations. Systems (HCS) as introduced in (Nobre, 2008)
along with the principles of Telecommunications
Cognitive Information Systems (CIS) Management Networks (TMN) architectures
which have been proposed by International Tele-
The processes with the new organization are man- communication Union (ITU-T); where ITU-T is
aged by Cognitive Information Systems (CIS): the designation of the United Nations Specialized
Agency in the field of telecommunications (ITU-T,
Definition 3: Cognitive Information 2000). In the organizational architectures of TMN,
Systems (CIS) are Knowledge agents execute tasks in all hierarchical layers of
Management Systems (KMS) that pursue the organization. Similarly, agent technology
high degrees of cognition, intelligence, au- (Bradshaw, 1997; Watt, 1997) plays important
tonomy, and learning. They are particular tasks in the functional layers of the new organiza-
classes of cognitive machines, and they are tion of COMN; where in this chapter, agents are
designed to participate in the organization also synonymous with cognitive machines and
by performing cognitive tasks of all levels Cognitive Information Systems (CIS).
and by fulfilling managerial roles in all the This subsection proposes four functional layers
layers of the whole enterprise (Nobre et al., for the new organization. It also introduces the
2008, 2009a, 2010). roles of the agents that participate in the COMN
by governing, controlling and coordinating cog-
Participation of CIS in nitive tasks of all levels in all the layers of the
the Organization whole enterprise.
Cognitive Information Systems (CIS) participate Step 1: CIS in the Element

in the organization by performing cognitive tasks Layer: The Operational Level
and by fulfilling roles of technical, managerial,
and institutional levels. From this point of view, The Element Layer (EL) comprises a Network
this chapter identifies four major areas of CIS ap- Element Layer (NEL) and an Element Network
plication in the whole enterprise. These areas are Layer (ENL). The former part (NEL) comprises
classified into four organizational layers: functional elements that work upon an individual
basis, and, therefore, each individual element
a. Element Layer: The operational level carries its own motives and fulfils micro-roles.
b. Network Management Layer: The primary The latter part (ENL) comprises a set of intercon-
managerial level nected functional elements that work in group,
c. Service Management Layer: The second- and, therefore, they carry common motives and
ary managerial level sub-goals, and they also fulfill micro-roles. In this
d. Business Layer: The strategic level kind of organization, an element is synonymous
with an agent, and an agent is synonymous with
662
a cognitive machine; and thus, a group of inter- by researchers who have developed information
connected elements is synonymous with a group and decision-support systems for manufacturing
of agents that has the same meaning of a group operations through the background of fuzzy logic,
of interconnected cognitive machines. Figure 3 neural networks and genetic algorithms (Kusiak,
illustrates the two parts of an Element Layer (EL), 2000; Monfared & Steiner, 1997; Rao et al., 1993;
where a(1n) denotes agents, for n integer. Wu, 1994). Nevertheless, despite achieving some
The roles of Cognitive Information Systems successful results, these managerial and decision-
(CIS) in the Element Layer (EL) are concerned support tools of mathematical and computational
with the execution of cognitive tasks for operation, background have been constrained by the limita-
control and coordination of individual elements tions of cognition, intelligence, autonomy, and
as well as of groups of interconnected elements. learning of the existing machines which are
These elements, as individuals and groups, par- mostly encountered in the organizations of today.
ticipate in the whole organization by performing The application of these machines in Flexible
cognitive tasks of technical, managerial, and in- Manufacturing Cells and Systems (FMS) and
stitutional levels. Therefore, in this particular case, their coordination through Computer Integrated
the CIS provide operational, control and coordi- Manufacturing (CIM) technology, have reached
native processes to individual agents and group thresholds and limitations of contributions be-
of agents that participate in the organization. cause of their insufficient degrees of cognition,
The Element Layer (EL) demands high degrees intelligence, autonomy, and learning (Nobre et
of cognition, intelligence, autonomy, and learn- al., 2009a, 2009b).
ing from the individual machines as well as from
the groups of machines. For these requests, the Step 2: CIS in the Network
technology of cognitive machines, along with the Management Layer: The
methodologies of Soft Computing (SC) (Zadeh, Primary Managerial Level
1994), Fuzzy Logic (FL) (Zadeh, 1973), Comput-
ing with Words (CW) (Zadeh, 1999), and Com- The united work of individual agents and groups
putational Theory of Perceptions (CTP) (Zadeh, of agents in the Element Layer (EL) forms a set
2001), play an important part in the conception of patterns or clusters which represent the main
of Cognitive Information Systems (CIS). macro-roles in the organization. Each pattern or
Applications at the level of Element Layer cluster is synonymous with a functional network.
(EL) have received some attention, for instance, The Network Management Layer (NML) com-
prises the set of individual functional networks in
the organization; and it is equipped with an orga-
Figure 3. NEL as a controller of individual agents nizing system constituted by normative structure,
a(1n) and ENL as a controller of a group of in- processes, technologies, agents and sub-goals, in
tegrated agents order to provide management to each functional
network upon an individual basis. Therefore, the
NML provides the individual functional networks
of the organization with coordination, control and
management of processes, operations and infor-
mation that flows through the clusters of agents
and groups of agents that participate in the whole
enterprise. Figure 4 illustrates a NML managing
individual Functional Networks FN(1m), for m
integer.
663
The roles of Cognitive Information Systems the degree of cognition of Cognitive Information
(CIS) in the Network Management Layer (NML) Systems (CIS), the higher is their capability to
is concerned with the effective and efficient use manage Functional Networks (FN) in the organi-
of the NMLs organizing system resources in zation; and that the higher the degree of cognition
order to execute cognitive tasks for coordination, of the elements of a Functional Network (FN), the
control and management of the functional net- higher is the capability of CIS to manage the FN.
works upon an individual basis; where, in this
case, a functional network is synonymous with a Step 3: CIS in the Service Management
network of agents and also with a network of Layer: The Secondary Managerial Level
cognitive machines. In such a perspective, func-
tional networks (and thus networks of cognitive The set of functional networks in the organiza-
machines) participate in the organization by per- tion forms vertical and horizontal processes and
forming cognitive tasks of technical, managerial involves sub-goals and goals, where sub-goals
and institutional levels; and they fulfill opera- represent means for the achievement of more
tional, management and strategic roles in the complex goals. Therefore, a managerial system
whole enterprise. is needed in order to coordinate, to control and to
It is important to emphasize that while Cog- mediate all the operations, processes and informa-
nitive Information Systems (CIS) participate tion that flow between the functional networks in
in the Network Management Layer (NML) by the organization.
managing each individual functional network in The Service Management Layer (SML)
the organization, they participate in the Element comprises the set of functional networks in the
Layer (EL) by operating and controlling individual organization; and it is equipped with an organiz-
agents and groups of agents that participate in the ing system constituted by normative structure,
functional networks of the organization. Therefore, processes, technologies, agents, goals and sub-
the NML comprises the management of the EL goals, in order to provide management for the
in the organization. set of functional networks. Therefore, the SML
The performance of managerial roles in the provides the organization with a managerial sys-
organization is contingent upon the capabilities tem with the capability to coordinate, to control,
of the managers and also upon the capabilities to integrate, and to mediate all the operations,
of the individuals and groups that the managers processes and information that flows between
supervise. Therefore, it can be stated that the higher the functional networks in the whole enterprise.
Figure 5 illustrates an SML managing a set of
integrated Functional Networks FN(1m).
Figure 4. NML as the manager of individual The roles of Cognitive Information Systems
FN(1m) (CIS) in the Service Management Layer (SML)
is concerned with the effective and efficient use
of the SMLs organizing system resources in order
to execute cognitive tasks of integration, coordi-
nation, control and thus management of the rela-
tions, operations, processes and information that
flows through and between the functional networks
in the organization; where, in this case, the set of
functional networks is synonymous with the set
of networks of agents and consequently with the
664
Figure 5. SML as the manager of integrated FN(1m)

greater contributions in the proportion of the
continuous advancements in Cognitive Informa-
tion Systems (CIS) of high degrees of cognition,
intelligence, autonomy, and learning; and thus
CIS will play an important role in the SML of
new organizations.
Step 4: CIS in the Business

Management Layer: The
Strategic Level
The Business Management Layer (BML) com-

set of networks of cognitive machines in the or-
prises all the operations, management processes,
ganization. In such a domain, each functional
strategies and services of the previous layers (i.e.
network can be synonymous with a cluster of
the EL, NML and SML respectively); and it is
services, or in short, a service. Therefore, the
equipped with an organizing system constituted
Cognitive Information Systems (CIS) in the Ser-
by normative structure, processes, technologies,
vice Management Layer (SML) can also be viewed
agents and goals, in order to provide the organi-
as agents of management of the whole services
zation with capabilities to manage the environ-
in the organization.
ment. More specifically, the BML provides the
It is important to emphasize that while CIS
enterprise with a managerial system with the
participate in the Service Management Layer
capability to coordinate, to control and to mediate
(SML) by managing the operations, processes and
the operations, processes and information between
information between all functional networks in
the organization and the environment. Figure 6
the organization, they participate in the Network
illustrates the role of the BML in the organization.
Management Layer (NML) by managing each
The roles of Cognitive Information Systems
functional network upon an individual basis.
(CIS) in the Business Management Layer (BML)
Therefore, the SML comprises the management
are less obvious and less present in the organiza-
of the NML in the organization.
tions of today. It is concerned with the effective
Applications at the SML and NML have re-
and efficient use of the BMLs organizing system
ceived some contributions with the advances in
resources in order to execute cognitive tasks for
Enterprise Resources Planning and Management
coordination, control and thus management of the
Systems (EPR) that emerged from the 1970s.
relations, operations, processes and information
ERP are classes of information technology and
in between the organization and the environment.
management systems which are applied to, and
To enhance this application, this chapter presents
implemented in the whole organization with the
the concept of immersiveness which idea was first
purposes of integration, control and automation
spoken in (Nobre & Steiner, 2002), and further
of data, information and processes. Examples
developed in (Nobre et al., 2009a).
of areas of application of ERP systems include:
Manufacturing, Supply Chain, Financials, Cus-
The Concept of Immersiveness
tomer Relationship Management (CRM), Human
Resources, Warehouse Management and Decision
It was stated in this research that organizations
Support System. Applications in the level of the
have to be equipped with structure, processes,
Service Management Layer (SML) will receive
goals, agents and technologies which are able to
665
provide them with the capability to pursue high solving, learning, and management; additionally,
levels of immersiveness, where: the internet will play an important part in the con-
nection of customers into the new organization.
Definition 4: Immersiveness represents This perspective is illustrated in Figure 7 and it
the ability of the organization to interact is assumed that such an illustrative immersive
with agents of the market (either humans system can be configured to provide customers
or machines) in a friendly way, by immers- with different levels of access and interaction to
ing them into the organizations operations the technical and managerial operations of the
through approaches such as virtual real- processes of design, engineering and production
ity, simulation or via real world protocols; in the organization. The dotted lines symbolize
and it aims to satisfy customers by captur- the internet which connects customers within the
ing their exact needs, by customizing and organization; and the continuous lines denote the
managing the design, engineering and pro- system operational levels that clients can interact
duction of their goods and services, and by with, in order to capture customers exact needs
delivering their products with efficacy and and even emotions, to customize and to manage
efficiency. the design, engineering and production of their
goods and services.
More specifically, either manufacturing or
service organizations, they can immerse their Definition of COMN
customers by providing them with the scope to
interact with some of the life cycle stages of their Definition 5: Computational Organization
processes of design, engineering and produc- Management Networks (COMN) are or-
tion, including those processes of requirements ganizations whose structure, processes,
analysis, product design, test, prototyping, demand participants, goals and technologies are
specification, volume and variety choice. Under designed according to the concepts of
this perspective, virtual reality will play an im- Functional Layers which include Element
portant task in the customer immersiveness; the Layer, Network Management Layer,
technologies of cognitive information systems Service Management Layer and Business
and cognitive machines will provide important Management Layer. COMN pursue high
contributions in the execution of cognitive tasks degrees of organizational cognition and
such as pattern recognition and vision, natural their main participants subsume Cognitive
language processing, decision-making, problem- Information Systems (CIS) and cognitive
machines.
Figure 6. BML as the manager that mediates
Structure and Processes of COMN
between the organization and the environment
Figure 8 illustrates the structure of Computational
Organization Management Networks (COMN)
which is composed by Element Layer (EL),
Network Management Layer (NML), Service
Management Layer (SML) and Business Manage-
ment Layer (BML) respectively.
666
Figure 7. Illustration of an immersive system

