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MANAGEMENT OF INNOVATION AND CHANGE IN A LARGE PRODUCTION


COMPANY

Article · December 2012

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Horizonty podnikateľského prostredia / Business Environment Horizons
Medzinárodné interdisciplinárne vedecké kolokvium / International Interdisciplinary Scientific Colloquium
17. december 2012 / 17th December, 2012

MANAGEMENT OF INNOVATION AND CHANGE IN A


LARGE PRODUCTION COMPANY
Mgr. Eleonóra Beňová, PhD. – RNDr. Michal Greguš, PhD., ml. – doc. RNDr. Michal
Greguš, PhD.
Faculty of Management, Comenius University in Bratislava
Odbojárov 10, P. O. Box 95, 820 05 Bratislava
eleonora.benova@fm.uniba.sk; michal.gregus.ml@fm.uniba.sk, michal.gregus@fm.uniba.sk

Abstract: The paper evaluates the innovative capabilities as well as change management potential in a large
production company. The paper undertakes to analyse the impacts in shift to different organizational structure
accompanied by a massive restructuring and downsizing. In the conclusion we propose an action plan for
reducing identified barriers to enhance innovation and to support change management.

Abstrakt: Článok hodnotí inovačný potenciál ako aj schopnosti manažmentu na riadenie zmien vo veľkej
výrobnej spoločnosti. Článok analyzuje rôzne vplyvy pri prechode na iné organizačné štruktúry, a zmeny
vyvolané mohutnou reštrukturalizáciou a prepúšťaním. V závere článku navrhujeme akčný plán na
minimalizovanie zistených prekážok na podporu inovácií a na podporu riadenia zmien.

JEL Classification: M110, M140

INTRODUCTION
The purpose of this paper is to evaluate the innovative capabilities as well as change
management capacity (Harvard Business Review, 2011) of a large production company (LPC).
The paper is written like a case study. Therefore the paper starts with a short historical excurse of
major changes in LPC‟s environment, which is needed to fully understand the current issues in
respect of innovation capabilities and change management.
Long term successful history of the LPC in stable socialistic economy disrupted by
political changes in the central and east European countries, followed by privatization and
subsequent takeover of the company by a large multinational group (MNE) are major highlights
of environmental changes that left its footprint on the company. The paper highlights that
traditional approaches to manufacturing are not appropriate, not even in the case of a large
established manufacturing company in a mature industry, traditionally competing on price. In
addition, LPC‟s inability to challenge and break its own paradigm, referred to as success trap
(Nadler&Shaw, 1995), is considered.
This paper undertakes the analysis of the impacts in shift of management control to MNE
and LPC‟s integration into this new context, accompanied by a massive restructuring and
downsizing. The paper critically evaluates the ability of the company to manage this major
change coming from the external environment, as well as its innovative capabilities. The major
barriers towards LPC‟s improved performance are identified and linked back to their roots. The
issues of major restructuring and downsizing, leadership issues, cultural clashes and persistently
insufficient focus on external linkages and „open innovation‟ mindsets are dealt with in detail.
The conclusions summarizing how the major external change impacts the performance of LPC
and recommendations for improvements leading to improved future prospects are drawn.
The major theoretical framework for undertaking the analysis is the Causal Model of
Organizational Performance and Change (Burke, Litwin, 1992). More specifically, the focus on

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transformational factors and their mutual links and links with the input/environmental change
(strategy, culture, leadership components) is analysed first, followed by the derived impacts on
the transactional factors (structures, systems, working climate, motivation, people) and their
interactions and links to output/organization performance.
In parallel, the Innovation management audit „toolkit‟ (Tidd at al, 2004) is used as a
secondary model helping to critically evaluate LPC‟s innovative capabilities, specifically in the
respect of strategic approach to innovation and supportiveness of organizational context to
innovation.