of cognition in order to improve their capabili-
ties for information processing and uncertainty
management. It assumed that improvements in
the degree of organizational cognition can lead
the organization to achieve higher degrees of flex-
ibility and agility, to operate through higher levels
of mass customization, and to provide customers
with immersiveness. In its broader sense, it as-
sumed that such improvements can extend the
capability of the organization to manage higher
levels of environmental complexity. In such a
context, this chapter contributed by presenting
the concepts of Customer-Centric Systems (CCS)
and Computational Organizational Management
Networks (COMN). COMN are new computa-
tional organizing models with the capability to
implement the features of CCS.
The main contributions and further research
are highlighted in the next paragraphs.
CONCLUSION
On Cognitive Machines,
This chapter is the result of the analyses of past
Organizations and the Environment
and current manufacturing organizations through
three complementary perspectives of technology,
Cognitive machines are agents of organizational
management and organizational systems theory,
cognition and they contribute to improve the
as researched in (Nobre et al., 2009a, 2009c);
degree of cognition of the organization. Conse-
whereas it was found that the convergence of
quently, improvement in the degree of organiza-
manufacturing organizations to the new features
tional cognition contributes to manage the level
of Customer-Centric Systems (CCS) is contingent
of environmental complexity and uncertainty that
upon the continuous growth in the level of envi-
the organization confronts.
ronmental complexity. The chapter emphasized
that Customer-Centric Systems (CCS) configure
On Computational Organization
the new technological, managerial and organiza-
Management Networks
tional faces which industrial organizations need
to have if they want to manage higher levels of
Computational Organization Management Net-
environmental complexity in the 21st century.
works (COMN) implements the new features of
The contributions proposed in this research
Customer-Centric Systems. COMN are organi-
were motivated by the principle of incompatibility,
zations whose structure, processes, participants,
and the non-equilibrium state, existing between
goals and technologies are designed according
the continuous growths in the level of environ-
to the concepts of Functional Layers which
mental complexity and the insufficient cognitive
comprise Element Layer, Network Management
capacity of current manufacturing organizations.
Layer, Service Management Layer and Business
Therefore, this chapter focused on the general
Management Layer. COMN pursue high degrees
picture of organizations pursuing high degrees
of organizational cognition and their main partici-
667
Figure 8. Structure of computational organization management networks (COMN)
pants comprise Cognitive Information Systems Nevertheless, some implications of Compu-

(CIS) and cognitive machines. tational Organizational Management Networks
Such a kind of new enterprise will play a (COMN) must be further investigated. COMN
fundamental part in the processes of engineering, may also be used by some corporations and
production, logistics and management of goods power-holders for their own benefits, who want to
and services along with the processes of man- reinforce and to continue supporting the contem-
agement of transactions, business and electronic porary society, and a political and economic model
commerce in the future organizations and markets. of maximization of production and consumption
According to Nobre et al. (2009a), COMN will be which has generated cultural alienation and in-
legally supported with nexus of contracts that as- tense materialism. These have, in turn, destroyed
sign the responsibilities to, and define agreements environmental resources and eroded the values
between, the organization and the designer of the and social conditions of humanity.
cognitive machines (and cognitive information
systems) which are the main participants in the Further Extensions
layers of the whole organization. The roles of these
new participants will be defined in the normative On Cognitive Machines and Emotions
structure of the organization.
The creation of COMN requires intensive The topic of machines with emotions and emotion-
investments in information technology, artificial al processes in organizations was left for further
intelligence and knowledge management systems. research. However, it deserves some comments
This chapter introduced the steps of design of due to its importance in the literature. Whether
such new organizations. machines should exhibit emotional behavior, and
whether they are able to have emotions or not, are
668
controversial topics among the researchers of ar- Challenges and the Future of
tificial intelligence, cognition and social sciences. the Industrial Organization
By assuming that machines may indeed be able
to have emotional processes and emotional behav- While the characteristics of the elements of the
ior, the question of whether emotions are important organization will change, evolve and develop
to machines or not depends on the motivations of continuously towards higher levels of cognition
their designers and upon the environment with and complexity, the purpose of existence of the
which they relate. On the one hand, machines organization will remain the same or will not
with emotions, or emotional machines, might change in the same proportion of its elements
form better relations and social networks with (Nobre et al., 2009a). The former part, which is
humans in organizations than other machines. In concerned with the elements of the organization,
such a view, machine emotion would be relevant will move towards high levels of automation,
for researchers on organizational behavior. On the and it will include machines with high degrees of
other hand, machines with emotions might have cognition, mainly in those areas at upper layers
their own motives and might represent additional and levels of the organization; and thus they will
agents of dysfunctional conflicts in organizations. provide organizations with more capabilities of
In such a view, machine emotion would be a prob- computational capacity along with knowledge
lem for researchers of rational theories. Among and uncertainty management. Therefore, new
the institutions which have been researching the organizations of this kind will be able to operate
field of emotional machines include The MIT Ar- in, and to manage higher levels of environmental
tificial Intelligence Laboratory at Massachusetts complexity and uncertainty than organizations of
(Breazeal, 2000). today. These transformations towards new orga-
nizations will have implications for the society
On Cognitive Machines vs. and this is a topic of further research (Nobre et
Humans in Organizations al., 2008, 2009a, 2009b). The latter part, which
is concerned with the purpose and the existence
Are cognitive machines better agents of organiza- of organizations, will remain the same and for
tional cognition and organizational learning than sure will not change in the same proportions
humans? Are they better agents of organization to the evolutions in the organization elements.
performance and productivity than humans? This is because the individual motives and the
Such questions rely on the statement that: if we organizational goals which are pursued by human
assume that the cognitive roles in organizations kind will not change over time into the political,
have performance and outcomes which can be economical and social facets of this society.
attributed to either humans or machines, without One day, perhaps not so far in the 21st century,
any distinction, then we are ready to consider worldwide organizations and their executives will
machines as participants within the organization have the ability to perceive, to sense, to decide
similarly to people. This perspective involves and to act based on new models of organizing
a rational comparison between machines and and management thought which are grounded in
humans performance if we assume that they concepts of systemic sustainability; whereas these
compete for the same roles in the organization. new models should require the reconciliation of en-
Such questions need to be further investigated in vironmental, social and economic demandsthe
order to derive conclusions about the economic, three pillars of sustainability. It is in such a new
political, social and technological implications context that organizations and their participants
of cognitive machines for the society (Nobre et will be challenged to decide on whether they are
al., 2009a). ready to create competitive advantage without
669
affecting the balance and equilibrium of such a Calori, R., Johnson, G., & Sarnin, P. (1994). CEOs
triad. It raises the question about the endurance cognitive maps and the scope of the organization.
and survival of the human species. Strategic Management Journal, 15(6), 437457.
doi:10.1002/smj.4250150603
Carley, K. M., & Gasser, L. (1999). Computa-
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ADDITIONAL READING Competitive Advantage: A position that a
firm occupies in its competitive environment and
Alavi, M., & Leidner, D. E. (2001). Knowledge it also represents the organizations capability to
Management and Knowledge Management create superior value for its customers and superior
Systems: Conceptual Foundations and Research profits for itself (Porter, 1998).
Issues. Management Information Systems Quar- Computational Organization Management
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structure, processes, participants, goals and tech-
Ichijo, K., & Nonaka, I. (2006). Knowledge
nologies are designed according to the concepts of
Creation and Management: New Challenges for
Functional Layers which include Element Layer,
Managers. Oxford University Press.
Network Management Layer, Service Manage-
ment Layer and Business Management Layer.
COMN pursue high degrees of organizational
KEY TERMS AND DEDINITIONS cognition and their main participants subsume
Cognitive Information Systems (CIS) and cogni-
Cognitive Information Systems (CIS): Are tive machines (Nobre et al., 2009a, 2009c).
Knowledge Management Systems (KMS) that Core Competencies: Are capabilities which
pursue high degrees of cognition, intelligence, are valuable and unique from a customers point
autonomy, and learning. They are particular classes of view, and also inimitable and non-substitutable
of cognitive machines, and they are designed to from a competitors point of view (Prahalad &
participate in the organization by performing cog- Hamel, 1990; Hitt, Ireland & Hoskisson, 2008).
nitive tasks of all levels and by fulfilling manage- Core competencies can represent a set of tacit and
rial roles in all the layers of the whole enterprise collective knowledge which is developed through
(Nobre et al., 2008, 2009a, 2010). learning processes and which provides the organi-
673
zation with particular strengths and superior value Manufacturing Organization: Are syn-
relative to other organizations. They are sources onymous with industrial organizations; which are
of innovation, customer benefits and sustainable classes of organizations that satisfy the concept
competitive advantage (Lei, Hitt & Bettis, 1996). of open-rational systems (Nobre et al., 2009a;
Customer Centric Systems (CCS): Repre- Scott, 1998) and also the perspective of economic
sent new organizing models of production that organizations (Milgrom & Roberts, 1992). They
pursue high degrees of organizational cognition are highly formalized organizations that pursue
in order to manage high levels of environmental specific goals, innovation and sustainable competi-
complexity, to operate through intensive mass tive advantage. They produce goods and services.
customization processes, and to provide customers Organization Elements: The elements of
with immersiveness. the organization include goals, social structure,
Immersiveness: Represents the ability of the technology, and the participants in the organiza-
organization to interact with agents of the market tion (Scott, 1998: 17-23).
(either humans or machines) in a friendly way, by Sustainable Competitive Advantage: The
immersing them into the organizations operations organizations competitive advantage becomes
through approaches such as virtual reality, simu- sustainable when its value evolves with basis on
lation or via real world protocols; and it aims to the strategic resources management along with
satisfy customers by capturing their exact needs, by the development of dynamic core competencies
customizing and managing the design, engineer- (Lei, Hitt & Bettis, 1996).
ing and production of their goods and services,
and by delivering their products with efficacy and
efficiency (Nobre et al., 2009a, 2009c).
674
675
About the Contributors
Farley S. Nobre (PhD, MSc, BSc) is Professor at the School of Management of Federal University
of Parana, Brazil. His research interests include organizations, knowledge management systems, innova-
tion and sustainability. He received his PhD at The University of Birmingham (UK) with thesis On
Cognitive Machines in Organizations, and he participated in the ARMMS project. He was Guest Re-
searcher with the Institute of Organization Theory and the Artificial Intelligence Research Group of the
Humboldt University of Berlin, and he participated in the Socionics project. With the multinational NEC
he worked in the areas of software process improvement. He received the 1998 NEC Industrial Honor
Prize for his contributions in the areas of innovation and quality. Dr. Nobre has authored international
books, chapters and papers in journals and conferences worldwide. He is first author of (Nobre, To-
bias & Walker, 2009) Organizational and Technological Implications of Cognitive Machines: Designing
Future Information Management Systems, IGI Global, USA. He is member of SERVAS (a voluntary
worldwide institution in support of peace and multi-cultural integration).
David S. Walker is Senior Teaching Fellow at the Business School of The University of Birming-
ham UK, where he has taught since 1995. Previous to this he was Professor of Marketing, Head of the
Marketing Department and Director of Business Research at Wolverhampton Business School. He com-
menced his academic career at Aston Business School where he completed his doctorate in marketing
as a Foundation for Management Education Research Fellow. He has throughout his professional life
founded and managed several extensive companies in the industrial cleaning and chemical industries,
besides current appointments as an external examiner at the Chartered Institute of Marketing, South-
ampton Business School, Westminster Business School, Northampton Business School and Brighton
Business School. He has published extensively in numerous business and management journals both
individually and in co-authorship with Dr. Andrew Tobias and Dr. Farley Nobre.
Robert J. Harris is Associate Director of the Institute for Innovation and Enterprise at the University
of Wolverhampton (UK). He has provided consultancy support to over 500 organisations since 1993,
working with Banks, Business Link and Regional Development Associations. He currently manages
all of the University of Wolverhampton Business Schools Knowledge Transfer Programmes. In 2007
he was presented the Lord Stafford Knowledge Transfer Champion Award in recognition of his work
with small and large businesses both in the UK and overseas. He has managed a number of businesses
over the last 20 years. Dr. Harriss research has focused on knowledge transfer and in particular the
development of capabilities and innovation within the SME sector. His specialist academic areas are
International Business Development and Small Business Marketing and he regularly lectures in these
areas in the UK, Europe and S.E.Asia. He is currently external examiner at University of Northampton.
***
Nelson Guedes de Alcntara is an Associate Professor of DEMa - UFSCar and Executive Director
of the Center for Materials Characterization and Development CCDM. He was hired by the University
in 1976 when he finished his course in Materials Engineering. In 1978 he completed his masters degree
in Mechanical Engineering from the University of Campinas in 1982 and obtained his PhD from the
University of Cranfield, England. Since 1982, he established the laboratory for teaching and research in
welding in DEMa, and since 1991 he worked in the laboratories and Materials Characterization of the
CCDM. In 2008 he conducted his postdoctoral studies at Michigan State University in Management of
Technological Innovation, and in 2009 he received the Executive Certificate in Strategy and Innova-
tion from MIT / Sloan School of Management, both in the United States. He is currently Vice President
of ABM - Brazilian Association of Metallurgy and Materials and Chief Editor of the Book Collection
Metallurgy and Materials, ABM.
Thomas Andersson is Professor of International Economics and Industrial Organisation at Jnkping

International Business School since 2004. From 2004 to 2009 he served as President of Jnkping Uni-
versity. Andersson holds several other international board and advisory positions in Europe, Asia and
the Middle East. Among these, he is Senior Advisor of Science, Technology and Innovation Policy in
the Sultanate of Oman, member of two expert groups of the European Commission, Vice Chairman of
division XI of the Royal Swedish Academy of Engineering Science (IVA) on Education and Research
Policy, board member of the Swedish Programme on ICT in Developing Regions (SPIDER), and serves
on the Steering Committee of the Global Forum. Andersson was previously deputy director of science
technology and industry at the OECD, where he headed the technology part of the OECD Jobs Study
and co-coordinated the OECD growth study. He has also been assistant under-secretary in the Ministry
of Industry and Commerce in Sweden. Andersson graduated in 1983 in Economics at Stockholm School
of Economics where he earned a PhD in 1989 and was appointed Associate Professor in 1993. He has
been published widely on international economics and industrial organisation and has been a visiting
fellow at Harvard University, Bank of Japan, Hitotsubashi University and the University of Sao Paulo.
Oihana Valmaseda Andia is an Assistant Professor of Marketing at the Basque Country University
and an Assistant Researcher at the Institute for Advanced Social Studies, which belongs to the Span-
ish National Research Council. Her research interests include new product and process development,
industry-university collaboration for innovation and academic entrepreneurship. She has taken part in
various R&D projects.
Glauco Arbix is Full Professor of the Department of Sociologyof the University of So Paulo (USP).
He is a member of (Brazilian) National Council of Science and Technology (CCT) and General Coordi-
nator of the Observatory for Innovation of the Institute for Advanced Studies at USP. He is President of
the (Brazilian) Institute of Applied Economic Research (IPEA, 2003-2006), General Coordinator of the
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Center for Strategic Affairs of the Presidency (NAE, 2003-2006), a member of the Group of Advisers
of the United Nations Development Programme (UNDP / UN, 2006 -2009) and Fulbright New Century
Scholar (2009-2010). He is a Professor of the Department of Political Science, UNICAMP (1996-1997)
and Fundao Getlio Vargas (FGV-SP, 1995).
Theodora Asimakou is a Senior Lecturer in Organization Studies at London Metropolitan Business

School, UK. She has a PhD in Management from Manchester Business School. She has researched
and consulted in a number of projects on management practices, in the areas of CSR, Organizational
Knowledge, Learning, and Innovation, and Organizational Change for academic and business purposes
in the UK and Greece. Her research interests lie in the area of organizational discourses, and organi-
zational knowledge and innovation management; in particular how various and transforming concepts
and practices affect the workplace.
Mrio Otvio Batalha graduated in Chemical Engineering and MSc in Production Engineering from
Universidade Federal de Santa Catarina (Brazil). He holds a Doctorate in Genie des Systemes Indus-
triels - Institut National Polytechnique de Lorraine (France). He is Ad hoc consultant to the (Brazilian)
National Council for Scientific and Technological Development (CNPq), FAPESP, FINEP, CAPES;
a Member of the Technical Chamber of Foods - CTA of the (Brazilian) National Agency for Sanitary
Vigilance; Associate Professor III at the Federal University of So Carlos; and Chief Editor of the Book
Collection (2004-2009) of the Brazilian Production of Production Engineering.
Rachel Bocquet is Assistant Professor of Economics at the University of Savoy, France. Her field
of research is centered on the determinants of innovation in small and medium-sized firms. She is also
currently investigating the effects of cluster membership on the performance of SMEs. She has published
several articles in books and international journals.
Sebastien Brion is Assistant Professor at the Institute of Management of the University of Savoy,
France, where he mainly teaches the Management of Innovation and Information Systems. He is the
Director of the Master Management and Information Technology. His research deals with the explana-
tory factors of innovation process performance and with the organizational forms facilitating innovation.
Michael Brown is Professor of Corporate Reputation and Strategy at Birmingham City Business
School and Head of the Centre for Corporate Reputation and Strategy He holds his PhD from York
University. For almost 20 years he has headed the research into Britains Most Admired Companies
(BMAC) survey, published annually in the Economist and Management Today, and the source of
numerous academic journal articles. He has been published in British Journal of Management, Long
Range Planning, The Service Industries Journal and Measuring Corporate Performance. He is also the
co author along with Paul Turner of The Admirable Company in 2008. His industrial experience was
gained in the United States.
Mara Catalina Ramrez Cajiao holds a PhD in Management, Economics and Industrial Engineering
from the Politecnico di Milano, a MSc in Industrial Engineering from the Universidad de los Andes, and
a BSc in Industrial Engineering from the Pontificia Universidad Javeriana. At present, she works as an
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Associate Professor at the School of Engineering at the Universidad de los Andes and is the President
of Engineers without Borders in Colombia (ISF Colombia).
Helio Gomes de Carvalho, Dr., holds a Doctorate degree in Industrial Engineering from the Federal
University of Santa Catarina (UFSC), Brazil. He is currently a professor at the Federal Technological
University of Paran (UTFPR), Brazil, where he has advised over 25 graduate students of the Innova-
tion and Technology Graduate Program. He is the lead researcher of the Innovation and Technology
Management Group at UTFPR and his research includes Innovation, R&D and Project Management,
Competitive intelligence and Strategic management.
Luiz Caseiro is a Graduate Student in Sociology at University of So Paulo (USP) and has a Bachelor
degree in Social Sciences at the same institution. He has research experience in Sociology of Develop-
ment, working mainly with the following themes: public policy, multinationals, innovation, emerging
markets and socio-economic development. He is currently a researcher at the Observatory for Innovation
and Competitiveness of the Institute of Advanced Studies at USP, Brazil.
Gregorio Martn de Castro, Dr., is Associate Professor at the Business Administration Department
in Universidad Complutense de Madrid (Spain). He has several years of research experience at CIC
Spanish Knowledge Society Research Centre, he holds an Expert Diploma in Intellectual Capital and
Knowledge Management from INSEAD (France), and he was a Post-Doctoral Research Fellow at Harvard
University during 20042005. He is author and co-author of several papers concerning Resource-Based
View, Intellectual Capital and Knowledge Management.
Jason G. Caudill holds a PhD in Instructional Technology as well as a BS in Business Administration