1.1. Historical excurse


In this section the paper provides a brief snapshot of the turbulent 1990‟s period into which LPC
entered, at the point of political changes in the central and east European countries. Though,it
had been generally considered as a „highly successful business‟, it nevertheless ended the decade
with a hostile takeover from its competitors. The reason for looking at the past development is
twofold. Firstly, it provides a better overview of the environment in its continuum, and this has a
significant impact on later analysed innovation capability and change management capacity.
Secondly, it provides unique evidence of the importance of radical innovation (Tidd et al, 2004)
and transformational change management (Bass, 1985) for survival in a turbulent environment.
LPC has applied a very „traditional approach‟ (Bell, 1989) to managing its business
during 1990‟s. In general, traditional approaches to manufacturing are based on the assumptions
of a closed system, where plant managers strive to eliminate perturbations and enhance stability
(Bell&Murham, 1989). However, Levitt challenged the concept of a growth industry, arguing
instead, that there are only companies organised and operated to create and capitalize on growth
opportunities. He believes that companies can only continue to prosper by constantly challenging
their dominant paradigm otherwise they tend to fall into a „self-deceiving cycle‟.
Its major paradigm (Kuhn, 1962) was formed over years of the very stable environment
of former communist bloc. This fall resulted in major changes in the environment in which LPC
did the business. LPC was trying to adjust to radical change during the 1990‟s. However, product
orientation (Jobber, 2004) and internal efficiency focus remained the major paradigm with focus
on incremental and closed innovation. Despite its ability to survive the change, LPC failed to
radically change its products, processes and systems in order to adopt to significant changes in
the environment, and this resulted in a disadvantageous competitive position. Inability to break
the paradigm resulted in lack of integration of new value chains, generating less favourable
customer value propositions, devaluation of competitiveness and finally culminated in the hostile
takeover by a more aggressive competitor.
After understanding this „foreplay‟, the impacts of the company‟s takeover in 2000 is
then analysed. Bass (1985) uses the term „transformational change‟ to describe such a change in
external environment.By „transformational‟, Burke, Litwin (1992) meant areas in which
alteration is likely caused by interaction with environmental forces and will require entirely new
behaviour sets from organizational members.

2. ANALYSIS OF LPC CHANGE MANAGEMENT CAPACITY AND


INNOVATION CAPABILITIES
This part of the paper will focus on showing how this change in external environment
(representing input to the model) influenced the company‟s mission/strategy, culture and

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leadership. To assess the change management capacity the extent that the actual changes match
required ones to achieve better company performance (output) is analysed.

2.1 Mission/Strategy
Mission and strategy is what the organization's top management believes and has declared is the
organization's mission and strategy and (b) what employees believe is the central purpose of the
organization Burke, Litwin (1992).
LPC mission statement reads as follows: LPC sets the industry benchmark for operational
excellence, supply chain management, innovation and environmental protection through
„Pushing the Limits‟programme. LPC is therefore the preferred partner for our customers, with
whom they build long-term, mutually rewarding relationships. This is accomplished by
delivering products trusted for their quality, innovative solutions and reliable service. LPC attract
people with entrepreneurial spirit who are proud to be part of MNE and LPC gives them every
opportunity to succeed. LPC success is based on strong leadership, co-operation and a united
passion for excellence. MBP continue to be strongly committed to sustainable development and a
safe working environment through targeting zero work accidents.
Apparently, the mere fact of having a written mission statement is important to
organizational effectiveness (Pearce & David, 1987). The qualitative shift in mission statement
can be summarized as follows. The mission statement and core values give clear evidence that
LPC strives to both challenge the status quo and enhance creativity and innovation. Its external
focus is expressed with aim to deliver value to all LPC‟s significant stakeholders. This represents
a significant shift from the prior understanding of the purpose of the business that was much less
broadly defined, with focus on product quality, internal efficiency, customers and shareholders
value.