and an MBA. He currently serves as an Assistant Professor of Business at Carson-Newman College in
the state of Tennessee, USA. Dr. Caudills research interests include technology integration, technology
management, and online education.
Steven Cavaleri has co-authored five books on systems thinking, knowledge management and or-
ganizational learning. Steven is former editor of The Learning Organization Journal. He is also former
president of The Knowledge Management Consortium International and co-founder of KMCI Press
imprint of Elsevier Publishing. Dr. Cavaleri holds a PhD from Rensselaer Polytechnic Institute (USA).
He was also a Visiting Scholar in the Learning Center at MITs Sloan School of Management. Steven
has consulted for many well-known companies, such as IBM and Stanley Tools. He is professor of man-
agement at Central Connecticut State University (USA). Steven is also a certified Systems Integrator by
the Institute of Industrial Engineers.
Claudio Cruz Czares is an Industrial Engineer who has studied the PhD in Business Economics
at the Autonomous University of Barcelona (Spain). He is highly interested in the field of innovation
management and firm performance. During the last years he has actively participated in national and
international conferences such as ACEDE, ISPIM, EIASM. He has been also involved in several research
projects financed by the Spanish Ministry of Education. He is also part of team of the department of
Business Economics of the Autonomous University of Barcelona.
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Javier Alejandro Carvajal Daz holds a MSc degree in Engineering (Organisational Management)
and Industrial Engineering with emphasis on education from the Universidad de los Andes, Colombia.
At present, he works as a researcher and lecturer in Systemic Thinking in Organisations (Pensamiento
Sistmico en las Organizaciones) at the Industrial Engineering Department of the Universidad de los
Andes. His research areas involve innovation, sustainable development and education in engineering.
Friedrich Grosse Dunker is co-founder of the innovation consultancy Dark Horse GmbH, which is
engaged in user-centered innovation and Design Thinking, and also gets involved as a coach in innova-
tion and entrepreneurial projects. He graduated at Technische Universitt Mnchen, Germany, and holds
a degree in Business Administration and Engineering. He wrote his diploma thesis on Sustainability
Innovation Cube A framework to evaluate sustainability-oriented innovations. His research interests
are innovations and innovation management in the field of sustainability and design-based innovations
and business strategies. Friedrich obtained broad academic and practical experiences in Australia, Nor-
way, Germany and South Africa.
Gustavo de Boer Endo is a graduate in Business Administration from University of Sao Paulo
(USP), Brazil. Gustavo de Boer Endo is consultant at TerraForum and advises companies in knowledge
management, maturity models, knowledge strategies and innovation network and clusters and strate-
gies. Within innovation management projects, he structured innovation processes for large clients and
modeled open innovation structures, partner evaluation and structuring of innovation environments.
Niels R. Faber is Researcher at the Department of Social Sciences of the Frisian Academy (KNAW),
and Assistant Professor at the Faculty of Economics and Business of the University of Groningen. His
research and publications concentrate on the topics of knowledge management, knowledge technology,
decision-support systems, and social sustainability, especially within the domain of agriculture. In 1999,
he received his MSc in computer science at the University of Twente. His MSc in Industrial Engineering
and Management Science was completed in 2002. In 2006, he received his PhD for his thesis Knowl-
edge in Sustainable Behavior.
Pilar Fernndez Ferrn is an Assistant Professor of Marketing at the University of Pas Vasco. She
has a PhD in Business Administration from the University of Santiago de Compostela (Spain). She teaches
and carries out research in the fields of new product development, sales management and consumer
behavior. Her work has been published in Journal of Product Innovation Management, Technovation,
Industrial Marketing Management, European Journal of Marketing, Creativity and Innovation Manage-
ment, Psychology & Marketing, Revista espaola de Investigacin en Marketig Esic, Revista Europea
de Direccin y Economa de la Empresa and Cuadernos de gestin.
Diana A. Filipescu holds a PhD in Business Economics from the Autonomous University of Barcelona
(Spain). Her main research interests are in firms technological innovation and internationalization, R&D
strategies, and family business. She has presented various studies in important national and international
conferences such as ACEDE, McGill International Entrepreneurship, EIBA, EIASM, and AOM. She is
also a Professor of International Business and International Marketing Strategies at the Foundation of
the Autonomous University of Barcelona.
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Jonas Gabrielsson is Associate Professor in Business Administration at the Centre for Innovation,
Research and Competence in the Learning Economy (CIRCLE), at Lund University (Sweden). His
teaching and research is primarily focused on issues related to entrepreneurship and innovation. He has
also a general research interest in corporate governance, primarily related to companies operating in
entrepreneurial contexts.
Simone Galina is an Assistant Professor of Innovation and Operations Management at the School
of Economics, Business and Accountancy of Ribeiro Preto at University of So Paulo, Brazil. She has
a PhD in Engineering from Polytechnic School of University of So Paulo. She is teacher and advisor
of Master and Doctorate students at the Graduate Program in Management of Organizations (PPGAO).
She leads the Group of Studies on Innovation and Internationalisation of Companies and her main areas
of expertise are innovation management, R&D internationalization and globalization of operations.
Jorge Cruz Gonzlez is PhD Candidate in Business Administration at the Business Administration
Department in Universidad Complutense de Madrid (Spain) and member of the Strategy, Knowledge
and Innovation Research Group (ECI) of this university. Additionally, he is scholarship holder of the
Spanish Ministry of Science and Innovation (University Professorship Formation National Plan). His
main research lines are about Knowledge Management and Dynamic Capabilities.
Jos A. Varela Gonzlez is a Professor of Marketing at the University of Santiago de Compostela

(Spain). He has a PhD in Business Administration from the University of Santiago de Compostela. His
research interests include sales management, new product/new service development and launching, ser-
vices marketing and marketing orientation. His work has been published in Journal of Organizational
Behavior, Marketing Intelligence & Planning, Technovation, Journal of Product Innovation Manage-
ment, The Service Industries Journal, Creativity and Innovation Management, Revista espaola de
Investigacin en Marketig Esic, Revista Europea de Direccin y Economa de la Empresa, Informacin
Comercial Espaola and Cuadernos de gestin.
Sergio Ronaldo Granemann graduated in Civil Engineering from the University of Santa Catarina.
He earned MSc in Production Engineering from Federal University of Santa Catarina, MA in Econom-
ics from the Universit dAix Marseille II and PhD in Economics from Universit DAix Marseille II
(France). He is currently a member of the committee of experts from the Ministry of Education, Adjunct
Professor at the University of Brasilia and reviewer of Gesto&Produo Journal.
Jerald Hage is the Director of the Center for Innovation at the University of Maryland. He is a
graduate of Columbia University, he is a former chair of the Department of Sociology at the University
of Maryland. He has been a visiting professor at four universities and the winner of three international
fellowships. In addition, he is the author of 16 books, over 100 papers and chapters, and has a book
forthcoming from Stanford University Press on the need for a new policy model based on innovation.
Erik G. Hansen is a senior researcher at the Centre for Sustainability Management (CSM) at Leuphana
University Lneburg, Germany. Prior to this appointment he was a Postdoc researcher at Friedrich-
Alexander-University Erlangen-Nuremberg, Germany and a visiting researcher at Cranfield University,
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Doughty Centre for Corporate Responsibility in the UK. His research interests are innovation, strategy,
and governance in the context of corporate responsibility and sustainability. Erik teaches business classes
at undergraduate, graduate and executive level. He wrote his doctoral thesis on Responsible Leader-
ship Systems at Technische Universitt Mnchen, Germany. He has also gained broad experience in
industry jobs and academic exchanges in Brazil, China, Germany, and Thailand.
Ariane Hina (MSc, PMP) is the coordinator of the Industrial Development Observatory under the
Industry Federation of Paran (FIEP), in Brazil. Shes holds a bachelor degree in Economics from the
Federal University of Paran (UFPR). She obtained her masters degree in Technology from the Federal
Technological University of Paran (UTFPR) where she is currently a doctoral candidate. She is also a
researcher at the Innovation and Technology Management Group at UTFPR.
Gretchen Jordan is a Principal Member of Technical Staff with Sandia National Laboratories in
the USA. She works with the Sandia Science and Engineering Strategic Management Unit and the US
Department of Energy on evaluation and performance measurement and innovative methods of assessing
the effectiveness of research organizations. She is Co-Editor of Research Evaluation.
Ren J. Jorna is head of the Social Sciences Department of the Frisian Academy (KNAW) and
full Professor in Knowledge Management and Cognition at the faculties of Economics and Business
and Behavioural Sciences of the University of Groningen. He studied Analytic Philosophy and Logic
(Master in 1981) and Experimental Psychology (Master in 1982) and had his PhD in 1989 in Cognitive
Science on knowledge representation. His research and publications refer to cognition, semiotics, knowl-
edge management, sustainability and knowledge technology. In 1994, he published Semiotic Aspects
of Artificial Intelligence (de Gruyter). From 1990 until 1995 he was manager of a research project on
planning (DISKUS), resulting in commercial software and five PhDs. From 2001 until 2004, he was
program manager of the NIDO project on Sustainable Innovation. In 2006 he published the book Plan-
ning in Intelligent Systems (Wiley, New York) and also in 2006 Sustainable Innovation (Greenleaf). He
published over 150 journal articles and book chapters. He supervises 10 PhD projects on sustainable
innovation, planning, cognition and social simulation.
Yuya Kajikawa is a Project Lecturer at the School of Engineering at The University of Tokyo (Ja-
pan). He received his PhD degree in Chemical System Engineering from The University of Tokyo in
2004. He also received his BS and MS degrees from the same university in 1999 and 2001, respectively.
His research interests include the structuring of engineering knowledge, technology and innovation
management, and innovation policy. He has a number of publications in peer-reviewed journals and
conference proceedings, which cover a variety of disciplines including engineering, information science,
environmental science, and management science.
Jose Carlos Korelo (MSc) is a PhD student in the Business Administration Program, concentrating
on Marketing and Consumer Behavior at School of Management of Federal University of Parana, Brazil.
He holds a Master in Business Administration (concentration in Marketing and Consumer Behavior)
from Federal University of Parana, Brazil, 2009. He is interested in consumers innovation adoption
behavior and consumer behavior.
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Valentina Lazzarotti is Assistant Professor at the Institute of Technology of Universit Carlo Cattaneo
LIUC (Italy). She teaches Business Economics and Organization and Management Control Systems
at LIUC. She holds a PhD in Management Engineering from Politecnico of Milan and a Master Degree
in Business Administration from Bocconi University. Her research interest concerns R&D performance
measurement and accounting for innovative activities. She has published papers in international journals
such as International Journal of Innovation Management and Project Management Journal.
Enrique Leff, Mexican born, is a pioneer and one of the main authors on environmentalism, rec-
ognized internationally and particularly in Latin America. He got his BA in Chemical Engineering at
UNAM in Mexico City and a Doctorat de Troisieme cycle in Economic Development in Paris I-Sorbonne
University in France. He works in the fields of Environmental Philosophy, Epistemology and Sociology,
Ecological Economics, Political Ecology and Environmental Education. For over 22 years, Enrique Leff
was Coordinator of the Environmental Training Network for Latin America and the Caribbean and then
Coordinator of the Mexico Office of the United Nations Environment Programme, until May 2008. He is
presently full-time researcher at the Institute of Social Research and Professor at the Faculty of Political
and Social Sciences at the National Autonomous University of Mexico. He has published extensively
in the field of environment and sustainability and is regularly invited as keynote speaker, lecturer and
professor to universities throughout Latin America and Spain.
Suzana Monteiro Leonardi is consultant at TerraForum and a specialist in innovation and knowledge
management helping companies to implement, manage and improve their innovation processes. She is
Professor, with a Masters Degree in Business Administration, she is working hard to get her doctorate
degree in Education at UNICAMP, Brazil.
Jos Emilio Navas Lpez, Dr., is Professor at the Business Administration Department in Universidad
Complutense de Madrid (Spain) and Chairman of the Strategy, Knowledge and Innovation Research Group
(ECI) of this university. He is author and co-author of several books and papers concerning Technology
Management, Strategy and Knowledge Management. He has held the first Knowledge Management
Chair in Spain at I. U. Euroforum Escorial.
Raffaella Manzini is Associate Professor at the Institute of Technology of Universit Carlo Cattaneo
LIUC (Italy). She teaches Business Economics and Organization and Technology Strategy at LIUC
and Politecnico di Milano. Her research interests concern R&D and innovation management, technology
strategy and organization and technological collaborations. She has published more than 40 papers in
leading international journals such as R&D Management Journal, Long Range Planning, International
Journal of Technology Management, and International Journal of Operations & Production Management.
Leonardo J. Melo is an MSc student at the Institute of Economics, Federal University of Rio de
Janeiro (IE/UFRJ) and research assistant at the (Brazilian) National Institute of Science and Technol-
ogy Policy, Strategy and Development (INCT / PPED). Melo has a Bachelors Degree in Business Ad-
ministration (focused on Entrepreneurship and Management and Evaluation of Public Policy) from the
Catholic University of Rio de Janeiro (PUC-Rio). He works in the field of project management related
to innovation and interaction between universities, government and society. Melo researches in the fol-
lowing areas: public policy, sustainability and the knowledge economy.
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Jonathon Mote is an Assistant Professor of Management at Southern Illinois University in Carbon-

dale (USA). His research interests are primarily focused on the interrelationship between organizational
environments and the networks of science and innovation. His articles have appeared in The Journal of
Engineering and Technology Management, R&D Management, and Research Evaluation, among others.
Caroline Mothe is full Professor of Strategic Management at the University of Savoy, where she
mainly teaches strategy and innovation management. Interested in interfirm cooperation and in innova-
tive organizations, she actually coordinates several research projects on intra and inter-organizational
innovation processes. She has published many articles related to these fields in international journals.
Helen E. Muga, PhD, is an Assistant Professor in Civil Engineering at the University of Mount
Union, Alliance, Ohio (USA). She worked as a postdoctoral researcher in the Civil & Environmental
Engineering department at the University of South Florida, Tampa, Florida. She received a PhD in En-
vironmental Engineering from Michigan Technological University, Michigan, USA, a Masters degree
in Chemical Engineering from Curtin University of Technology, Australia, and a Bachelors degree in
Chemistry from the University of Papua New Guinea. Her research interests include sustainability, life
cycle engineering, green engineering, diffusion and adoption of green technology, and international
development work.
Hiroko Nakamura is a Project Researcher at the Centre for Aviation Innovation Research at The
University of Tokyo (Japan). She previously worked for Nissan Motor Co. Ltd., as a product planner,
making the efforts of engineers attractive to the market. She received her MS degree in Environmental
and Ocean Engineering from the University of Tokyo in 2006 and a Special Masters degree in Indus-
trial System Engineering from the Ecole Centrale Paris in 2004. She also received her BS degree from
The University of Tokyo in 2003. Her research interests include transition management of innovation.
Christina berg is an Assistant Professor in marketing at Lund University. She received her PhD
from Linkping University. She has an industry background and has previously worked in such posi-
tions as financial manager and head accountant. Today, she is an authorized accountant. Her research
interests are mergers and acquisitions, innovation management and business relationships. She has
previously published in journals such as Journal of Business Research, Construction Management and
Economics, International Journal of Innovation Management, and Industrial Marketing Management.
In addition, Christina has had articles accepted for publication in European Journal of Marketing and
The Service Industries Journal.
Luisa Pellegrini, PhD, is Associate Professor of Management Engineering at the faculty of Engi-
neering, University of Pisa (Italy) where she teaches Innovation Management and Business Economics
and Organisation. She is actively involved in national and international research projects on Knowledge
Management and Continuous Innovation. She is member of the Continuous Innovation Network (CINet)
and author of numerous international publications.
Jos Tiberio Hernndez Pealoza has a PhD in Informatics from lEcole Nationale Suprieure
de Techniques Avances, and a MSc in Computing and Systems Engineering from the Universidad de
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los Andes. He is a former Dean and Vice-Dean of the School of Engineering at the Universidad de los
Andes and currently works as an associate professor and head of the Visual Computing R&D Team in
the School of Engineering at the Universidad de los Andes, in Colombia.
Diamanto Politis is Assistant Professor in Entrepreneurship at School of Business and Engineer-

ing of Halmstad University, Sweden. She is member of KEEN and CIEL at Halmstad University. Her
research interests include entrepreneurial learning, academic entrepreneurship and the value-adding role
of business angels in new firms.
Andrew Pollard joined the University of Wolverhampton (UK) in 2002 and was appointed Indus-
trial Professor in 2003 with the responsibility to set up and run the Caparo Innovation Centre (CIC), a
joint collaboration between Caparo plc and the University of Wolverhampton. The CIC team work with
inventors to help them commercialize their ideas, earning a royalty on products launched this way. Prof
Pollard also works on a consultancy basis for small and large companies, addressing issues in the area
of innovation, new product introduction and internationalisation. He has been appointed a Director of
Unibyte ltd, a spin-out company from the University, and also sits on the Caparo Engineering Board
responsible for strategic development.
Anne Berthinier Poncet is a PhD candidate in Management at the IREGE (Institute of Research
in Economics and Management) and teacher at the University of Savoy, France. Shes studying the
influence of regional cluster governance on firms innovative performance, in particular in technopoles
and competitiveness clusters. Her topics of interests cover also innovation in services, and specifically
innovation of KIBS.
Paulo Henrique Muller Prado, PhD, is Adjunct Professor of Marketing at the School of Manage-
ment, Federal University of Parana, Brazil. He holds a PhD in Marketing, from FGV Getulio Vargas
Foundation, Brazil, 2004; a MSc in Business Administration, (Concentration in Marketing and Consumer
Behavior), from Federal University of Parana, Brazil, 1995; and a BSc in Electrical Engineering, from
UNICAMP, Brazil. His research interests include: Satisfaction Models, Relationship Quality and Loy-
alty, Cognitive Structures and Innovation adoption, Consumer-Brand Relationship, B2B Relationship,
Marketing Metrics.
David L. Rainey is an internationally-known author, educator, and business consultant. He is a