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Strategic approach to innovation


Many organizations and knowledgeable observers now propose, and seem to be experiencing,
that strategy innovation - emanating from new (e.g. creatively different, expanded) mindsets - is
necessary to break free from direct competition (Hamel, 2000; Christensen & Raynor, 2003).
The fundamental shift from an internal innovation perspective to one of 'open innovation'
(Chesbrough, 2003), has further underscored the critical importance of innovative, new mindsets
about how new stakeholder - including customer - value is created, developed and implemented.
Open innovation mindsets enable companies to rethink the ways in which they view the
fundamental nature of their business, and this requires the cultivation and nurturing of new
mental space in the organization. It is by acquiring rapidly-flexible and re-inventive mindsets
that organizations not only can cope with the ever-increasing opportunities and threats that arise
in the business environment, but proactively create and shape that environment, thus creating
unique opportunities and new competitive bases for performance and survival (Leibold et al,
2004).

Links between Innovation strategy and Corporate strategy


Strategy is the direction and scope of an organization over the long term, which achieves
advantage for the organization through its configuration of resources within changing
environment and to fulfil stakeholders expectations (Johnson, Scholes, 2002)
LPC has developed a Strategic Innovation Program (SIP) that is an integral part of
„Pushing the Limits‟ (PTL) movement incorporated in the company‟s mission statement. SIP
establishes the framework/system for innovation processes, techno-structures, culture and people
within the organization. Continuing to focus on innovation will be essential if MNE is to achieve
its targets of becoming a highly operating profit business. MNE requires relatively high profit to
be generated each year from sources other than normal growth and acquisitions to meet this
targeted high profits.
Innovation strategy (SIP) is embedded into corporate strategy – it complements and
supports corporate strategic goals, is measurable and time specific.

External environment scanning


The environmental scanning is considered an important senior managerial task aiming
identification of threats and opportunities, especially emerging from advances in key
technologies, traditional industries convergence. Different tools are employed in environmental
scanning and analysis – SWOT, PESTL, 5-Forces, external benchmarks.

Innovation strategy communication and understanding


Innovation strategy communication is appropriate. The content clarity, consistency, credibility
and competitiveness of the message, communication channels, frequency, management
involvement and other analysed aspects are appropriately designed and implemented.
People‟s understanding of how innovation helps to compete is in general not at the
required level. The reasons creating barriers to better understanding of the strategic importance
of innovation can be summarized as follows: effects of downsizing, lack of trust, communication
barriers, leadership style and managing within different cultures.
Overall the analysis shows that LPC considers innovation as a strategic weapon. The only
significant deficiency identified relates to employees understanding of the importance of
Innovation and buy in to the strategy, which requires the immediate attention of top

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management. The reasons for the barrier seems to be the conflict between the mission statement
strategy promoting correct values and aiming to create an employee/employer covenant, but the
restructuring and downsizing effects (discussed in detail later) are breaking this psychological
contract (Beardwell et al, 2004). Kanter (1989) noted contradictions between remaining „lean,
mean and fit‟ on one hand, yet being seen as a great company to work for on the other.

2.2 Company Culture


The company culture is defined as the deepest level of basic values, assumptions and beliefs,
which are shared by the organisation‟s members and are manifested by actions especially from
leaders and managers (Locke, Kirkpatrick, 1995). LPC‟s core values expressed in its mission
statement are partnership with customers and suppliers, enjoying working as team, passion for
excellence, valuing diversity, challenging existing boundaries, innovativeness, justice and ethics
towards their people and environment and sustainable value creation for shareholders.
LPC is shifting from what Brand (1998) calls „Controlling and Directive‟ culture toan
„Innovative and supportive‟ one - aiming at a culture of try it, fix it, try it again, and learn from
the experience (Perry, 1995).
LPC recruiters search for people who are action oriented and prepared to take some risk
with their future. Those are the employees who are creative (people who can live in contradiction
and perceive opposites as true at the same time), have a strong work ethic, are self-motivated and
resourceful, and are problem-solvers with broad interests. Such employees who are eager to
learn, willing to explore ideas with others, have a multi-disciplinary approach, and are happy
networking both face to face and by electronic means (Brand,1998), fit with the company‟s new
culture.
Retaining such people also requires a culture in which they can flourish. This entails a
culture that is „innovative‟ (divergent and learning) and „supportive‟ (empowered and caring),
rather than „controlling‟ (convergent and efficiency conscious) and „directive‟ (profit before
people).
The argument that innovation is quintessential for the survival and growth of business
enterprises means that business behaviour would be robust not when individual enterprises seek
to be driven by either divergent-thinking systems or convergent-thinking systems, but rather
when they manage to draw a balance between the two systems while mapping out their strategies
for the way forward. (Paul W. Hyland, Ronald C. Beckett, 2004). As Lawrence and Dyer (1983)
have pointed out: “For the re-adaptive process to be sustained, organizational members need to
learn in order to be innovative and need to strive in order to be efficient.” A balance between
learning and efficiency is the target. Organizational history has a significant impact on today‟s
innovation. Key crises, events, former executives, organizational heroes and myths all shape and
constrain current behaviour. Highly stable organizations may have no traditions or precedent to
foster innovation (Tushman&Nadler, 1986).
There are then several barriers in the area of the company culture subsystem. The first
and major one is that the transition towards „Supportive and Innovative‟ culture, as any major
company culture change, is a long-term process and LPC still has a long way to go.
Consequently many people, even at managerial level, still do not share the „Supportive and
Innovative‟ company culture. That might be caused by several factors (i.e. unfamiliarity with the
new culture due to historical baggage, national „cultural stereotypes‟, etc.), but in LPC‟s context
it is mainly due to the impacts of downsizing effects described above. So despite the fact that

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management articulates and promotes these core values and beliefs, people do not buy in due to
the simultaneous adverse effects of downsizing. Unfavourable company cultural impacts also
adversely influence the working environment, which makes hiring and retention of people with
right innovation spirit and attitudes, fitting with new culture, a challenging task for managers.

2.3 Leadership
Leaders are executives providing overall organizational direction and serving as behavioural role
models for all employees (Burke, Litwin, 1992). Recognizing the distinction some authors made
between leadership and management, this report takes them as synonyms. Management‟s role in
innovative organizations is to prescribe a set of strategic goals, but to allow personnel great
freedom within the context of the strategic goals (Judge, 1997). Personal and organizational
goals that emphasize quality rather than effectiveness improve the level of innovation (Hall,
1997). Supportive Leadership style (Goleman, 2000) enhances creativity, innovation and
excellence (“Pushing the Limits” movement).
The current situation in LPC certainly requires transformational/discontinuous leadership
(i.e. Bass, 1985, or Nadler et al, 1995). Transformational leaders gain acceptance of the
organizational mission by developing the ability within followers to look beyond their own self-
interests. Nadler et al (1995) emphasize that the CEO is the single most important factor in
managing the transformational/discontinuous change. LPC‟s CEO is a strong individual with
significant powers; he is clear on the mission and tries to „sell‟ the case of necessity of change.
However, the CEO cannot lead the whole change process alone. He must get support and full
commitment of top executives and form a team able to bear the collective responsibility for
success.
Subsequently, the key stakeholders‟ support for the change should be acquired, and they
should be informed of the rational of the change, key directions and potential risks. However, the
downsizing/restructuring that is being done in the company context stepwise was never
communicated to the stakeholders as a formal plan. As such, this process has been taking longer
than necessary (mainly due to trade union power, political/privatization and shareholders related
issues) since support for it is lacking. Winning the support of those two groups is essential, as
their support is a prerequisite for the diffusion of innovation support in lower operating levels.
Bass (1999) suggests that getting acceptance of the transformational change by followers
is accomplished by employing one or more of the factors associated with transformational
leadership: 1) charisma, 2) inspirational motivation, 3) intellectual stimulation, and 4) individual
consideration. Transformational leaders should be able to encourage followers to think critically
and to seek new ways to approach their job. This may directly strengthen followers‟ job
involvement and intrinsic motivation, resulting in more desirable work-related attitudes
(Gardner, 2000).
Management style is perceived by employees as autocratic/coercive (Goleman, 2000),
which might be a by-product of downsizing/restructuring effects. The ability of the LPC leaders
in this respect seems to be insufficient, as their management practices do not motivate followers
to transcend their own self-interests for the sake of the group. The barrier also seems to be the
micromanagement techniques, strong control exercised over tasks and unwillingness to
understand their problems, lack of empowerment, support and consultation. Taking bottom up
approach to analysis, the leaders are not able to bring a deeper understanding and appreciation of
input from employees, which makes them isolated and hinders trust and innovation.