leading authority on sustainable development, strategic leadership, strategic management, strategic in-
novation, product development, and energy management. He is a strategist and pragmatist developing
innovative solutions to the challenges in todays turbulent business environment. Dr. Rainey has over
35 years of experience and leadership in industry and academia. He is a Professor of Management in
the Lally School of Management and Technology at Rensselaer Polytechnic Institute. Dr. Rainey is a
Visiting Professor at the Technical University of Munich and an Associate of the Center for the Study
of Corporate Sustainability in Buenos Aires, Argentina. Dr. Rainey is the author of Product Innovation:
Leading Change through Integrated Product Development (2005), Sustainable Business Development:
Inventing the Future through Strategy, Innovation and Leadership (2006) and Enterprise-wide Strategic
Management: Achieving Sustainable Success through Leadership, Strategies and Value Creation (2010).
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The books are published by Cambridge University Press. His next books are Full-Spectrum Strategic
Leadership: Achieving Sustainable Success through Solutions, Systems and Relationships and Corporate
Strategic Management: Achieving Sustainable Success through Visionary Leadership and Strategic In-
novation. Dr. Rainey earned a BS in Mechanical Engineering, a MBA, and Master of Science degrees in
Engineering Science and Business Management. He earned a PhD from Rensselaer Polytechnic Institute.
Caspar van Rijnbach is Dutch from origin with a Masters degree in Economics and a Masters degree
in Political Science. He is a specialist in Innovation Management, partner at TerraForum Consulting in
Brazil, Professor at the Brazilian Business School in 2010 and was Professor of the discipline Innova-
tion Management in the educational course Knowledge Management in Pratice USP FIA 2006
(one of Brazils major universities). He led many in-company courses on innovation and knowledge
management. Co-author of Innovation: Breaking Paradigms and Management 2.0 in which he
wrote the chapter Innovation 2.0 (both books in Portuguese). Caspar has given advice about innova-
tion and knowledge management to large Brazilian companies and multinationals, such as Vale, Sadia,
CPFL, Unilever, Syngenta, Citibank and Mahle.
Felipe Fontes Rodrigues, MSc, is a Professor of Operations Research at the Department of Applied
and General Management at the Federal University of Paran (UFPR), Brazil. He was granted a research
fellowship at the Industrial Development Observatory at the Industry Federation of Paran (FIEP), and
he is a researcher with the Technology Prospective and Regional Technology Development group at the
Federal Technology University of Paran (UTFPR).
Renata Lbre La Rovere is Associate Professor at the Institute of Economics of Federal University
of Rio de Janeiro (IE/UFRJ) since 1993, and researcher at the (Brazilian) National Institute of Science
and Technology Policy, Strategy and Development (INCT / PPED) since 2009. She holds a PhD in
Economic Sciences from Universit Paris 7, France, 1990. She was a Visiting Professor at the Manage-
ment of Information Sciences Department, University of Arizona, between 1991 and 1992; and took
a Post-Doctoral research in Innovation Policies for small enterprises at the Management of Informa-
tion Sciences Department at Rostock University, Germany, between 1995 and 1996. Her main areas
of research are: innovation policies for small enterprises, Information Technologies and development,
entrepreneurship and local development.
Pedro Lpez Sez, Dr., is Associate Professor at the Business Administration Department in Univer-
sidad Complutense de Madrid (Spain) and member of the Strategy, Knowledge and Innovation Research
Group (ECI) of this university. Additionally, he has several years of research experience at CIC Spanish
Knowledge Society Research Centre and has been Post-Doctoral Research Fellow at Harvard University
during 2004-2005. He is author and co-author of several books and articles concerning Resource-Based
View, Intellectual Capital and Knowledge Management.
Javier Amores Salvad is Assistant Professor at the Business Administration Department in Uni-
versidad Complutense de Madrid (Spain). He holds the Advanced Studies Diploma from Universidad
Complutense de Madrid. His main research lines are Innovation, Environmental Innovation and Sus-
tainable Development.
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Daniela Tatiane dos Santos graduated in Economics from the Universidade Estadual Paulista Julio
de Mesquita Filho (2005). She holds a Masters in Production Engineering from Universidade Federal de
So Carlos (2007). Currently she is a PhD student in Industrial Engineering (UFSCar) and has experi-
ence in Industrial Economics and Technology Management and Innovation.
Horst-Hendrik Scholz received his MSc degree in Engineering Management at The University of
Birmingham (UK) after the completion of a BEng degree in Industrial Engineering at the Leuphana
Universitaet Lueneburg (Germany). After finishing A-level at the Gymnasium Suederelbe, he worked
part-time besides studying on projects like: upgrading an ERP- Systems and implementation of an avia-
tion standard (EN9100) in a manufacturing enterprise. To gain work experience abroad he worked for
9 month in several Canadian and American SMEs in Project- and Customer Relationship Management.
To apply academic knowledge in financing he worked as a financial adviser; assisting the management
of a SME company in the aviation industry.
Laila Del Bem Seleme, MSc, holds a Bachelor degree in Service Management from Mogi das Cru-
zes University (UMC) and a Masters degree in Strategic Management from the Federal University of
Paran (UFPR), Brazil. She is a Technical Researcher with the Industrial Development Observatory at
the Industry Federation of Paran (FIEP), and a researcher with the Technology Prospective and Regional
Technology Development group at the Federal Technology University of Paran (UTFPR).
Danielle Mantovani Lucena da Silva, MSc, is a PhD student in the Business Administration Program,
concentrating on Marketing and Consumer Behavior at School of Management of Federal University of
Parana, Brazil. She holds a Masters in Business Administration (concentration in Marketing and Con-
sumer Behavior), from Federal University of Parana, Brazil, 2006. Her research interests concentrate on
the analysis of the psychological and cognitive aspects regarding consumers decision making process.
Gavin Smeilus is a Senior Consultant in Product Innovation at the University of Wolverhampton

(UK). He is currently enrolled on the Universitys Doctoral programme undertaking research into the
Integration of Independent Inventors in Open Innovation. Gavin has undertaken new product introduction
related consultancy projects on behalf of numerous businesses from sole traders through to multinational
corporations.
Marilia de Souza, PhD, is the Manager of the Industrial Development Observatory under the Industry
Federation of Paran (FIEP), Brazil. Prior to her managerial career she obtained her Doctorate degree
in Mechanical Engineering Sciences at the Technology University of Compiegne (UTC), France. She
is a Guest Senior Researcher for the Technology Prospective and Regional Technology Development
group at the Federal Technology University of Paran (UTFPR).
Shinji Suzuki is a Professor at the Department of Aeronautics and Astronautics and Head of the
Center for Aviation Innovation Research at The University of Tokyo (Japan). He received his PhD degree
in Engineering from The University of Tokyo in 1986, after his research career at Toyotas Central R&D
Labs, Inc., in Japan. He received his BS and MS degrees from the same university. His main research
interests are in the design and control aspects of air safety and unmanned aerial vehicles. Shinji Su-
686
zuki is currently Vice- President of JSASS, the Board Director of JSME, and an Executive Committee
Member of ICAS.
Ken D. Thomas completed his PhD in Civil & Environmental Engineering from the University of
South Florida, Tampa, FL, and BSc in Chemical and Process Engineering & MSc in Environmental
Engineering from the University of the West Indies, St. Augustine, Trinidad. During the latter stage
of the MSc he worked for the state agency of Environmental Management Authority of Trinidad and
Tobago in the capacity of Environmental Protection Officer up until commencing PhD studies at the
University of South Florida, Tampa, Florida. Ken is currently a Postdoctoral Fellow of The University
Honors College, Auburn University, Auburn, AL where he is engaged in teaching sustainability courses
and undertaking research on sustainable development.
Paul Turner is Professor of Management Practice at Ashcroft International Business School, Cam-
bridge; a Non Executive Director of Blessing White and a Non Executive Director on the European
Advisory Board of OPI. He was formerly President of Europe, Middle East and Africa, Employee Care
for the Convergys Corporation, Group HR Business Director for Lloyds TSB, Vice President of the
CIPD, a Director of BT and Executive in Residence at Nottingham Business School. He holds his PhD
from the University of Sheffield. He is the author of HR Forecasting and Planning (2002), Organizational
Communication (2003) and co author of Talent (2007). He is also the co author along with Michael
Brown of The Admirable Company published in 2008.
Miriam Delgado Verde, Dr., is Assistant Professor at the Business Administration Department in
Universidad Complutense de Madrid (Spain) and member of the Strategy, Knowledge and Innovation
Research Group (ECI) of this university. Additionally, she has been Post-Doctoral Research Fellow at
MIoIR-The University of Manchester during 2009 and University of Edinburgh Business School dur-
ing 2010. She is author and co-author of several books and articles concerning Resource-Based View,
Intellectual Capital and Technological Innovation.
Eric Viardot is Permanent Professor of Marketing and Strategy at EADA Business School in Barce-
lona. He has a Doctorate in Management. He is a graduate of the HEC Business School, Paris, and the
Institute of Political Sciences, Paris. He has published various books and articles on strategic manage-
ment and marketing with a strong focus on Innovation and Technology Management. He is currently the
co-editor of the International Journal of Technology Marketing. He is an active consultant and trainer
and has worked with several major multinational corporations, notably with various innovation-driven
technology firms.
Beln Bande Vilela is an Assistant Professor of Marketing at the University of Santiago de Com-
postela (Spain). She received her PhD in Business Administration from the University of Santiago de
Compostela. Her research interests include sales management, consumer behavior and new product
development. Her work on these topics has been published in a variety of journals, such as Journal of
Organizational Behavior, Journal of Product Innovation Management, Technovation, Industrial Mar-
keting Management, European Journal of Marketing, Creativity and Innovation Management, Revista
espaola de Investigacin en Marketig Esic, Revista Europea de Direccin y Economa de la Empresa
and Cuadernos de gestin.
687
688
Index
A Biomass to Liquid (BLT) 62

biopiracy 13
abductive reasoning 328, 334, 344 bioprospecting 13
Absorptive Capacity 179, 182, 186, 188, 259, 283, biospheric resources 8
386, 394, 396, 401-406, 429-434, 440-445, bisociation 373
448, 466 Brazilian multinationals 590-592, 594-595, 598-
Academic Inventors 135 599, 604, 606-607, 609-611, 613-614, 616-617,
Accreditation Board of Engineering and Technology 632
(ABET) 108, 111-112, 127 Britains Most Admired Companies (BMAC) 264-
adverse selection 565, 569, 572, 583, 587 275, 277
Advisory Council for Aeronautics Research in Eu- Building Relationships 33
rope (ACARE) 60, 70 business angel 567, 572, 587
Aeronautics Innovation 55 Business Environment 18-20, 27-28, 30-33, 35, 37-
Aerospace Industries Association (AIA) 65 39, 162, 207, 228, 336, 387, 595
Agency for the Promotion of Exports and Invest- Business Management Layer (BML) 665-667, 673
ments (APEX) 593, 611
agroecology 11 C
agroforestry 11
air transport management (ATM) 57, 59 Career Experience 245-249, 254, 256-258, 262-263
American Institute of Aeronautics and Astronautics CDIO cycle 106, 111-113, 126
(AIAA) 58, 65, 69-71 Centre for Aviation Innovation Research (CAIR)
American Society For Testing and Materials 58, 60, 69
(ASTM) 62, 65, 71 Centre for Technological Development of Industries
Analytic Hierarchy Process (AHP) 476, 480, 485- (CDTI) 541, 552
486, 488-489 choice confidence 508, 512-514, 516-520, 524-525
anticipated regret 508, 512-517, 519-520, 524 choice goals 508-509, 512-513, 516, 519-520, 525
Asia and Pacific Initiative to Reduce Emissions Civil Aviation Authority of Singapore (CAAS) 65
(ASPIRE) 37, 65, 70, 134, 222 Clean Technology 38
asymmetrical information (AI) 565, 572, 587, 671, Cognitive Information Systems (CIS) 278, 280,
673 287-288, 299, 301, 434, 458, 464, 528, 653,
attract retain and develop top talent (AADRT) 266 655, 661-666, 668, 673
average variance extracted (AVE) 459, 472-473, cognitive machines 653-655, 660-669, 671, 673
517 Combinative Capabilities 386, 392, 395, 403, 405-
406
B commercial object 352
Committee for Economic Development (CED) 557-
Bank for International Settlements (BIS) 565, 586 558
Bank of Brazil (BB) 593, 611, 618 Committee of European Banking Supervision
bioeconomics 8 (CEBS) 565
Index
common, but differentiated responsibilities (CBDR) Dynamic Environment 391, 406