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Politicking is also a barrier of increased innovativeness (Stern, 2004), as people feel their
work is threatened by other‟s agendas (Amabile, 1998). Especially in the environment of
changing organizational structures and downsizing, some managers might feel that they are
losing their power so they start politicking (Morgan, 1997).
To summarize, leadership is a very central aspect of the organizational change, as leaders
steer/manage change in the directions (mission, strategy) as well as facilitate the cultural shifts
and influence the transactional factors. The most significant strategic leadership issue in LPC is
that the core executive group is not a team committed to success of the change. Ability to
manage within a different national culture (Hofstedte, 1993) is another barrier associated with
foreign managers. They tend to blindly apply models that worked before in different
environments.

2.4 Structure and Systems


Structure and Systems comprise procedures, technologies, reward and control systems (Tan
1998). LPC‟s organizational structure is being changed from mechanistic (Morgan, 1997), which
emerged in a stable environment of mass production in a socialistic economy, towards a more
organic and flatter structure enhancing innovation and flexibility with changes in itsoperating
context (Donaldson, 2001). This was done by focus on creation of cross functional teams and
working groups; reduction of power distances, lowering high uncertainty avoidance and
masculinity of the organizational structure (Hofstede, 1993).
LPC reward systems are mainly extrinsic rather than intrinsic, which does not fit with the
aimed change toward a more innovative culture. At operating level, LPC implemented the tool
(MNE Innovation Zone) that supports the gathering, screening, sharing ideas generated over the
MNE operations worldwide. The tool is accessible on intranet and novelty ideas can also be
contributed via manual forms available at all working places. Separate innovation teams exist at
each SBU level within whole MNE. The team facilitates the innovation and change activities,
where the team leader reports directly to local CEO, as well as to the central innovation
committee established directly at MNE headquarters.
Innovation barriers within LPC‟s techno-structural subsystem, despite many changes
adopted during the restructuring process, are rigid job descriptions accompanied with a strong
perception of being tight with their department. Subsequently cross-departmental co-operation is
not supported, therefore creative teams are difficult to establish and manage. The bureaucratic
procedures for getting approvals for using company resources (resulting from historical, as well
as downsizing effects) is another barrier that hinders employees from unfolding their creative
ideas and experiment; e.g. purchase orders of any non-standard materials need the approval of a
direct superior, department manager and CFO. The procedure is lengthy and illogical, resulting
in de-motivation of involved people, and therefore hinders innovation.

2.5 Individuals and Teams


Innovation is the complex product of people‟s behaviour in a given situation and is influenced
by both individual and group characteristics (Woodman, 1993). People‟s perception of the
working environment has been influenced by continued fears of redundancy, particularly given
that there is high unemployment rate and traditionally low mobility of workforce in the region.
Furthermore there has been breakdown in communication at different levels, which has resulted
in deterioration of trust, since people feel that management has not been honest with them. This

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has increased their feelings of disappointment and adversely impacted their motivation and
innovation. People‟s natural resistance to change is even increased by such a working
environment that typically makes them stick to rigid behaviour patterns and risk aversion, mainly
due to worries of redundancy. Team instability represents an additional creativity barrier, as
people are worried about their own jobs and therefore do not share team spirit (Amabile, 1999).
Such a working environment is extremely hostile for innovation.