57
Community Innovation Survey (CIS) 278, 280, E
287-288, 299, 301, 434, 458, 464, 528, 536,
653, 655, 661-666, 668, 673 Earnings before Interest and Taxes (EBIT) 581
Competitive Advantage 4, 33, 38, 40, 75, 80, 89-90, ecoefficiency 8, 11
97, 101-103, 106-107, 230-231, 238, 264-265, eco justice 42, 54
273, 276-277, 298, 304, 321, 328, 342-343, economic diversification 278, 282, 294, 299
345, 361, 384-385, 387, 390-391, 393, 397, Economic-Input Output Model (EIO-LCA) 78
399, 401-402, 425, 430-432, 443, 445, 448, Element Layer (EL) 662-664, 666-667, 673
467, 497, 503, 506-507, 541, 597, 621, 623, Element Network Layer (ENL) 241, 662-663
625, 641, 643, 655, 669, 672-674 EMAS (Environmental Management and Auditing
competitiveness clusters 457, 463 Scheme) 93, 96, 98, 101-102
Computational Fluid Dynamics (CFD) 60 emissions control 90
Computational Organization Management Networks Encyclopedia of Philosophy (EoP) 367, 381
(COMN) 653, 655, 661-662, 666-668, 673 entrepreneurial businesses 560, 566, 576, 585
Computer Aided Information (CAI) 647 Entrepreneurial knowledge 245-250, 252, 256-257,
Computer Integrated Manufacturing (CIM) 663 263
Computer Supported Collaborative Work (CSCW) Environmental Innovation 89-103
642-643 environmental management system (EMS) 59, 96,
Conference of the Parties (COP) 57, 60, 69, 123 101-102, 591, 611
control variables 253, 255, 334, 434, 437, 459, 462 Environmental Rationality 1-3, 7, 9-16
Corporate Sustainability 40-41, 44, 51, 53-54, 71, Environmental Strategy 38, 90, 97, 102, 401
85 Environmental Thinking 1
cost per unit service or utility (COPS) 6 European Recovery Programme (ERP) 494, 578,
credit crunch 555-556, 566-567, 572, 575, 580, 665
584, 587 European Union (EU) 17, 21, 27, 65, 67, 101-102,
credit rating 555-556, 562, 566-569, 572, 576, 578, 156, 188, 233, 253, 282, 284-286, 299-300,
580-581, 583-587 307-308, 366, 436, 494, 528, 536, 558-559,
Credit Rating Agency (CRA) 566 563, 571, 578
credit rationing 555-556, 563-565, 569, 571-572, evaluation costs 508, 512-520, 525
583 Experiential learning 245, 248-249, 257-261, 263
critical success factors 131-132, 137, 139-140, 143- Explorative Learning 384, 386, 391-392, 394, 399-
144, 146-148, 159, 161, 163-164, 269 400, 406
cross-functional teams 526-527, 531, 535, 546, Extended Enterprise 30-31, 33-35, 39
548-549 external communication 526-527, 531, 535, 540-
Cultural Diversity 3, 13-14 541, 548, 550
customer-centric organizations 653 External Organizational Learning 386, 406
Customer-Centric Systems (CCS) 654-655, 657,
667, 674 F
Federal Aviation Administration (FAA) 59, 61, 65,
D 70
developing country multinationals 613 Federation of Industries of Paran (FIEP) 302-303,
Developing Nations 62 305, 310, 312-313, 317, 319-322, 324
digital gap 285 Financial Intermediary (FI) 563
directional risk 42 financial soundness (FS) 265-266, 268, 271-273,
direct loan 568, 572, 587 661
Dutch disease 278, 280, 282, 292, 297, 299 Firm-Specific Factors 167, 170-171, 185
Dynamic Capabilities 186, 242, 384-388, 390-391, Flexible Manufacturing Cells and Systems (FMS)
393-394, 396-402, 404-406, 466, 507 663
free riding 235
689
Index
free riding effect 235 intangible asset 265-266, 275, 431

Fuel reduction 66 integrated course blocks (ICBs) 110
Intellectual Property Protection 137, 141, 151, 158,
G 161, 213
Internal Organizational Learning 406
Gas to Liquid (GTL) 62 International Air Transport Association (IATA) 59,
gatekeepers 394, 466, 527, 531-532, 535, 537-538, 65-67, 70, 72
541-542, 544, 547-552 International Civil Aviation Organization (ICAO)
geared turbo fan (GTF) 61 56-57, 59-60, 67, 70
General Systems Theory 78, 382, 660 International Council of the Aeronautical Science
GENEX 646-648 (ICAS) 58, 69-71
Global Corporation 18, 31, 34, 627, 633 internationalization 234, 400, 432, 436-437, 441,
global economic system 8, 19, 21 447, 590-591, 593-594, 596-603, 606-617, 619-
global economy 5, 18, 20-23, 27-28, 34, 299, 309, 626, 632-638
571, 613, 615-616, 636 international R&D 619, 627-632, 636, 638
Globalization 4, 12-13, 18-28, 31-32, 37-39, 128, Inventor-Entrepreneurs 135
410, 591, 608, 620-621, 623-625, 634, 636-
638, 641, 644, 670 J
Global Link Network (GBN) 304-306
Globally Harmonized Agreement 55-56, 60 Japan Aerospace Exploration Agency (JAXA) 61,
Group on International Aviation and Climate 71
Change (GIACC) 57 Japan Civil Aviation Bureau (JCAB) 65
Gulf Cooperation Council (GCC) 278-288, 290,
292-294, 296, 299-300 K
H Knowledge Acquisition 368, 372, 384, 393-394,
396-397, 399-400, 448
high-velocity organization 343 knowledge acts 338-339, 341
house bank 572, 587 Knowledge Assets 230-232, 234, 361, 444, 447
knowledge claims 330-331, 372
I Knowledge Combination 384, 386, 392, 394-397,
399-400
immersiveness 653-655, 661, 665-667, 674 knowledge-intensive business services (KIBS) 455-
Independent Inventors 131-132, 134-148, 150-151, 456, 465-466, 469
153-154, 156, 160-165 knowledge life cycle 330-331
Industrial Development Observatory (ODI) 303, knowledge management (KM) 2, 68, 73, 83, 232,
305, 310, 317, 319, 321-322 265, 277, 327, 329-336, 338, 343-348, 350,
Information and Communication Technology (ICT) 360-363, 365-372, 374-375, 377-383, 405, 506,
120, 123, 125, 228, 278, 285-287, 289, 292, 586, 657, 660, 662, 668, 671, 673
296, 368, 371-372, 643 Knowledge of Sustainability (KoS) 365, 367, 377-
innovation adoption 508, 510, 515, 521 380, 383
Innovation Management 52-53, 56, 70, 128, 169, Knowledge Production 113-114, 168, 183, 230,
185-188, 200-201, 204, 221-222, 226-227, 229, 235, 359-361, 364, 372, 379, 606
241-243, 275, 347-349, 354, 358, 360-361,
363-364, 405, 408, 425, 443-444, 447, 475, L
487, 504-507, 523, 536-538, 551-552, 615,
635, 651 large scale enterprise (LSE) 558, 560-562, 574,
Innovation Network Relationships 191, 202 576, 579
innovation positioning 497, 507 law of entropy 8
Innovation Radicalness 384-386, 391, 393-394, lead users 169, 496, 527, 531, 533-534, 536-539,
396-401 541-546, 548-552
innovative systems 648, 651-652 Liabilities of Newness 245, 247-253, 255-258, 263
690
Index
Licensing 26, 131, 135-136, 138, 141, 148, 158, New Product Development (NPD) 42, 139, 143-
160, 173, 183, 205, 216, 220, 277, 309, 431, 144, 162, 235, 277, 364, 391, 394, 403, 410,
447, 599-600 416, 425, 433, 445, 475, 503, 505-507, 526-
life cycle assessment (LCA) 42, 52-53, 73-74, 78- 544, 546-552, 615
79, 82, 85 New Product Introduction 131, 137-143, 148, 154,
life cycle cost analysis (LCCA) 73-74, 77-79, 85 157-159, 161-162
Location Theory 486, 489 New Venture Creation 245-247, 249, 256-258, 263
New York Stock Exchange (NYSE) 595-596, 600
M Next Generation Air Transportation System (Next-
Gen) 59
make-buy 187, 428-430, 432-434, 436-442, 449 North American Free Trade Agreement (NAFTA)
Management Information Systems (MIS) 504, 649, 27
673
Marketing Core Competencies (MCC) 491-493, O
498, 503, 507
Material Input per Service (MIPS) 6 OCDIO cycle 105, 107, 112-113, 117, 120, 124-126
Mental Models 73-74, 82-87, 340-341, 658, 661 Open Innovation Continuum 168, 184, 188
mezzanine capital 567-568, 586 Open Innovation (OI) 50, 127, 131-134, 137, 140,
Middle East and North Africa (MENA) 282-286, 143, 145-148, 150-151, 153, 162-179, 182-188,
297, 299-300 190, 203-209, 214-216, 218-220, 222-228, 429,
Millennium Development (MD) 374 431-432, 434, 436, 438, 440, 442, 444, 448,
Ministry of Development (MDIC) 322, 593, 616 536, 538, 600-601, 613
misfuelling 148-149, 151-156, 166 Open Innovation Systems 222, 224
moral hazard (MH) 565, 569, 583 Opportunity Recognition 247-248, 261-263
Multicriteria Analysis 474-476, 479-485, 489 Organisation for Economic Co-operation and Devel-
Multi-Level Perspectives (MLP) 55, 68-69, 72 opment (OECD) 76, 86, 88, 92, 95, 99, 102,
multinational enterprises (MNEs) 19-20, 26-27, 106-107, 129, 186, 216, 301, 303, 434, 436,
604-605, 610-611, 614, 636-637 446, 448, 469, 559, 571, 577, 587, 591, 593,
608, 613, 615
N Organisations Creative Area (OCA) 575, 585
organizational cognition 654-661, 666-667, 669,
National Academy of Engineering (NAE) 107, 111- 671, 673-674
112, 122, 128-129 organizational innovation theory 409, 423
National Aeronautics and Space Administration organizational intelligence 659
(NASA) 59-60, 69, 71, 409-410, 420, 422 Organizational Networks (ONs) 230
National Innovation System (SIN) 17, 114, 258, Organizational Structure 83, 177, 179, 207, 222,
260 423, 561, 600, 632
National Institutes of Health (NIH) 409, 418, 422 Organization Networks 191, 202
National Science Foundation (NSF) 409, 418, 422, Outward Foreign Direct Investment (OFDI) 591,
651 593, 596-597, 599, 604, 606-607, 617-618
National System of Science and Technology (SN-
CyT) 114 P
Natura 591, 599, 602-603, 607, 614, 616-617
Natural resource curse 278, 280-281, 292, 296-299 Partial Least Square (PLS) 457
Natural Resource-Rich Economies (NRE) 279, 281- PDCA cycle 341
282, 286, 296 Performance-Based Navigation (PBN) 61
negative resources 191-192, 195, 197-200 Politics of Difference 1, 7
Neguentropic Productivity 1, 11 Politics of Knowledge 361, 364
Net Profit (NP) ratio 579, 588 Preemptive Strategies 30-31, 33, 39
Network Element Layer (NEL) 662-663 process and business model 576
Network Management Layer (NML) 662-667, 673 product champions 527, 531-533, 535, 538, 540-
542, 544, 546-547, 549, 551-552
691
Index
Product Development Phases (PDP) 191, 193, 200, S