CONCLUSIONS
The major takeover of the management control by MNE and subsequent integration of LPC into
the structures of the new shareholder, accompanied with major restructuring and downsizing,
represents transformational change influencing the strategic and operational areas of LPC. Based
on the results of analysis undertaken of LPC‟s innovative capabilities, it could be concluded that
the company is aware of the need to change and have some abilities to do so. More specifically,
the company has committed itself to right values and aims to use the innovation as a core
competence, leading to a lean enterprise contributing towards value creation for all of its
stakeholders. Such a transformational innovation requires leaders who are as a team fully
dedicated to succeed with the managing the challenging transformational change. The new
“Supportive and Innovative” culture is being promoted. The changes being undertaken at this
level have a direct impact on the transactional changes in the company‟s structure and its
systems, motivation, rewards and individual‟s needs.
The major obstacle identified in achieving better LPC performance is restructuring and
downsizing. This very process seems to be in conjunction with innovative approach, as it is very
traditional „cure‟. In addition, several issues in managing this change were identified (lack of key
stakeholder support, problems with creating strong top management team backing the CEO in
managing the change).

Action plan to reduce the barriers identified


As the process of restructuring/downsizing is in its late stage (there is no room for discussion of
opinions rejecting restructuring and downsizing as useless and unacceptable), announcement of
successful restructuring process finalization should be made, stressing all its positive effects
(improve internal efficiency, coping with declining markets, new company culture introduction,
etc.). Presenting this formal and honest announcement and getting the support of the key
stakeholders, would be the first and very important step towards successful management of this
transformation. At the same time, change in the current perceived work environment, toward a
more supportive one, might be enhanced. LPC should focus all the energy on establishing widely
shared values in the centre of which are innovation, quality, customer orientation and teamwork.
The transformation of the top executives group into a team (Zalegnik, 1977, Beebe, 2009) is
necessary and the task should be given the top priority.
Without change in people‟s mindsets no real change is achievable. Therefore the
announcement might have significant symbolic value and management should make sure it is
well understood and accepted by employees e.g. use special „Dialog‟, plus managers at all levels
should organize effective training to stir employees attention and make them understand the
importance of change and try to get their support. The aim is to buy in employees into the new
company culture via honest communication (Kelly, 2000) and commitment of top management
that should result in reintroduction of trust, ease the fear feelings and uncertainty/chaos, and

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improve communication at lower levels.Teambuilding activities should be organized with


support of experienced consultants and top management sponsors, to eliminate working teams‟
instability. These measures should decrease resistance towards change; buying employees into
new values should eliminate risk aversion and enhance experiments that should increase
innovation (Mc Fadzen, 1998). Looser job specifications should be prepared, fitting with the
implemented shift from highly mechanistic to more organic organizational structure, with aim
of reducing departmental boundaries (i.e. participation on teamwork should be part of most job
descriptions) to improve teamwork and knowledge sharing (Lenhard, 2012). That would also
mean potential for further decentralization (e.g. delegating higher responsibilities to lower levels
so that operating day-to-day decisions are made by owners of the process), which would imply
less strict control of resources (form of empowerment). Intrinsicrewards should become part of
the motivation at all levels (e.g. allow for more autonomy, reduce time pressure) leading to
improved conditions for innovation. In terms of reducing bureaucratic procedures it is
recommended that a list of all internal guidelines in the whole company be prepared; eliminate
20% immediately and 20% each following year. The leaders should ensure that all top and
middle managers are properly trained in management styles application. Timely feedback from
the lower levels should be sought (comments on top management style should be gathered by a
non-executive board member). Improper styles (bullying) should be treated as non-compliance
with company policies. Managers should be trained in order to understand the challenges of
managing within different cultures.

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Horizonty podnikateľského prostredia / Business Environment Horizons
Medzinárodné interdisciplinárne vedecké kolokvium / International Interdisciplinary Scientific Colloquium
17. december 2012 / 17th December, 2012

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Reviewer: Prof. Ing. Dušan Baran, PhD.

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