202, 593, 616
Product Innovation 39, 41, 54, 128, 140, 185, 187, Scenario building 302-306, 309-311, 313-314, 317-
200, 241, 261, 275, 299, 402, 405, 412, 425, 322, 325
443-444, 447, 456, 458, 460, 462, 492, 494, Science Parks (SPs) 227, 230-233, 235-243, 451,
496, 500, 503-507, 523, 528-529, 534-538, 453, 457
550-552, 568, 575-576, 615, 635, 651 self-regulation 508-509, 511-514, 521, 523, 525
Product-Service Systems (Pss) 40-51, 53-54 sensory store 603
Project-Based Learning (Pbl) 105, 127 Service Management Layer (SML) 662, 664-667,
Proprietor-inventors 135 673
Pultruded Rod Stitched Efficient Unitzed Structure small and medium-sized enterprise (SME) 20, 162,
(PRESEUS) 60 172, 186, 188, 228, 240-241, 259, 443, 453-
454, 457, 463, 489, 555-562, 564-572, 574-
Q 580, 582-587
Social Innovation 89-94, 99-104, 374, 382
quality of management (QM) 266, 268-271 Social Network 73, 80, 83-88, 233, 235
quality of marketing (QMar) 266-268 Social Network Analysis (SNA) 73, 80, 82-86, 88
quality of products (QP) 231, 266, 268, 272, 593 source of innovation 42, 147, 279, 506, 576, 607
Southwest Airlines (SWA) 28
R Strategic HQ Allied Powers Europe (SHAPE) 126,
Radical Innovations 35-36, 179, 182, 187, 224, 270, 150, 232, 252, 351, 378, 390, 424
329, 369, 385-386, 394-400, 406, 433, 437, Strategic Innovation 18-19, 22, 31, 35-37, 276, 487,
440-442, 495-496, 548-549, 603 535-536, 550-551
Radical Technological Innovation 35, 39 Strategic Niche Management (SNM) 56-57, 62, 68,
R&D activities 182, 188, 429-438, 440-443, 445- 70-71
446, 448-449, 576, 599, 619, 623-626, 628, supply-side knowledge management 330
631, 633-636 Sustainability of Knowledge (SoK) 365, 367, 377-
R&D strategy (RDS) 186, 428-442, 448-449, 551 380, 383
rebound effects 43 sustainability-oriented innovation (SOI) 40-42, 44,
Reflective modernity 3-4 52, 54, 70
Regulatory Focus Theory (RFT) 508-512, 520 Sustainable Aviation 55, 60, 62, 65-66, 69, 71
Research and Development (R&D) 5, 35-36, 57, 65, sustainable development (SD) 4-5, 7, 11, 13, 16,
71, 75, 81, 113, 116, 132, 141, 147, 152, 167- 18-22, 25, 30-34, 37-39, 51-52, 54, 56, 71, 74-
168, 171-174, 176-179, 182-190, 204-205, 209, 76, 85, 89-90, 92, 99, 127, 375, 382
213, 216, 218, 224-226, 231, 237, 241, 251, Sustainable Solutions 29-32, 37
253, 275, 279-280, 282-284, 286-287, 290, Sustainable Success 19, 26, 28, 30-32, 37-38
292, 294-296, 300, 307-308, 346-348, 352, systems of shared use 41, 43-44
355-356, 360, 362, 394, 396, 402, 408, 410,
423-449, 459, 469, 475-478, 497, 502-503, T
505, 527, 529-531, 535, 537-538, 541-542, Tacit Knowledge 234-235, 237, 277, 386, 420, 651
549-552, 560-561, 574, 576, 578, 583, 598- Technological Demand 475, 489
601, 603, 606-608, 610, 618-620, 622-638 Technological Innovation 2, 6, 8, 11, 35, 39, 87,
Research, Development and Innovation (R,D&I) 102, 114, 277, 347, 355, 361, 364, 402-403,
203-204, 208, 214-220, 222-223, 225-226 429, 434, 445-447, 452, 456, 465, 467, 477,
Research Profiles 408, 410-411, 417-420, 423-424 487-488, 498, 510, 533, 536, 619-620, 623,
Resource Dependence Theory (RDT) 191-195, 198- 626, 641
200, 202 Technological Services 475-476, 478-480, 483-484,
Return On Assets (ROA) 177, 182 487, 489
Return On Sales (ROS) 177, 182-183 Technological Supply 489
692
Index
Technology and Innovation Support Centers (TISCs) United Nations Framework Convention on Climate
474-477, 479-484, 486-487, 489 Change (UNFCCC) 57, 60, 69, 301
Technopoles 450-460, 462-467 use of corporate assets (UCA) 266, 268
Telecommunications Management Networks (TMN)
653, 661-662 V
Territorial anchoring 450, 452, 454-455, 457, 462-
463, 467, 469 value-added services 231, 556, 567
Theoretical Review 386, 399 value as a long term investment (VLTI) 266, 268
theory of fallibilism 335 Value Chain 36, 44, 98, 216, 287, 290
total factor productivity (TFP) 279, 282, 285, 299- Value Creation 30, 32, 35, 38-39, 44, 227, 430, 448,
300 504
Total Quality Management 33, 328-329, 332, 341 Value System 36
total yearly material flows (TAPS) 6 venture capital 133, 168, 170, 194-195, 213, 223,
traditional financiers 563 259, 566-567, 570-572, 587
Transition Management 55
Transnational companies (TNC) 239, 619, 621-625, Y
628-629, 631, 634-636 yokoten process 333
yokoten system 332-333, 343
U
United Arab Emirates (UAE) 279, 281, 286, 290,
292, 294, 296, 298, 300
693

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Technological, Managerial

and Organizational Core

Published in the United States of America by

Library of Congress Cataloging-in-Publication Data

British Cataloguing in Publication Data

Foreword by Alan D. Meyer and William H. Starbuck.................................................................... xii

Foreword by Colette Henry................................................................................................................ xv

About the Contributors..................................................................................................................... 675

THE ROLE OF ORGANIZATIONAL CREATIVE AREAS (OCA) IN DYNAMIC

Genesis and Overview: The Organization as Mediator

Objectives: What the Book is About

What are the roles (and contributions) of Sustainability in (for) Innovation?

Key Concepts of the Book

The Dynamic Model

Figure 1. Organizations Creative Areas (OCA)

Figure 2. Dynamic Innovation Model

Research programs of undergraduate and post-graduate levels.

Schools of: Business Administration, Management, Information Systems, Organization Theory,

Book Structure and Chapters Synopsis

Section 1: Sustainability and Innovation

Section 1 on Sustainability and Innovation Subsumes Seven Chapters

In Chapter 1, Environmental Rationality: Innovation in Thinking for Sustainability, Leff proposes

Section 2 on Organizational Networks and Innovation Subsumes Six Chapters

Section 3 on Entrepreneurship and Innovation Subsumes Four Chapters

Section 4 on Knowledge Management and Innovation Subsumes Four Chapters

Section 5 on R&D&T (Research, Development and Technology)

In Chapter 22, Research Profiles: Prolegomena to a New Perspective on Innovation Management,

Section 6 on Marketing and Innovation Subsumes Four Chapters

Section 7 on Finance and Innovation Subsumes Two Chapters

Section 8 on Internationalization and Innovation Subsumes Two Chapters

In Chapter 33, R&D Internationalization as Mechanism of Innovation in Global Enterprises: A

Section 9 on Information Systems and Innovation Subsumes Two Chapters

Suarez-Villa, L. (2009). Technocapitalism: A critical perspective on technological innovation and cor-

Farley Simon Nobre

INTRODUCTION and Darwinian biology thought nature as the

Garca, R. (1986/2000). Conceptos bsicos para Leff, E. (2001). Epistemologia ambiental. So

INTRODUCTION formulate and implement strategies, policies, and

corporations, and small and medium sized enter- BACKGROUND

importantly, it is based on the context of all of individuals engaged in or impacted by business

Table 1. Salient factors pertaining to national, regional and global markets

Scope National Regional Global

Focus Company Market Business Environment

Dimensions Salient Factors of the External Context

model is depicted in Figure 1; it is an adaptation include existing markets, emerging ones,

Table 2. Types of strategic innovations

Categories Main Types Salient Aspects

CONCLUDING COMMENTS global corporations, the focus shifts from busi-

REFERENCES Rainey, D. L. (2006). Sustainable business de-

INTRODUCTION studies (Baines et al., 2007) and focus on such

BACKGROUND to sustainability is considered highly complex

Target dimension Life-cycle phases

Company Background panels installed on the rooftop of the building. This

Table 3. Sustainability effects on the technological level

Target dimension Life-cycle phases

Table 4. Sustainability effects on the PSS level

Target dimension Life-cycle phases

Table 5. Overall assessment of sustainability effects

Target dimension Innovation Life-cycle phases

INTRODUCTION as sustainability, however air travel also allows

Table 1. World aviation goals

nological goals for future-generation aircraft that Technical Development Directions

6. Development of Biofuels: Airlines still grown on soil or in water that is otherwise

Airlines Engine Research Airports Others (fuel